Intermediaries: independent financial advisors (IFAs)
IFAs receive income in the form of either fees or commission from advising clients, both initially and on a regular basis, about the best investment opportunities for them and intermediating between the client and financial service providers to conclude contracts.
Fees or commission for advice only services are always taxable. Remuneration for intermediary service may benefit from the VAT exemption if the IFA acts as an intermediary by bringing together parties to an exempt financial service (e.g. where an authorised distributor of securities). In this case remuneration is often paid by the financial service provider and referred to as commission. It can be an initial amount or ongoing trail commission. Remuneration can also, however, be in the form of fees paid by the client to the IFA for introducing them to an exempt financial service and again no VAT is chargeable on such fees.
However, regardless of how it is remunerated, there is no exemption for the introduction of the client to a discretionary investment management service because discretionary investment management is a taxable service that does not fall within the financial services exemptions.
The service provided by the IFA is a taxable introduction to a taxable management service. It is not correct for IFAs to look through to the selection and purchase of VAT exempt assets by the discretionary investment manager and treat their services as being exempt introductions to a series of VAT exempt transactions. For further information on discretionary investment management see VATFIN5800.
Fees and commissions paid via managers
The FSA has determined that all charges made to the client by anybody in connection with their investment should be itemised, valued and notified to the client to ensure transparency.
Initial charges levied by the discretionary investment manager will carry VAT at the standard rate. However, when the client is introduced to the manager for a discretionary investment service this will very often include an introductory commission which is agreed at the point of sale between the IFA and the client. As the assets are to be transferred or held buy the manager, the IFA and client often request that the manager, for the sake of convenience for the client, makes this initial commission payment on behalf of the client upon the completion of the account opening and transfer of assets to the new portfolio. These fees may be collected by the discretionary investment manager but as they are the IFAs fees, will be subject to the treatment described above.
VAT registration of IFAs
Any business that makes taxable supplies which exceed the current registration threshold, must register for VAT. It is important that IFAs monitor their taxable turnover and are careful to include all taxable fees and commissions (such as those for introductions to discretionary investment management services).
Investment managers may assume they have not charged VAT on taxable fees and commissions by IFAs because the IFA is not VAT registered. It may however be the case that some IFAs are incorrectly treating commission as exempt income when it is taxable and should therefore be registered and charging VAT. In order to assist with this monitoring process it is advisable that both parties regularly review and update any Self Billing Agreements that are in place between them. IFAs should inform managers immediately of any changes in their VAT status.
The current VAT registration threshold is £73,000 but is subject to change at Budget time and it is important that businesses check it regularly.