The Retail Distribution Review (RDR) will significantly alter the way in which financial advisers charge for their services. The current VAT rules for financial advisers are complex. What VAT changes will arise as a result of RDR and what VAT issues should financial advisers be considering in the light of the RDR changes? Many financial advisers provide advice and act between the customer and provider of a financial services product. In such a case, it is necessary to establish which of the two elements of the adviser’s service predominates to determine the correct VAT liability. The Retail Distribution Review (“RDR”) will introduce changes to the way in which financial advisers are remunerated from 2013. Among the changes, financial advisers will be required to agree explicit charges that will have to be disclosed with clients at the outset. The intention is that product providers should play no part in establishing the level of remuneration received by an adviser and will result in advisers charging fees as opposed to earning commissions from financial services product providers. Many customers seeking financial advice have been under the mistaken impression that paying fees based on an hourly rate to an adviser is always subject to VAT, while an adviser receiving commission from a product provider is exempt from VAT. The VAT liability of a service is determined by the nature of the service rather than the charging mechanism and therefore not all fees charged on an hourly rate are subject to VAT. Likewise not all commission payments are necessarily exempt from VAT. HM Revenue & Customs (“HMRC”) together with the Association of British Insurers recently issued a joint guidance document regarding the VAT liability of advisers’ remuneration. This 10 page guidance provides a number of examples of when advice can be standard rated and exempt. The guidance explains that if an adviser provides services which are predominantly exempt, payment for all the services need to be agreed when the contract is entered into in order for VAT exemption to apply. As a result of the RDR it is likely that advisers will undertake increased levels of standard rated advisory work. Advisers who previously may not have been obligated to register for VAT as the value of supplies subject to VAT was low may now be liable to register. Other advisers may see a shift in their business to the provision of more standard rated advisory services. Clearly, if advisers commence charging VAT in 2013, HMRC may start asking questions – HMRC takes the view that the RDR does not change the VAT liability of supplies. It will be necessary to demonstrate to HMRC that the nature of services supplied has changed. With this in mind it is certainly worth thinking about the VAT position before 2013 and reviewing the VAT liability position of advisers services both prior and post RDR. Advisers which make a mixture of standard rated and exempt supplies are restricted in the levels of input VAT they can recover. In many cases, it is necessary to negotiate a VAT recovery method with HMRC in order to obtain the optimum VAT recovery result. TaxWise is available to help answer any tax queries. Just call the Advice Service on 01455 852555 and one of our specialists will be happy to help.