BUSINESS BRIEF

17 Sep 2004 03:45 PM

Contents:
1. VAT - Bad Debt Relief: Invitation to contribute to Customs and Excise Review
2. VAT - Treatment of Services Supplied by Independent Financial Advisor (IFA) Networks

1. VAT - BAD DEBT RELIEF: INVITATION TO CONTRIBUTE TO CUSTOMS AND EXCISE REVIEW

This Business Brief article invites contributions to a review of Bad Debt Relief in which Customs & Excise will look at whether changes announced and implemented since 2002 have achieved their intended aim. The review will also consider the need for further changes and for the continuation of extra-statutory concessions/agreements, and look at ways of simplifying or updating legislation if appropriate.

Background

The VAT Bad Debt Relief Scheme (BDR) enables VAT registered businesses to recover VAT they have declared and paid, where the customer has failed to pay, providing certain conditions are met.

The main changes that have occurred since 2002 have been: - - Business Brief 23/2002 announced the removal of the notification requirement for supplies made after 31.12.2002
- Business Brief 23/2002 announced the requirement from 01.01.2003 for customers to monitor input tax claimed and repay any of it that remains unpaid over six months from the relevant date.
- Reg 170A provided instructions from 01.01.2003 on how to attribute payments where the BDR arises from supplies of goods and credit under a finance agreement.
- Business Brief 27/2003 announced that BDR claimants must adjust their claims if payment for the debt is subsequently received by an assignee to whom the applicant is connected in respect of debts assigned on or after 11.12.2003.

Contributions
The views of traders and other interested parties who have knowledge of this relief or are affected by it are being sought to help inform the review. Responses/contributions will enable the Government to assess the effect of the relief and to take on board useful and constructive input, before deciding on any further changes. Any contributions must be received by 30 November 2004.

Contributions should be sent to Martin Gordon, Supply Division, Policy Group, HM Customs and Excise, 22 Upper Ground, London, SE1 9PJ or e-mailed to martin.gordon@hmce.gsi.gov.uk

Confidentiality
Responses and contributions may be made public. If you do not wish your response to be identifiable in any published summary, you should state this clearly in your communication.

Further Information

Public Notice 700/18 'Relief from VAT on Bad Debts' is available from Customs' National Advice Service and from the 'Public Notices' section of Customs' Website. Other relevant publications include parts of Public Notice 48 'Extra-Statutory Concessions' which are available from similar sources. For general enquiries please contact the Customs' National Advice Service on 0845 010 9000.

2. VAT - TREATMENT OF SERVICES SUPPLIED BY INDEPENDENT FINANCIAL ADVISOR (IFA) NETWORKS

This Business Brief article clarifies the VAT treatment of services supplied by Independent Financial Advisor (IFA) networks and their appointed representatives (ARs).

Background

Customs are aware there has recently been some concern over the VAT treatment of services supplied under arrangements that allow IFA firms, authorised to carry out regulated activities under the Financial Services and Markets Act 2000 (FSMA), to operate as networks for non-authorised financial advisers. Under these arrangements, the authorised IFA firm takes regulatory responsibility for non-regulated advisers, known as appointed representatives, enabling the ARs to carry out regulated activities without the need to be authorised directly by the Financial Services Authority (FSA).

Currently, 'regulated activities' means the selling of investment products. This will extend to the selling of mortgages from 31 October 2004 and to general insurance sales in January 2005. This Business Brief only applies to regulated activities provided under IFA network arrangements.

These network arrangements are permitted under section 39 of the FSMA and are subject to strict regulatory rules. These rules are outlined in Chapter 12 of the Supervision Manual of the FSA Handbook and, in particular, the following should apply:
* the network appoints the ARs and trains them to operate in accordance with FSA requirements;
* in all dealings with the client, the ARs make it clear, both orally and on any paperwork, that they are acting on behalf of the network; * the network has the contractual relationship with the financial product providers and at all times the AR acts on the network's behalf;
* the network maintains a high level of control over the ARs, carrying out regular checks and audits and imposing sanctions where appropriate;
* the network accepts responsibility for the actions of the ARs and handles all customer complaints made against the AR;
* the network meets the regulatory requirement relating to professional indemnity insurance to cover any claims resulting from the activities of the ARs and is legally liable for any sanctions imposed under the FSMA; and
* all fees or commissions for regulated activities are paid by the clients or product providers to the network and these form part of the income of the network for accounting and direct tax purposes.

VAT Treatment

When networks operate in this way, a "sub-agency" or "sub-contract" arrangement in effect exists between the network and the ARs. The network acts as principal, making supplies of financial intermediary services to the financial product providers and supplies of advice and/or financial intermediary services to the clients. The networks effectively sub-contract their functions to the ARs who interact directly with the client and the product providers in the provision of individual supplies on behalf of the network.

This means that:
* All payment (whether by fee or commission) received by the network from the product providers or clients for the supplies of regulated financial intermediary services provided via the ARs is the network's VAT exempt income, and the onward payment made to the ARs is consideration for the AR's VAT exempt intermediary services supplied to the network.
* Fees, whether paid directly to the network or via the ARs, in respect of regulated advice only services which fall outside the exemptions for intermediary services are the network's standard rated income. Any onward payment made by the network to the ARs is consideration for the provision of those services by the ARs to the network on which VAT will be due if the AR is registered or required to be registered for VAT (i.e. its' taxable income, including those onward payments, is above the VAT registration threshold). * Any optional services supplied by the network to its' ARs for additional consideration (such as specific compliance or IT services) will be separate supplies and the relevant VAT liability will apply. * Any non-regulated services provided by ARs may fall outside the network arrangements altogether and, if so, will be made directly by the ARs to the client/product provider.

A different VAT treatment will apply to supplies made by networks that do not operate in the way outlined above (for example, firms, which on first appearance look like networks, but are set up to provide marketing and/or compliance support services to directly authorised IFA firms). In the event of any doubt, businesses are advised to contact Customs immediately on the number shown below.

Further information

For further help and advice please contact Customs' National Advice Service on 0845 010 9000.

The views expressed in this Business Brief are those of HM Customs and Excise.

GENERAL ENQUIRIES:
For general enquiries please contact the Customs' National Advice Service on 0845 010 9000.

This release and other information about HM Customs & Excise can be found at our website: www.hmce.gov.uk

For the attention of Businesses and News & Business Desks Business Briefs are available by subscription from the News Distribution Service, Government News Network, Hercules Road, London, SE1 7DU