VAT treatment of financial advisory fees… the debate continues
There has been much debate and speculation regarding the impact of the Retail Distribution Review (RDR) on the VAT treatment of financial advisory fees. In a nutshell, there is no change to the core VAT treatment, i.e. a fee for arranging a financial product or transaction remains exempt from VAT (where it falls within the financial exemption), and the separate supply of advice remains subject to VAT at the standard rate, as for all professional advisory services. The hurdle is in identifying the VAT treatment of supplies that combine, or intend to combine, both advisory services and a transaction.
It is anticipated that HMRC will not issue formal guidance before the New Year, but draft guidance recently published makes reference to the intent or purpose of an advisor’s services. This means that an advice only led service will remain subject to VAT at the standard rate, but where the intention for receiving the advice is directly connected with a potential subsequent financial transaction the whole fee remains exempt from VAT. However, HMRC have indicated that advisors relying on the exemption will need to obtain evidence that their customers have agreed to the advisor arranging transactions for them, or that they intended that the advisor would arrange transactions for them, when the advisor’s services were engaged.
This is reflective of the ‘purposive’ test which we have seen evident in a number of case decisions, but disappointingly retains a level of subjectivity and uncertainty with regard to the VAT treatment of advisory services. Where an advisor does not keep on top of administrative functions, it may not be possible to produce evidence of the intent that existed at the time an agreement was entered into with a client; where no transaction resulted from the advice, HRMC are likely to regard the service as a separate advice-led service and subject to VAT at the standard rate. Advisors should review the terms of the contractual arrangements they enter into with their clients and, if necessary, revise the content to reflect the substance of the service, i.e. does the client intend for the advice to lead to a transaction, or is it purely advice?
Going forward it will be important for financial advisors to understand both what is being supplied as well the motive of its customers, in readiness for the changes which will take effect from 1 January 2013.
How the VAT rise is a blessing in disguise if you operate the Flat-Rate Scheme
The recent rise in VAT has brought to light the benefits of the flat-rate scheme with many self-employed people and SME’s actually profitting from operating it
. We’ve put togther our guide to help you work through the benefits and potential pitfalls of using the flat rate scheme.
What is the Flat Rate Scheme (FRS)?The Flat Rate VAT scheme was introduced in 2002 and is available to all small businesses or sole proprietorships. The FRS differs from standard VAT accounting as you pay a percentage of turnover rather than paying VAT on the difference between sales and purchases. So, while you continue to charge clients the newly introduced 20% VAT rate, you can potentially give a smaller percentage to the taxman. The FRS rate differs from sector to sector but for IT contractors the norm is 14.5%.
What are the advantages of the FRS?The FRS helps to simplify VAT calculations and record keeping. This is particularly helpful to smaller organisations that may not have the time or expertise to conduct their accounting in the traditional way (and, bearing in mind the increasingly severe penalties that can be charged for errors, this can only be a good thing). It shortens the process, removing the need to keep a record of VAT charged for each individual sale or that paid on purchases. However, you do still need to show a VAT amount on each sales invoice.
It might also save you money, for example:
Standard VAT CalculationTotal Billings £50,000
Output VAT 20% £10,000
Total invoiced £60,000
VAT reclaimed through purchases £750
Total payable to HMRC £9,250
Flat Rate Scheme CalculationTotal Billings £50,000
Output VAT 20% £10,000
Total invoiced £60,000
Total payable to HMRC at 14.5% of T/O £8,700
In addition, if you are in your first year of business you can benefit from a 1% reduction to your FRS rate.
Who Stands To Benefit From The Flat Rate VAT Scheme?Largely contractors are likely to benefit from the scheme, though this depends on turnover and expenses as the higher your sales turnover, the more likely it is to be beneficial.
Whilst the rates increased on January 4 2011, reducing the possible profit made, there are still many people who could benefit.
The rates alter depending upon your business, ranging from 4% to 14.5%. For those working in computer and IT consultancy or data processing the rate has increased from 13% to 14.5%.
Visit the the FRS page on HMRC’s website to find out your flat rate.
What are the disadvantages?There are rules and exceptions governing the Flat Rate Scheme. For example if your turnover is more than £150,000 per annum, you will be unable to take part.
If you make use of the scheme, you cannot reclaim VAT on purchases, except in certain circumstances. As a result, the FRS works best for people who have few expenses compared to their fee income. VAT on expenses can only be recovered if they are capital items costing £2,000 or more or if the assets are still within the business on the date of registration.
How do you apply for the FRS?The Flat Rate Scheme can commence at the beginning of any VAT accounting period and it is very easy to change tax programmes. Simply download an application form from the HMRC website and post it to them.
Any other tips?Work done for EU businesses is outside the scope of UK VAT and is therefore excluded from the Flat Rate Scheme calculations
For more advice contact us on 01962 735350 or follow us on twitter: @vatconsultancy.
VAT rise survival plan – don’t pay the price for poor preparation
With VAT rising today to 20% we’re urging businesses not to bury their heads in the sand. Whilst the 2.5% hike can make for a difficult start to the New Year, if businesses assess the impact and act accordingly it will be possible to manage the rise as effectively as possible and minimise the risk of errors arising.
Be prepared, seek clarification if you are unsure on how to treat an item for VAT purposes, and you never know you may actually profit from the rise.”
Here’s our 12-point survival plan:-
1. Be aware of the tax point rules and make sure that you have a company policy that your staff know and understand. Because each business is unique, it is neither necessary nor appropriate for all businesses to have identical policies relating to the VAT rate increase. It is, however, essential that any policy adopted fits within the scope of the tax point rules as well as the anti-forestalling legislation.
2. Think about pricing – will you pass the VAT increase onto customers or absorb this cost to keep prices the same, remembering that you will still have to pay over the additional 2.5% to HMRC. This will be a commercial decision based on what competitors are doing, whether suppliers are increasing their prices and elasticity of customer demand.
3. As the vast majority of people will be aware of the VAT rise, a marketing push could encourage customers to make purchases. Holding any prices as they are could provide a competitive edge especially if you can boost margins on other lines to compensate.
4. Don’t forget if you are a business only selling standard rated goods, one-sixth of your revenue will be VAT.
5. One of the great traditions of Christmas shopping is the return of unwanted presents in the New Year, so retailers should make sure they understand the rate to put on credit notes, the value of gift vouchers to give in return and the value of exchanged goods.
6. Retailers should ensure their POS systems can identify goods bought before the rise so that any later refunds reference the rate that was applied for the original supply.
7. Get your accounting right to avoid any fines from the tax man. HMRC will as ever penalise mistakes such as a wrongful declaration of output tax so don’t expect leniency. Careless errors could trigger a 30% penalty.
8. If you are not registered for VAT and sell mainly zero rated products, the rise is a good prompt to register as you will be able to recover the VAT you incur on suppliers’ costs and so reduce overheads.
9. Charities and VAT-exempt businesses, which are unable to recover VAT costs on purchases, will be hit the hardest. Be aware that your budgets will have 2.5% less to work with in 2011 than you did in 2010.
10. Take a look at supplier terms and don’t be fooled by ‘Beat the VAT Increase’ promotions. Unless cash-flow is extremely tight or VAT is irrecoverable it will take a £1,000 spend to incur an additional £25 cost as a result of the VAT rate increase. However, for larger businesses, payments on account will be based on pre-VAT rate rise quarterly liabilities which will give some relief from the effect of the rise.
11. Businesses on the flat rate scheme should take the opportunity to review their position. Revised flat rate scheme rates will become effective at the time of the rise so take advice to establish if there is the chance to use a lower banding. This could have a considerable impact on cashflow.
12. Pay particular attention if you or your clients import. Import VAT deferment levels should be reviewed. SIVA (Simplified Import VAT Accounting) could be a good option but make sure you take further advice on this.
Ultimately our advice would be to be prepared, seek clarification if you are unsure on how to treat an item for VAT purposes, and you never know you may actually profit from the rise.
For further advice or information get in touch with us: vat@thevatconsultancy.com
The 12 VAT rules of Christmas – Day 12
On the twelfth day of Christmas ….
- Make it your New Year’s resolution to review your insurance policies as the rate of Insurance Premium Tax (IPT) always follow the rate of VAT and consequently will also be going up to 20%
- Pay particular attention if you or your clients import. Import VAT deferment levels should be reviewed. SIVA (Simplified Import VAT Accounting) could be a good option but make sure you take further advice on this.
- Finally, make it your New Year Resolution to plan your activities carefully and continually review your methods for calculating the amount of VAT that is recoverable to ensure you achieve optimum benefits from the available reliefs. Don’t assume that the current method will remain efficient and suit your charities needs.
The 12 VAT rules of Christmas – Day 11
On the eleventh day of Christmas ….
- So what do you buy the person who has everything for Christmas and keep it VAT-free? Well, a private jet of course, but do pay for it before 4 January 2011 as private aircraft will carry the standard rate of VAT after this date, meaning your purchase will cost 20% more.
- Businesses on the flat rate scheme should take the opportunity to review their position. Revised flat rate scheme rates will become effective at the time of the rise so take advice to establish if there is the chance to use a lower banding. This could have a considerable impact on cashflow.
- When dealing with your suppliers, don’t accept a VAT charge if there is a relief available and be prepared to explain any available VAT reliefs to suppliers; after all charity is about giving and sharing.
The 12 VAT rules of Christmas – Day 10
On the tenth day of Christmas….
- Time to curl up on the sofa in front a roaring log fire with a glass of mulled wine and watch a Christmas movie – but don’t rent them! As with presents, buy your films from one of the many VAT-free import online retailers and for the ultimate VAT-free munchie opt for microwave popcorn or Pringles.
- Businesses on the flat rate scheme should take the opportunity to review their position. Revised flat rate scheme rates will become effective at the time of the rise so take advice to establish if there is the chance to use a lower banding. This could have a considerable impact on cashflow.
- Christmas is a time when charities may be reliant on voluntary or seasonal staff – don’t overlook their training so that VAT free sales are recorded correctly.
The 12 VAT rules of Christmas – Day 9
On the ninth day of Christmas….
- Christmas is a great time to catch up friends and family for dinner. When you’ve been slaving over a hot stove for a few days, it’s tempting to indulge in a takeaway, but be warned this will carry VAT. Better to cook something at home. Looks like it’s turkey curry after all then!
- Charities and VAT-exempt businesses, which are unable to recover VAT costs on purchases, will be hardest hit. Be aware that your budgets will stretch 2.5% less far in 2011 than they did this year. If you’re considering making a capital investment, you may wish to consider bringing the purchase forward to benefit from the 17.5% rate.
- If you are one of the larger charities and have a shop, encourage and sell donated goods, which are VAT free. Goods that are bought in for resale will be subject to VAT; but don’t forget that books and children’s clothing are VAT free!
The 12 VAT rules of Christmas – Day 8
On the eighth day of Christmas….
-If you’re planning a family day out over the festive period, zoos and museums are generally VAT-free. If you take a packed lunch you’ll not only avoid the VAT in the park café, but you’ll get through the left-over turkey a lot quicker.
- If you are not registered for VAT and sell mainly zero rated products, the rise is a good prompt to register as you will be able to recover the VAT you incur on suppliers’ costs and so reduce overheads.
- Mail-outs have a proven track record for publicity and generating responses. General mail outs or bulk mailings are VAT free, whereas those targeted to specific individuals or groups will incur a VAT charge.
The 12 VAT rules of Christmas – Day 7
On the seventh day of Christmas….
- If you’re looking for ways to keep the children amused while you finish off those last minute Christmas preparations – take a look at what activities local independent organisations are running as generally they will be VAT-free.
- Get your accounting right to avoid any fines from the tax man. HMRC will as ever penalise mistakes such as a wrongful declaration of output tax so don’t expect leniency.
- When it comes to advertising your charity, take advantage of zero-rated advertising such as “pay per click” internet click through facilities.
The 12 VAT rules of Christmas – Day 6
On the sixth day of Christmas ….
- Looking for the ultimate outfit for the office Christmas party? Remember that all adult clothing carries VAT, so opt for vintage chic and visit your local charity shop, and get a double saving – the clothes will be VAT-free and cheaper.
- Retailers should ensure their POS systems can identify goods bought before the rise so that any later refunds reference the rate that was applied for the original supply.
- During an event, if you are asking for any kind of monetary donation, make sure that it stays VAT free by not offering to provide anything in return for the donation.