Download DISCRETIONARY INVESTMENT MANAGEMENT

Guidance for IFAs on the VAT Treatment of Charges made in
Connection with Discretionary Investment Management Services
1.
DISCRETIONARY INVESTMENT MANAGEMENT
Discretionary investment management is a service provided by an investment manager to a
client in which the client authorises the investment manager to act in respect of his/her relevant
funds to use his/her discretion to invest those funds to achieve the best result for the client in
relation to the level of risk to which the client wishes to expose their capital. The client may also
request that certain investments are not made for ethical or religious reasons.
Once authorised, the investment manager uses his/her experience, knowledge and expertise to
invest those funds and makes all the decisions in relation to the pooling and investment of the
capital.
Discretionary investment management is a taxable service. It is often confused with exempt
fund management - possibly because investment management services provided in the course
of the management of certain “Special Investment Funds” (SIFs) is exempt in accordance with
VATA 1994, Sch 9, Grp5, Items 9 and 10. Here there is no SIF being managed (although the
discretionary manager may be investing some or all of the client’s capital in SIFs) so all the
charges made by the manager for his management services to the client carry VAT at the
standard rate; these include any charges described as:

Initial charges

Annual management charges

Performance charges.
Dealing fees/commissions that are charged specifically for separate supplies of trade execution
services are VAT exempt.
2.
INDEPENDENT FINANCIAL ADVISERS
It is normal for a client to be introduced to a discretionary investment manager via an
intermediary such as an Independent Financial Adviser (IFA).
Independent Financial Advisers (IFAs) receive income in the form of either fees or commission
from advising clients, both initially and on a regular basis, about the best investment
opportunities for them and intermediating between the client and financial service providers to
conclude contracts.
Fees or commission for advice only services are always taxable. Remuneration for intermediary
services may benefit from the VAT exemption if the IFA acts as an intermediary by bringing
together parties to an exempt financial service (e.g. where an IFA is the authorised distributor of
securities). In this case remuneration is often paid by the financial service provider and referred
to as commission. It can be an initial amount or ongoing trail commission. Remuneration can
also, however, be in the form of fees paid by the client to the IFA for introducing them to an
exempt financial service and again no VAT is chargeable on such fees.
However, regardless of how it is remunerated, there is no exemption for the introduction of a
client to a discretionary investment management service because discretionary investment
management is a taxable service that does not fall within the financial services exemptions.
The service provided by the IFA is a taxable introduction to a taxable management service. It is
not correct for IFAs to look through to the selection and purchase of VAT exempt assets by the
discretionary investment manager and treat their services as being exempt introductions to a
series of VAT exempt transactions.
3.
FEES AND COMMISSIONS PAID VIA MANAGERS
The FSA has determined that all charges made to the client by anybody in connection with their
investment should be itemised, valued and notified to the client to ensure transparency.
As noted in Section 1, initial charges levied by the discretionary investment manager will carry
VAT at the standard rate. However, when the client is introduced to the manager for a
discretionary investment service this will very often include an introductory commission which is
agreed at the point of sale between the IFA and the client. As the assets are to be transferred or
held by the manager, the IFA and client often request that the manager, for the sake of
convenience for the client, makes this initial commission payment on behalf of the client upon
the completion of the account opening and transfer of assets to the new portfolio. These fees
may be collected by the Discretionary Investment Manager but as they are the IFA’s fees, will
be subject to the treatment in Section 2 above.
4
VAT REGISTRATION OF IFAS
Any business that makes taxable supplies which exceed the current registration threshold, must
register for VAT. It is important that IFAs monitor their taxable turnover and are careful to
include all taxable fees and commissions (such as those for introductions to discretionary
investment management services).
Investment managers may assume they have not been charged VAT on taxable fees and
commissions by IFAs because the IFA is not VAT registered. It may however be the case that
some IFAs are incorrectly treating commission as exempt income when it is taxable and should
therefore be registered and charging VAT. In order to assist with this monitoring process it is
advisable that both parties regularly review and update any Self Billing Agreements that are in
place between them and IFAs inform managers immediately of any changes in their VAT status.
The current VAT registration threshold is £70,000 but is subject to change at Budget time and it
is important that businesses check it regularly.
5.
CONCLUSION
Charges for discretionary investment management services are taxable and any fees or
commissions received by IFAs in connection with these services are also liable to VAT. Any
amount charged on by the manager to or collected by the manager for the IFA from the client for
the initial introduction by the IFA is not a disbursement but part of the remuneration for the
manager’s or, as appropriate, the IFA’s taxable supply. All taxable income must be included in
the calculation to determine whether the IFA is liable to be registered for VAT.