I’ve seen no discussion about VAT on pension fees and that’s troubles me as we put together our strategy to sort out the pension challenge facing the 1.2m companies about to stage auto-enrolment.
Here’s the issue. If I levy a fee to Tesco or Marks & Spencer, they offset the VAT I charge at 20% against VAT they charge. Most companies are VAT registered and don’t have a problems “reclaiming” VAT.
But some companies don’t get to reclaim VAT, typically small companies and charities. Leave charities to one side for the moment, there are some 800k of the 1.2m companies staging auto-enrolment who are deemed micro-employers. These employers have such small turnover that they probably do not pay VAT (and cannot reclaim it).
The reason they have a VAT exemption (and this goes for charities too ) is the Government wants to give them a VAT break.
But they are going to have to pay more than VAT registered companies for pensions costs – advice, guidance , middleware and associated tra la lah that gets them staged.
Small companies never had to pay pension fees, they got the members of staff to pay via commission which was paid to an adviser from the staff member’s pension pot.
But that is changing; commission is no longer payable on new schemes and the Government’s keen to stop members paying for the company’s administration costs ( the tra la lah).
My thinking is that a company can find the right provider, integrate the workplace pension into the business and get going compliantly for £500 (+vat). I reckon we can put together a package using new technology for £500 but that’s £600 after I’ve added the VAT and that’s not right. I don’t see why small companies and charities should be paying 20% more for something they are being made to do by the people making them do it (Her Majesty’s Government).
The matter’s made more complicated because advice related to an insurance product such as a personal pension does not carry VAT but advice relating to the whole of the market including non-insured products such as NEST and NOW, is VATable.
Advisers may be able to get round charging VAT provide they stick with insured products and provide they can wing it for the members to pay (which is not what the Government wants but is what will happen if the loophole stays open).
So what we are going to get is a market distortion.
If I build an advisory service that leads to purely insured products being used, my customers pay no VAT (provided that they are small or charities) but if my guidance gets them to go into NEST, they pay more for it!
There are two problems here then;-
- small companies and charities paying more to get advice or guidance about some products than others
- and big companies paying less in fees than small ones .
I would like the Government to consider VAT on pension fees and make them VAT exempt. I’d suggest that the exemption is capped at somewhere between £500 and £1000.
There’s precedent here as employees get a £150 exemption from the first £150 of advice being treated as a benefit in kind.
Exempting the first tranche of pension fee payments would have limited impact on revenues (I haven’t done detailed modelling but lets say 800,000 x £100 =£80m but it would make life a whole lot easier for the companies who the DWP know have not got the big pensions budget (their cost estimates for staging are less than £200 per micro company).
This is not a big issue today as most of the non-exempt organisations I’m thinking about won’t be staging for a couple of years but this is something that can be dealt with now as part of the current consultation on Auto-Enrolment simplification.
Payroll World have written to me asking what single measure I’d like to see included in the simplification consultation guys, this would be it. And as a good part of the guidance needed for micro employers to stage will be payroll related – this one’s for you!
By way of an appendix, here is George Kirrin’s brilliant synopsis of the current VAT position he adopts when billing clients. It shows how diligent IFAs can be on behalf of their customers and how ludicrously complicated the current approach actually is
The Personal Finance Society (PFS), in conjunction with consultants Engage Partnership and following lengthy discussions with HMRC, has produced a paper outlining the applicability of value added tax (VAT) on a number of advice scenarios, including ongoing services.
The PFS’s latest Professional Directions paper clarifies which services offered by a financial adviser are VAT-able, following confusion about when the tax would apply.
It confirms that whether a service is liable for VAT or not depends on the actions of the adviser: if at any point the adviser has acted between a product provider and customer with a view to arranging a product sale, the adviser charge will be VAT exempt, regardless of whether a sale is finalised.
Put simply, general financial advice is taxable; intermediation is exempt. Intermediation, if transacted through a platform, would qualify for VAT exemption.
The PFS has cited four examples to demonstrate its guidance…
An individual has approached a financial adviser to discuss his retirement planning needs. Subject to the findings in relation to any potential shortfall, the individual agrees that the adviser should make a recommendation on how any funding shortfall should be met. A fixed fee is specified for the work.
OUTCOME A: The adviser gathers client information, identifies a shortfall but makes no product-specific recommendation on how this should be met. At this stage, the adviser has not made contact with any product providers. The client receives the report, pays the fee but takes no action. Likely position: VAT charged.
OUTCOME B: The adviser gathers client information, agrees retirement objectives and carries out research to identify the most suitable financial products to meet the client’s objectives. As part of the recommendation, the adviser contacts the product providers chosen by email or telephone to obtain personal illustrations, which are then supplied by the providers. The adviser recommends a retail investment product(s) in a personal report or suitability letter that meets regulatory requirements. The client receives the recommendation, pays the fee but decides to take no further action. Likely VAT position: VAT exempt.
OUTCOME C: The client receives the recommendation in the personal client report or suitability letter and agrees to act upon the advice given. The adviser assists the customer with the completion and submission of the application forms. The client pays a fee for the service provided. Likely VAT position: VAT exempt.
OUTCOME D: The adviser acts as in outcome (c) and the sale is transacted via a platform. Likely VAT position: VAT exempt.
An individual asks an adviser to carry out an analysis of their estate to determine the inheritance tax liability and to recommend ways it could be mitigated or provided for financially.
OUTCOME A: The analysis is carried out by the adviser and an inheritance tax liability is identified. A client report is produced and refers to generic solutions that are based on the use of financial products (life assurance investment bonds) and trusts. The client receives the report and pays the fee. No specific recommendation for a RIP is given and none are purchased. Likely VAT position: VAT charged.
OUTCOME B: The analysis is carried out and the adviser designs a solution based on the use of life assurance bonds that will be written under trust. The adviser selects the product and asks the product provider to send him the written investment bond key features and personal illustrations.
He presents his suitability report to the client with the illustrations. The client receives the report and personal recommendations and agrees to proceed. The adviser arranges the product for the client. Likely VAT position: VAT exempt.
An individual asks an adviser to review their existing investment portfolio comprising mostly of retail investment products (RIPs) with a view to recommending any necessary adjustments to meet the client’s stated financial planning objectives. There is no contractual obligation or agreement for the adviser to undertake regular reviews.
OUTCOME A: The review is carried out, valuations secured and a new RIP investment is recommended and detailed in a suitability letter. The client accepts the recommendation and the adviser arranges the investment. Likely VAT position: VAT exempt
OUTCOME B: The adviser contacts the relevant providers to secure valuations and, although no new investment is recommended, the adviser recommends that some RIPs are realised/encashed with the resulting funds held in cash. A suitability letter containing the recommendation is provided to the client but the client decides not to proceed with the recommendation. Likely VAT position: VAT exempt
An adviser has arranged a number of RIPs for a client. In some cases these may be administered on an investment platform. The adviser has a responsibility (recognised by the client agreement) to review the portfolio of RIPs and, as appropriate, to:
• rebalance the investments to remain aligned to an agreed asset allocation model
• recommend new investments
• top up existing investments
OUTCOME A: A review takes place and the adviser contacts the appropriate product providers to obtain relevant information on a client’s existing investments, with a view to rebalancing the client’s portfolio. As a result of the information received and an analysis of the client’s overall investment portfolio, the adviser makes a recommendation to the client that no action is required. Likely VAT position: VAT exempt.
OUTCOME B: The review takes place and the adviser executes the rebalancing in line with the original asset allocation. Likely VAT position: VAT exempt.
OUTCOME C: The review takes place and the adviser makes a recommendation for a top-up to an existing product. Likely VAT position: VAT exempt.
- What would you pay to get your firm a proper pension? (henrytapper.com)
- OFT rattles pension consultant’s cage -shock! (henrytapper.com)
- Pension agnostic? (henrytapper.com)
- Who’ll pay the price for an auto-enrolment train crash? (henrytapper.com)
- Lord make AE simple – but not yet! (henrytapper.com)
- Some of our insurers are missing (henrytapper.com)