Discretionary fund managers (DFMs) are still shrouded in uncertainty over the ongoing VAT issue, as HMRC gears up to publish its final guidance in the next few months.
The issue came to a head in July 2012 when a European Court of Justice (ECJ) ruling forced Deutsche Bank to pay VAT on its transaction fees, prompting UK tax officials to launch a consultation into whether UK DFMs should also be liable.
HMRC published its draft consultation on October 31 last year, prompting a backlash from the DFM community. The trade body for wealth managers – the Association of Private Client Investment Managers and Stockbrokers (Apcims) – published an opposition to the proposal, arguing that as clients pay a management fee and separate transaction charges, the latter should be exempt. It also argued that if transactions were taxed, the same should apply to advisory-managed services.
Martin Bamford, managing director and chartered financial planner at Informed Choice, says there still appears to be a mismatch between the objectives of HMRC and the practicalities of offering financial advice.
“The VAT issue is clearer today than it has been, but some uncertainties remain and the messages from HMRC do not seem to match up with the reality of providing financial advice,” he says.
A key concern within the DFM and adviser community has been whether the results of the consultation will translate into the forced repayment of back-dated tax, adds Mr Bamford. “Most advisers fear interpreting the rules incorrectly and being forced to pay VAT on historical revenue. Until HMRC applies their rules in real life test cases, it is difficult to see how advisers can trade confidently around the VAT issue,” he says.
Ed Murphy, indirect tax expert at KPMG, says the implementation of the RDR on January 1 has shone a light on the difficulty of applying complex VAT rules to the advisory sector. A key challenge is the range of advice scenarios, making VAT difficult to implement fairly across the board. “HMRC have worked with the industry to agree how VAT rules should apply and in recent months significant progress has been made. In spite of HMRC’s helpful guidance, it can still be challenging for financial advisers and DFMs to determine where the rules require VAT to be charged,” he explains.
For DFMs, the crucial concern appears to be how the rule changes will affect their competitiveness against financial advisers in the future.
“DFMs should be as exempt from VAT as any other fund managers,” argues Philip Milton, managing director of Philip J Milton & Company. “The possibility of VAT on transaction charges is another ugly worry – something which also should not apply and does not apply elsewhere.”
Ben Willis, investment manager at Whitechurch Securities, agrees that the lack of certainty over the ongoing VAT issue is a concern, in particular with regard to price competitiveness. “DFM management charges are subject to VAT as it is deemed a service, and at the present rate of 20 per cent this can add a significant premium to charges. In the DFM world, with so many competitors in the market, costs have become the battleground and so to win business margins are being squeezed,” he says.
