Businesses that serve as intermediaries in financial transactions often face uncertainty regarding whether their services qualify for the VAT exemption on financial services. We get asked by a myriad of businesses querying their VAT position, which includes IFA’s (independent financial advisors), mortgage advisors, estate agents and peer to peer lenders. This can affect both VAT registered businesses and those who are unregistered.
The default position is that services provided between UK businesses are subject to the standard VAT rate of 20%, unless a specific exemption applies. Certain financial services qualify for VAT exemption, meaning that such supplies are not subject to VAT.
As per VAT Notice 701/49, a supplier of an exempt intermediary service is a person who:
- brings together a person seeking a financial service with a person who provides a financial service
- stands between the parties to a contract and acts in an intermediary capacity, and
- undertakes work preparatory to the completion of a contract for the provision of financial services, whether or not it is completed.
The final point is of importance, as merely providing general administration and clerical services as an intermediary would likely render a supply to be taxable. For a supply to be VAT exempt, it would be expected the intermediary conducts tasks such as helping set the terms of a contract, undertake due diligence, or complete credit checks to satisfy the ‘preparatory work’ condition.
Notably, those intermediaries receiving income for dealing with the issue of securities, i.e. shares or bonds can still qualify for VAT exemption despite not undertaking any preparatory work.
So long as IFA’s or mortgage advisors can meet the exemption conditions above, they can exempt those services when acting as an intermediary. On the other hand, it is common practice for estate agents to refer clients to financial institutions or mortgage advisors. Commissions received for simply passing on a client’s details would not qualify for exemption, and VAT is due at 20% for VAT registered businesses.
Incorrect application of the legislation can lead to:
- Not registering for VAT on time.
- Failing to apply the correct VAT liabilities on sales.
- Recovering incorrect amounts of input tax.
If you have a query please contact our VAT Team at Ellacotts on 01295 250401 or email solutions@ellacotts.co.uk.
Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.
