Unfortunately, there is no single answer to the question of whether or not appointed representatives should register for VAT. What might appear to be small differences can lead to widely varying tax treatments.
Revenue & Customs set out its views on the VAT treatment of services provided by ARs in Business Brief BB/26B/04. Provided the necessary conditions are met, R&C treats the relationship between a network and an adviser as a sub-agency arrangement. Commission income from product providers is treated as being for a supply by a network to a provider and payment by a network to an AR as a supply by an AR to a network.
If the only income from any source received by an AR is for VAT-exempt intermediary services, there is no requirement or ability for the AR to be registered for VAT. But where an AR receives income from a network in respect of advice-only services or where they receive income from elsewhere which
would be taxable, the question of VAT registration has to be addressed.
The VAT registration threshold is 61,000. If the taxable income an AR receives exceeds this they must register for VAT. Below this limit, registration is voluntary. Whether to voluntarily register is a question of whether or not the benefit – i.e. the ability to recover VAT – outweighs the costs. If an AR registers it does not mean they get back all their VAT. The AR will still be earning exempt intermediary income.
A basic tenet of VAT is that a business can only recover that proportion of the VAT it incurs which it can attribute to the supplies it makes for which a right to deduct exists, e.g. taxable supplies. The rules on how this attribution should be carried out are set out in VAT law. VAT on costs wholly used to generate taxable income is recoverable while that wholly used for generating exempt income is not.
VAT used to generate both taxable and exempt income – which is usually the majority – is, unless otherwise agreed with R&C, recoverable in the proportion taxable income bears to total income.
Turning to whether network charges should be subject to VAT there are two approaches a network can take. The first is to argue that network charges are not charges at all and do not relate to any supply for VAT purposes by the network to the AR. Instead, it could say they are cost components recognised by the network in calculating the commission payable to members for their services under their AR agreements.
Where this approach is taken, it should be made clear in documentation. The expectation would be that it is stated that the charges are contractual deductions made in the course of calculating the commission due to ARs. The non-supply approach raises commercial issues for a network. For example, what happens if the commission earned by an AR is insufficient to cover the network’s deductions?
The alternative approach is to accept that charges are made for a supply by a network to an AR and therefore payable regardless of commission due to the AR.
Where the latter approach is taken the question arises of whether some or all the charges made by the network should be exempt from VAT as insurance-related services. There is no simple answer to this. Whether exemption is available in respect of some, all or none of the charges depends on the nature of the services provided, how they are charged for and the extent to which ARs can choose what they receive. Thus ARs may perceive inconsistencies between networks.
Finally, it is worth noting that the European Commission together with the fiscal authorities of all the EU member states, is looking at the scope of financial services exemptions including those applicable to insurance brokers. Of course, this is against the background of the decision of the European Court of Justice in the Accenture case in which the court took a restrictive view of the insurance intermediary exemption.
Case study illustrating transactions between an AR, a network and an IFA
J Smith is an AR for a network whose network income of 160,000 includes 32,000 for advice-only services.
Additionally J Smith earns 25,000 per year for provision of office facilities and administration to an IFA who is not VAT registered. Some 8,000 of VAT is incurred on general costs. VAT of 500, 300 and 1,000 respectively is incurred on network fees for training and development, research resources and access to quotes.
The quote database is only used to generate exempt intermediary income. The research resources are used exclusively to provide advice-only services.
J Smith’s taxable income is 57,000, which is below the compulsory registration threshold. If J Smith registers he will have to charge VAT of 5,600 to the network and 4,375 to the IFA.
Recovery of VAT
The VAT on the quote database is not recoverable. But that on the research resources is recoverable in full. Of the remainder, using the default standard method prescribed by VAT legislation, 31% is recoverable, calculated as follows:
Taxable income (32,000 + 25,000) x 100 = 570,000
The above figure divided by the total income (160,000 + 25,000) = 31%
Total recoverable VAT is therefore 3,073 (500 + 31% of 300 + 8,000)
Charging the network VAT on the advice-only element should not cost the network. The network should be able to wholly attribute this tax to the taxable income from the client. For the IFA, J Smith registering for VAT is costly but it could argue that the 25,000 charge should be adjusted to reflect the 31% recovery.
If J Smith can’t charge the IFA VAT as an addition, the 25,000 has to be treated as VAT-inclusive. 3,723 of VAT would have been accountable leaving only 21,277 to be retained – a greater loss than the VAT recovered.
Agreeing an alternative method for recovering VAT might produce a better result, for example, identifying separately VAT relating to the facilities and admin services provided to the IFA and treating this as recoverable.
Any exempt intermediary income from outside the European Union would generate additional recoverable VAT based on the extent to which costs were used to generate that income.