Post-RDR VAT debacle reflects fudge of current exemption

With many advisers beginning to adopt a more quiescent stance with regard to the major sources of acrimony in the Retail Distribution Review rules, other debates are beginning to come to the fore.

In particular, the focus in recent weeks seems to have fallen once again on VAT and its potential application to adviser charges post-2012.

It should not be a surprise that this issue is a source of contention. The notion that the separation of the provision of advice from the distribution of products would require an additional 20 per cent to be levied on charges has worried an adviser community that already fears clients will eschew their services when faced with the reality of the costs.

HM Revenue & Customs has done nothing to ameliorate adviser discontent. In fact, it’s discordant messages reflect a dissonance to this issue within an organisation that is clearly in two minds on the legitimacy of exempting advice from the tax.

Last October, for example, the revenue held meetings with several interest groups and trade bodies across the industry. Following these tête-à-têtes, the Tax Incentivised Savings Association claimed that HMRC had confirmed the vast majority of advisory transactions carried out by IFAs should be exempt from VAT.

Cue a rash of rodomontade across the trade press and beyond proclaiming the revenue’s (eventual) prescience on this issue. But of course, it wasn’t quite as simple as all that.

When FTAdviser called up HMRC we were told that indeed advice would largely be free from VAT, except where a fee for advice was charged separately. Hang on, isn’t the whole point of the RDR that in some way or another advice fees are decoupled from product fees? Wouldn’t that mean that all advice was subject to VAT after all?

Skip to February this year when the revenue released its final guidance, elucidating that adviser charges will be free of VAT where “the customer is seeking the arrangement of a retail investment product and the adviser performs the arrangement as outlined”.

What this means, in short, is that if an adviser can evidence that the client was seeking to invest in a product of some description the initial charge and any agreed ongoing review charges will be exempt from VAT.

Of course, all of this was starting to sound altogether too simple, so the revenue threw a fresh spanner in the works by saying that outsourcing providers such as discretionary managers would, however, need to pay VAT on their fees.

This was met with a fresh wave of vituperative from the sector, not least I imagine because it was hoped this demon had been laid to rest. Outsourcing was seen by many as the solution to the independence dilemma; would it it continue to be so if it meant paying a hefty fee that included a fresh wedge of tax?