After many months of debate, and two important decisions by the courts (Bloomsbury Wealth Management at the Tax Tribunal and Deutsche Bank at the CJEU), it seems that HMRC and the financial sector have moved a little closer to understanding one another. At least, the position of a financial adviser post-retail distribution review (RDR) is becoming somewhat clearer.

The guidance notes produced by HMRC, and more recently the Personal Finance Society, don’t cover every possible action by an IFA, but the big picture is now clear. HMRC accepts that where an adviser arranges for an investor to buy shares or units in a selection of collective investment schemes, such as unit trusts or open-ended investment companies (OEICs), this constitutes an exempt intermediary service and any advice supplied (e.g. in selecting the funds) is ancillary to that service. Although the adviser’s marketing materials may use terminology such as ‘wealth management’ or ‘investment services’, the day-to-day management of the client’s funds actually takes place within the collective investment schemes and is provided by the fund manager and not (or not normally) by the IFA. This point was at the heart of the Bloomsbury decision.

HMRC has also accepted that the same principle can extend to the ‘ongoing services’ offered by a typical IFA; these may look at first glance like a form of investment management, but in most cases they will consist of periodic reviews of investment performance and market risk, with a view to rebalancing and/or topping up the portfolio. (In the Bloomsburycase the reviews were provided on a quarterly basis.) As long as it is clear from the documentation that this is the extent and the purpose of the ongoing services, they too will be accepted as exempt intermediary services.

Services of this kind can usually be quite easily distinguished from those of a discretionary investment manager, which the CJEU confirmed in the Deutsche Bank case as being subject to VAT. Discretionary investment management (DIM) is a bespoke, handson service, in which the manager has an obligation to keep the portfolio under more or less constant review and to take action to improve the results. DIM services clearly include the buying and selling of shares, but according to the court the dealing service is ancillary to the investment expertise – even if charged for separately. This aspect of the case has caused some concern in the UK, where separate dealing charges are normally exempted, and HMRC has been consulting with the industry on how the decision should be implemented here. HMRC has confirmed that any changes will take effect from a future date. It is not yet known whether all dealing charges under a DIM agreement will in future be subject to VAT, but it is clear that, going forward, a separate charge will not on its own be sufficient to justify treating the commission as representing a separate service.

It is possible that, as they adapt to RDR, some IFAs will look to enhance their client offering by making it more of a proactive, continuous service, in return for a higher fee. If they do that, then they will not be able to rely on the intermediary exemption (even if the investments are in collectives), because they will have changed the essential characteristics of their service. If they go too far in that direction, the IFAs would be competing directly with discretionary investment managers, which would put them in the taxable arena.