24th July 2023
Many different types of intermediaries are found in the financial services sector but the VAT treatment of their services can be difficult to identify, presenting pitfalls where you act as one, or if you seek their assistance.
Why is it important?
As an intermediary, depending on the nature of the services you provide to your clients, you could be making supplies that are:
- Subject to VAT, in which case you would need to consider your obligations to register for VAT and charge this on your sales; or
- Exempt from VAT, in which case you would not need to charge VAT. You would however need to consider the impact of making such supplies on your own input VAT recovery, as you may find yourself partly, or even fully, VAT exempt. After all, it’s only possible to recover input VAT on costs where these can be directly linked to an onward supply that is taxable. In other words, the more VAT exempt supplies you make, the less VAT can be recovered.
Mistakes in this regard can be expensive, as you could be penalised by HMRC and subject to significant interest charges for failing to:
- Register for VAT on time;
- Account for output VAT on taxable supplies; or
- Correctly restrict your input VAT recovery where you are partly exempt.
Equally, if you receive intermediary services from a non-UK supplier as a VAT exempt trader, you will need to know if these qualify for VAT exemption or whether you need to apply the VAT Reverse Charge, which can require you to impute a VAT charge.
So, what are financial intermediary services?
The core law setting out the VAT treatment of intermediary services is found in Schedule 9, Group 5 of the VAT Act 1994, which defines these as services bringing together:
- A person who is, or may be seeking, to receive financial services; and
- A person who provides financial services (per items 1, 2, 3, 4 or 6 of the same Group, such as providing credit, or dealing with money or securities).
The above applies to the extent that the intermediary also engages in “work preparatory to the conclusion of contracts for the provision of these financial services”.
An intermediary’s supplies of market research, product design, advertising, promotional or similar services are all excluded from this definition, as is the collection, collation, and provision of information in connection with these activities.
It can therefore be difficult to determine if the services you provide (or receive) fall into any of these carve-outs, or whether they are intermediary services that can lead to issues.
For example, certain aspects of due diligence work or carrying out credit checks might form part of an intermediary’s work, but general administrative and clerical support services would be less likely to.
Furthermore, when providing intermediary services in respect of shares or securities (per item 6), the ‘preparatory work’ requirement is waived, meaning even the most simple introductory services can be regarded as exempt intermediary services.
These rules can also apply in unexpected ways. For example, if providing general financial advice in respect of a takeover or purchase of shares, this would be a taxable supply for VAT purposes. However, if the transaction proceeds and securities change hands, it could be argued that the supply could be VAT exempt.
Other factors to consider include the impact of the Card Protection Plan (CPP) case C-349/96 (which considered whether a mixture of taxable and exempt supplies made by an intermediary should be a single or multiple supply for VAT). As a result, it may not be possible to split out separate elements of your supply for differing VAT treatments if they are deemed to be ancillary to an overarching supply of intermediary services.
Intermediary services in the courts
To explore the extent of these differences, we have highlighted the following three VAT cases:
The CSC Financial Services Case (ECJ C-235/00) looked at ‘negotiation services’ provided by intermediaries and considered if CSC could be considered an intermediary at all.
CSC provided call centre services to a financial institution, providing individual investors in a personal equity plan with information, processing application forms on the institution’s behalf.
Here, the European Court of Justice (ECJ) held that the provision of straightforward technical and administrative services did not change the legal or financial position of the contracting institution and investor, so could not be subject to VAT exemption under the terms of EU law.
Instead, the ECJ found that to qualify for VAT exemption, intermediaries providing negotiation services would need be independent of the contracting parties, and provide their own mediation services which would alter the legal or financial relationship between the contracting parties.
Furthermore, as the financial institution had already contracted with the investors, the condition of ‘bringing together’ was not met.
Therefore, CSC was held to be providing a taxable supply as a direct representative and sub-contractor of the financial institution, and not as an intermediary service.
In the emerchantpay case (TC/2017/04834), the UK First Tier Tax Tribunal (FTT) held that the supply of a broad range of sub-contracted services, including on-boarding and introductory services, were sufficient to allow emerchantpay’s Bulgarian subsidiary providing these services to qualify for VAT exemption as an intermediary.
Emerchantpay’s Bulgarian subsidiary was tasked with providing support to its VAT-exempt UK parent only in very broad terms, with there being no written services agreement; yet it actually provided significant amounts of introductory, underwriting, account management, IT support, payment processing and due diligence services.
On the basis of the CSC Financial Services case above, HMRC argued that these additional services were taxable. This lead HMRC to issue assessments to emerchantpay for back-VAT of £129,235 for failing to apply the VAT Reverse Charge.
However, in this case, the courts found that the intermediary’s role was significantly more involved, and it was therefore necessary to consider the services provided more broadly. In particular, it was found that:
- The supply of due diligence and onboarding services were essential in bringing the two contracting parties together (changing their legal and financial relationship).
- The main service provided by the Bulgarian intermediary was not of payment processing, but instead of introducing businesses to emerchantpay. It did not matter that the subsidiary was remunerated on the basis of the number of transactions it processed.
On this basis, the supply by the Bulgarian subsidiary-intermediary was held to be VAT exempt and HMRC’s assessments were overturned.
The Bloomsbury Wealth Management case ( UKFTT 379 (TC) considered the VAT liability of charges by independent financial advisors (IFAs).
Bloomsbury provided financial investment advisory services to high net worth individuals. After initially meeting investors to determine their financial circumstances, Bloomsbury would provide high-level advice, including recommending fund managers. After providing this advice, the investors could then choose whether to become a Bloomsbury client, at which point they were introduced to fund managers, with a view to allocating their funds. Bloomsbury would then provide ongoing support in maintaining the client’s portfolio and issue their fee as a percentage value of the sum invested.
Bloomsbury filed a claim to recover VAT overdeclared on their fees, after determining these were instead for the provision of VAT exempt financial intermediary services, as opposed to taxable advisory services.
This was upheld by the Tribunal on the basis that Bloomsbury’s services were portfolio management (Item 6, Group 5), not the introduction to managers of special investment funds (Item 9, Group 5). This was due to the fact Bloomsbury received payment for providing introductory services, but not in respect of the advisory services, demonstrating that this potentially taxable element of the service was unimportant to the customer for ‘card protection plan purposes’.
As demonstrated by the cases above, the correct VAT treatment of intermediary supplies is not always clear cut, despite the seemingly innocuous passage in the legislation that provides for it. As such, this may work to your organisation’s advantage or its detriment. If you have any questions on this matter and how it may affect you, please do reach out to our VAT team at VAT@haysmacintyre.com.