Update on HMRC guidelines on VAT and RDR Adviser Charging

Transcription

1 Update on HMRC guidelines on VAT and RDR Adviser Charging Introduction Alex Ellerton, Associate Director/Financial Services Risk and Regulatory Practice, BDO David McDonnell, VAT Senior Manager, BDO Using the chat facility Participate in today s webinar send us a question Audio problems 1

2 Update on HMRC guidelines on VAT and RDR Adviser Charging RDR + VAT =? Adviser Charging and VAT: An Update Alex Ellerton 7 March 2012 Copyright March 12 BDO LLP. All rights reserved. AGENDA 1. Background and RDR objectives 2. Reminder of key areas of change 3. Focus on adviser charging requirements 2

3 Background: the drivers behind the RDR State of the industry Modernisation needed Concern that the market does not work well enough for: - Consumers - Advisers - Product providers Evidence of poor consumer outcomes - Pensions & FSAVC review - Endowment mis-selling - Structured products - Thematic reviews of quality of advice Opportunity to re-build trust Background: the drivers behind the RDR FSA objectives & measures Main objectives: - Industry engages with consumers in a way that delivers more clarity for them on products and services - Market allows more consumers to have their needs and wants addressed - Remuneration arrangements allow competitive forces to work in favour of consumers - Standards of professionalism inspire consumer confidence and build trust - Firms are sufficiently viable to deliver on their longer-term commitments and where they treat their customers fairly - Regulatory framework supports delivery of all of these aspirations and does not inhibit future innovation where this benefits consumers Fundamental measures: 1. Improving the clarity with which firms describe their services to consumers 2. Addressing the potential for adviser remuneration to distort consumer outcomes 3. Increasing the professional standards of investment advisers Reminder of key areas of change 1. Service labels Independent advice Restricted advice Simplified advice Basic advice Non-advised 2. Professionalism Updated qualifications Accredited bodies Statement of Professional Standing ( SPS ) 3. Capital requirements for Personal Investment Firms 4. The role of platforms Facilitation of adviser charging Use of platforms by independent advisers 5. Adviser charging Ongoing CPD FSA liaison and reporting 3

4 Adviser charging Upfront agreement of fees Applies to: - Personal recommendation - Retail investment product - Related services Agreed between adviser and retail client before advice provided Objective that charges for advice are product neutral Flexibility for firms to determine how price tariff is formulated No cash rebating, factoring or 100%+ allocation rates Adviser charging rules apply to new business after 31 December 2012 Facilitating payment of adviser charges is permitted Use of credit Adviser charging Related services Arranging or executing transactions recommended by a firm, an associate or another firm in the same group Administrative tasks Managing a relationship between a retail client and a discretionary investment manager Adviser charging Ongoing charges and disclosure of charges Ongoing charges permitted only where: - Ongoing service or related service has been agreed with and disclosed to client OR - Regular contribution to recommended product and disclosure of no ongoing service Applies to all regular savings products Disclosure of charges must: - Be Clear, fair and not misleading - Be in Cash terms - Be as early as practicable (NB recommendations at a distance & market fluctuations) - Be in durable medium / Website - Detail ongoing payments re ongoing services plus cancellation (NB % x funds under mgt) Record keeping - Charging structure - Total adviser charge per client plus reasons for any material variation from structure 4

5 Adviser charging Vertically integrated firms and Inducements Providers that distribute their own products must ensure adviser charges are reasonably representative of services associated with making the personal recommendation Objective to remove significant cross-subsidisation Soft commissions should not undermine adviser charging MiFID enhancement test extends to business involving Retail Investment Products Adviser charging VAT Post-RDR will see more transparency in the different elements of firms service offerings Firms remuneration for different service aspects will be more clearly articulated VAT rules not changing, but RDR planning forces firms to think about the tax position of different elements of their services Some firms will previously have charged clients on a fee basis May be the first occasion that some firms have fully considered their VAT position Consideration of recent guidance essential part of developing unique approach to charging model For more information Alex Ellerton Financial Services Risk and Regulatory Practice BDO LLP Direct Line: +44 (0) alex.ellerton@bdo.co.uk 5

6 Update David McDonnell Tax Senior Manager VAT Services 7 March 2012 Copyright March 12 BDO LLP. All rights reserved. Points to cover 1. Background 2. HMRC s position and new guidance 3. Practical issues; what do I need to do? Page 17 Background Historically : Fees/Invoices= VATable Commissions = Exempt EU law : Focus on negotiation UK law : Focus on intermediary services VAT exemption depends on what you are doing not how you are paid Page 18 6

7 UK VAT legislation Insurance services : VATA 1994, Schedule 9, Group 2 - Insurance and reinsurance transactions - Provision of insurance intermediary services by insurance brokers and insurance agents acting in an intermediary capacity - e.g. bringing together insurer/insured; work preparatory to the conclusion of contracts; assistance with administration and performance of contracts Financial Services : VATA 1994, Schedule 9, Group 5 - The issue, transfer, receipt of, or any dealing with money/security for money; granting of credit; issue/transfer of shares, stocks, bonds, units, etc - The provision of intermediary services in relation to the above by a person acting in an intermediary capacity. - e.g. bringing together insurer/insured; work preparatory to the conclusion of contracts; assistance with administration and performance of contracts UK law to be rewritten following EU review? Page 19 Example 1 : Pre-RDR IFA/Adviser Commission ( ) Intermediary Services Product Provider Insurance/financial product Payment for products ( ) End Customer Page 20 Example 2 : Post-RDR IFA/Adviser Payment/Fee( ) Intermediary Services Product Provider Insurance/financial product Payment for products ( ) End Customer Page 21 7

8 HMRC s position Initial view: No change to the VAT rules what s the problem? - Advice only is taxable - Intermediary services are exempt - Covered by existing published guidance (hopelessly outdated!) Revised view: Accept need for clarity and updated guidance - Extensive consultation process - Meetings with industry representatives - Draft guidance produced for comments - Further final guidance now produced Not looking to generate extra revenue - Will practice vary from policy views? - Will HMRC come under pressure to change policy view? Page 22 HMRC s guidance Guidance now finalised for inclusion in HMRC Manuals Key extracts - It is important when considering the VAT treatment of services in this area to understand the meaning of advice for regulatory purposes - From a VAT perspective general financial advice is not synonymous with the term advice for the purposes of the RDR rules - The term advice under the RDR thus covers a broad range of functions including primarily recommendation, referral and intermediary work around product distribution which would continue to be VAT exempt under general principles. - The above demonstrates HMRC s understanding at least at policy level that the term advice does not automatically equate to taxable services. Page 23 HMRC s guidance Key extracts - An adviser s role in the retail investment market will normally involve them entering into arrangements with the customer under which they might: 1. gather information about the customer (fact-find); 2. carry out research to find suitable investment options; 3. provide the customer with reports, financial health-checks, forecasts; 4. recommend specific investment products to the customer, including the prices at which these can be arranged; 5. act between the product provider(s) and the customer with a view to arranging the sale of Retail Investment Products agreed with the customer; 6. and, where applicable, i.e. Where the customer agrees to an ongoing review service, monitor the customer s ongoing position to ensure that the products continue to meet the requirements of the customer. - The above is clearly recognisable as the role advisers play in advising clients Page 24 8

9 HMRC s guidance Key extracts - Where the customer is seeking the arrangement of a Retail Investment Product and the adviser performs the arrangement as outlined at stage 5 above, (regardless of whether the sale of the product is finally concluded); and is able to evidence that they have done so; the services in stages 1-6, which fall within the agreement concluded with the customer, will be VAT exempt. - The VAT liability depends on what is done by the adviser and it makes no difference whether a fee is levied up front or over the life of the product (as for example with Regular Contribution products). - Without prejudice to the general VAT evidential requirements, an adviser will need to keep sufficient evidence to support the tax treatment applied to the services supplied. - If an adviser is unable to provide evidence that an exempt supply has taken place, VAT will be due on that supply Page 25 Practical issues What do I need to do? What is being provided to customers? - General advice only still taxable - Intermediation still exempt Ongoing services - Health checks/reviews and rebalancing services - What is primary purpose of services? - Will new contracts be arranged? Need to keep evidence - Clearly defined services for exemption to apply - Letter of Engagement/other correspondence - Robust invoicing/accounting processes - Checklist for fee earners? Page 26 Practical issues What do I need to do? Is there a choice? - Restructure business model/pricing policy? - What is competition doing? - Regulatory restrictions Increased risk of review from HMRC - No change in VAT rules, but were these being implemented correctly in the past? - Agency/principal arrangements e.g. Networks Is VAT registration necessary? - Taxable supplies over 73,000 - Can business clients recover any VAT charged? - VAT recovery not all bad news? Page 27 9

10 For more information Alex Ellerton Financial Services Risk and Regulatory Practice BDO LLP Direct Line: +44 (0) David McDonnell VAT Services BDO LLP Direct Line: +44 (0) Page 28 Any questions? Q&A Ask a question Participate in today s webinar send us a question Click here to see questions 10

11 Upcoming events Events Recovery and Resolution Plans: Lessons from Lehmans -14 March 2012 Delivering Valuable Skilled Persons' Reports 28 March 2012 Financial Planning Conference 23 May 2012 Icaew.com/fsf A world leader of the accountancy and finance profession 11