Management of investments and portfolios, funds and ‘wrapper’ products and related services: Tax-efficient ‘wrapper’ products and the VAT liability of associated charges
Tax Efficient Wrapper products
“Wrapper” products hold investments in a tax efficient wrapper making them free of income and capital gains tax, and are aimed at trying to stimulate the general public into saving and investing money. Examples of these products (current and historical) include Individual Savings Accounts (ISAs), Child Trust Funds (CTFs), Junior ISAs, Personal Equity Plans (PEPs) and Self- Invested Personal Pensions (SIPPs).
Individual Savings Account (ISA)
An ISA is a tax-free annual investment product and was launched on 6 April 1999 to replace the Personal Equity Plan and the Tax Exempt Special Savings Account (TESSA). When launched, it was made up of three ‘components’ - cash, insurance, or stocks and shares and could be a mix of these components. An ISA comprising of one component only was called a ‘mini’ ISA, whilst an ISA allowing for more than one component was referred to as a ‘maxi’ ISA.
From 6 April 2005, the ISA structure was changed. The separate ISA insurance component was removed and insurance products were given the same ISA treatment as other collective investment schemes within the ISA stocks and shares component. The distinction between mini and maxi ISAs was removed from April 2008. This means that there are now only two ISA components - cash or stocks and shares.
The VAT liability of the various charges to customers of each of these ISAs is as follows:
(a) Cash ISAs
These operate like bank accounts and therefore consideration received by the provider is exempt under Item 8.
(b) Stocks and Shares ISAs
Customers may be charged for execution of the purchase of stocks or shares or for portfolio management once the stocks and shares are purchased and held in their ISA. Arranging the purchase of securities is exempt under Group 5, Item 5. Portfolio management is excluded from the exemption and is therefore taxable.
Junior ISAs are long term, tax-free savings accounts for children, and have now taken over from the Child Trust Fund (CTF). There are two types:
- a cash ISA, and
- a stocks and shares ISA
These follow the VAT liability shown above for these types of ISA.
Child Trust Fund (CTF)
The CTF was introduced in April 2005 and is now closed to new accounts, and has been replaced by the Junior ISA. It was an account that could be either a ‘stakeholder account’ or a ‘non-stakeholder account’. This account had to be held with an ‘account provider’ who was approved as such by the relevant section within HMRC. The Government provided the initial contribution in the form of a voucher and others could also contribute to the account.
There was a maximum 1.5% annual charge if the CTF was a stakeholder account which was deductible from the child’s fund and was normally charged by the CTF provider. Non-stakeholder accounts had a range of charges. The VAT liability of these charges depended on the nature of the services provided in connection with them and whether or not they fell anywhere within the financial services exemptions.
CTFs could also be provided as savings accounts and charges for their operation were therefore exempt under the VAT Act 1994 Schedule 9, Group 5, Item 8.