A review of mixed supplies could lead to dealing commission becoming subject to VAT.
Many businesses in the financial sector supply both taxable and exempt services, often to the same clients. If the client is unable to recover the VAT the business may be tempted – or put under pressure – to lean heavily towards the exempt aspects of the services. HM Revenue & Customs (HMRC), of course, approaches such questions from the opposite direction; it expects the exemptions to be interpreted narrowly and every so often an issue erupts where the 'industry practice' is shaken up. Currently, the focus is on investment management.
Private client fund managers will probably be aware that the VAT treatment of their charges is under review. HMRC is saying that commission charged under a discretionary fund management agreement should normally be subject to VAT, along with the annual management fee. In its view both charges relate to a single, VATable service, but most fund managers currently treat the dealing commission as exempt.
The correct answer, as is often the case with VAT questions, is that it depends. If the dealing commission genuinely represents a separate supply of services then it must be exempt, but if it is merely part of (or 'ancillary to') the fund management advice then HMRC could be right. If you have not already done so, you should check the wording of your contracts and client correspondence to determine whether you have an exposure.
Smith & Williamson is following developments closely and expects HMRC to clarify its views in the next few weeks. It remains to be seen whether HMRC will apply its preferred treatment retrospectively and raise assessments.
HMRC has also suggested that VAT should be charged on introductory fees charged to fund managers; again, strictly, the correct answer depends on what exactly is being introduced and it is not clear whether this indicates any change of policy by HMRC. However, this has always been an area where transactions can be interpreted in different ways and if you receive or pay introductory fees you should make sure that the VAT treatment has been properly considered.
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