Financial services businesses will still be smarting from the increased cost of irrecoverable VAT, following the increase in the standard rate. Unfortunately, more VAT problems are in the pipeline.
We briefly discuss three VAT 'events' that could affect your business over the coming months: VAT grouping rules, the EU review of VAT in the sector and the Retail Distribution Review (RDR).
VAT grouping
Last year, the European Commission initiated infraction proceedings against the UK (along with several other member states) on the grounds that the UK's application of the VAT grouping rules is overly generous. It has all gone very quiet, but at some point in the next few months this will be debated before the European Court of Justice. The particular point at issue is the ability of UK VAT groups to include companies that are not 'taxable persons' in their own right, e.g. holding companies. However, the European Commission also asserts that a VAT group must be seen as a separate entity from any of its component companies, which (if upheld) could mean inter alia that the reverse charge would be imposed on charges from an overseas head office to a UK branch.
EU review of VAT in the financial services sector
This review has been making slow progress for some years, but it is now approaching the stage where the member states actually think about implementing changes. Some of the ideas on the table, such as a proposal to exempt the management of pension funds, would be welcome. Others, however, include a potential tightening of the rules around outsourcing, possibly going as far as imposing VAT on all outsourced services; the UK is resisting this, but the idea has not gone away. The UK could also be forced to accept a change from zero-rating to exemption for commodity futures, which could prove expensive (the difference being that with zero-rating the business can recover all of the VAT on related costs).
Retail Distribution Review
The RDR is an FSA initiative which, on the face of it, has nothing to do with VAT. The VAT rules will not change – but the RDR is set to change the way in which financial products are sold to retail customers and that in turn will generate significant VAT problems, both for IFAs (and other intermediaries) and for the product providers. Advice has always been subject to VAT, but IFAs typically waive any charge for their advice because they expect to be paid a commission by the product provider. So a large part of the income for a typical IFA currently consists of 'initial' or 'trail' commission on investment and insurance products bought by his/her clients. Many IFAs are not therefore registered for VAT, because their advisory fees fall below the VAT registration threshold (£70,000). Under RDR no such commission can be paid and IFAs will have to charge their clients directly, either for advice (plus VAT) or for arranging specific investments (generally – but not always – exempt.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
