The FSA’s Retail Distribution Review (RDR), which was launched in March 2006 and will be fully implemented by December 2012, aims, among other things, to address a number of long term issues affecting the way advice is given to and paid for by clients.
One of the key changes will be the eradication of commission being paid to advisers and a move to an upfront fee-based payment structure.
However, according to a ‘VAT Guidance’ note published by the Association of British Insurers (ABI) last week, unless a client is able and prepared to pay for the full cost of their advice at the outset, they will have to pay VAT on all future payments. The cost will also escalate with the rise in VAT to 20%.
According to the guidance, which was jointly developed by HMRC and the ABI, to be exempt from VAT, payment for all services (ie both arranging the initial investment and ongoing review services) must be made at the time the contract is entered into.
The guidance also stipulates the exact nature of the ongoing review services from the adviser and their time-span must be set out in the initial contract between the client and adviser if VAT exemption is going to apply.
Colin Jelley, head of proposition marketing at Skandia, said: “One of the key desired outcomes of the Retail Distribution Review is to encourage the separation of financial advice from the purchase of financial products.
“The guidance note clearly explains that any such separation of advisory services will render those services subject to VAT. This aspect of the analysis does appear to be in accordance with the VAT legislation, but it is unfortunate, to say the least, that the desired separation of advisory services can only be achieved by increasing the total cost of financial advice to the consumer.”
