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HMRC internal manual

VAT Finance Manual

Intermediaries: Brokers: Commission sharing

Under FSA rules in PS 05/9, it is now no longer possible for more than one broker to receive commission for the execution of the same deal nor is it possible for commission payments to cover third party services other than research.

In response to this, investment banks, who will typically have ongoing broker/dealer relationships with most, if not all, of the large fund managers operating in the market, have entered into “commission sharing” arrangements whereby the main broker supplies execution services to the fund manager client in return for a commission, an element of which the broker has agreed to pay away to a third broker on the fund manager’s instructions (this is in recognition of services supplied by the third broker to the fund manager).

In circumstances where a broker contacts a client with the intention of executing a deal but for various reasons (most commonly because the broker does not have enough liquidity in the stock sought) the deal is executed through a different broker and a proportion of the commission is passed to the first broker in recognition of his contribution to the transaction, that commission will be VAT exempt on the basis that it represents consideration for a financial intermediary service that was not finally concluded.

For the services of third party broker to be exempt as outlined above the following must apply:

  • The intention at all times is to secure execution business, and
  • The services are sales orientated i.e. provided by sales traders dealing directly with clients, and
  • The research information provided to the client is not generic trend and stock analysis but is specific to the execution of potential transactions that the provider is capable of seeing through, and
  • The services go further than just the provision of information and include an element of ‘intermediation’ i.e. discussion of pricing, volumes etc. with a view to a potential sale.

Any fees or commission received for the provision of research that is not part of a supply of execution services or intended execution services that meet the criteria outlined above will be liable to VAT at the standard rate.