Advice in the workplace is 20% cheaper

I’m grateful to Paul Taylor of McCarthy Taylor for an excellent article on the current VAT treatment on the provision of free standing versus product related advice. His point is that when advice is linked to a VAT exempt product, the product can be used to pay for the advice (comission) and the advice is effectively VAT free. Pure advice incurs VAT at 20%.

This is also the case when advice is purchased by a  VAT registered entity, typically a company. The difference for VAT registered companies is they can claim back the VAT effectively making free standing advice VAT free.

Employer”s who purchase advice on behalf of employees (for instance to help them undrstand their employee benefits) not  only get the VAT exemption but they also can provide this (within limits ) as a tax-free benefit in kind with no P11D implications.

It is surprising, good advice being a commodity in great demand, that employers are not taking greater advantage of such a tax-advantaged benefit. It is also surprising that many IFAs are missing out on the opportunities to provide workplace advisory work using the employer as both introducer and sponsor.

Here’s Paul’s excellent article.

There is absolutely nothing wrong with financial advisers selling financial products.

Indeed, as Winston Churchill maintained, the selling of life assurance is the noblest of professions, protecting families from the risk of disaster.

But this can only be true if sales are the consequence of advice, and not the reason for it. Yet new rules designed to ensure that financial advisers are truly independent seem to be biased in favour of sales – leaving the door open to future mis-selling scandals.

The Treasury has recently explained to financial advisers what tax breaks we can expect next year when the Retail Distribution Review (RDR) takes effect. Put simply – advisers will receive a tax break on VAT only if they make a sale. If not, the VAT charge will add 20 per cent to the client’s bill. So clients who buy products, pay less for advice than those who don’t.

Since starting my own independent financial advisory firm, I, along with many of my peers, have tried to forge a profession to equal that of lawyers and accountants. We have long campaigned for commission-based services to be abolished in favour of fee-based practices, and the regulator’s ban on commission, part of RDR, is commendable.

But I believe the Financial Services Authority’s (FSA) approach to raising standards is one of the biggest blocks to achieving the desired objective, and the tax treatment of product sales typifies the problem.

The FSA still views the role of the independent financial adviser as a product seller; indeed it still talks about monitoring product sales. This perpetuates a gross misunderstanding of what our profession is all about.

Before making any sales, advisers should offer a free first meeting to ascertain a client’s requirements. Future fees should be disclosed, as a statutory obligation, but they should relate to the individual client’s needs, not the products on offer.

A proper understanding of the client should be achieved – what the FSA itself calls “knowing your client” – and a long-term relationship can begin. Our chartered financial planners are skilled professionals, but without fully understanding the client’s desires, plans and objectives, any resulting advice would be flawed.

The advice process is not solely about selling. It is about providing solutions, which may or may not include financial products, but may also result in tax planning and recommendations about how financial affairs are arranged, for example through trusts and effective will writing.

If people know they are dealing with a salesperson, they can be alerted to the fact that it is his or her job to sell products and make a profit for the firm. But if an individual wants advice, they should have access to a skilled professional who places their interests before the profits available on commission or a fee.

Only when the process of advice is separated from sales in the minds of regulators and consumer advice bodies, will clients get the reassurance they need that the course of action recommended is best for them. Until the FSA is limited to dealing with product sales, and a separate body is in place to regulate advice, the mis-selling will continue.

Paul Taylor is founder and managing director of McCarthy Taylor

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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