Distribution of Retail Financial Products

Distribution of Retail Financial Products: VAT under the European microscope 

The way in which retail financial products are distributed to retail investors is changing radically. In particular, the remuneration of independent financial advisers and others is moving decisively away from the traditional commission model to a fee basis. These regulatory-driven changes could have a significant impact on the VAT treatment of providers’ services which could result in either investors or providers bearing a significant additional cost.

Concern around how retail financial products such as savings plans, pensions and insurance are distributed has risen steadily in recent years. Increasingly, investors have struggled to understand the range of complex products as well as their opaque costs and benefits. In particular, the remuneration model for intermediaries and independent financial advisers (IFAs) has been criticized for creating potential conflicts of interest: there is a danger that IFAs are incentivized to sell products which bring them the most commission rather than those which best meet the client’s needs.

Abolishing commissions

The requirement for clarity over fee bases has led to a Europe-wide response which has sought to effectively outlaw the payment of commission to IFAs by originators. For example, the proposed revision of the Markets in Financial Instruments Directive (MIFID II) provides that:

  • When the investment firm informs the client that investment advice is provided on an independent basis, the firm […] shall not accept or receive fees, commissions or any monetary benefits paid or provided by any third party or a person acting on behalf of a third party in relation to the provision of the service to clients.1

Similar goals can also be seen in Packaged Retail Investment Products (Prips) initiative and in the review of the Insurance Mediation Directive (IMD). While details of how all these initiatives will interact remains to be clarified, a number of Member States are already reacting to concerns by introducing similar measures in individual jurisdictions.

Responses to regulatory developments

The UK is among the first few countries to implement these regulatory changes, with the Retail Distribution Review (RDR) being implemented from 1 January 2013. RDR rules require advisers to agree fees with customers in respect of all ‘retail investment products’, including most life policies, pension schemes and savings and investment products.

The majority of providers and their networks are currently finalizing the new fee mechanisms and are analyzing the wider impact these may have. For example, it is anticipated that significant consolidation will follow over the coming years with many IFAs exiting the business.

Other European countries are still considering the potential implications. In France, for example, where some 80 percent of IFA remuneration is currently channeled through agreements with asset managers, insurers etc., there is lively debate over how a ban on such commission might be implemented and/or whether alternative business models might allow current arrangements to continue in a different form. There is also, unsurprisingly, a significant concern that consumers will strongly resist the payment of explicit fees.

Focus on VAT

The role played by IFAs and other members of the wider wealth management network in the new regulatory environment has also brought renewed focus on the VAT treatment of these services. Unhelpfully, these discussions have come at a time when the services of advisers and wealth managers are also the subject of European litigation.

Under European VAT legislation, the intermediation and distribution of financial products is exempt from VAT.

Conversely, the provision of financial advice is taxable and therefore subject to VAT. The dividing line between VAT exempt introductory services and taxable advisory services is, however, often blurred. This matters because an unforeseen charge to VAT will either create an additional cost for investors wishing to access the market or, if it cannot be passed on, will reduce the profits of distributors and advisers.

In the UK, HMRC have consulted with the industry to consider the tests which must for met for exemption to apply. They have agreed that ‘advice’ can remain exempt where provided as part of a wider service which includes recommendation, referral and intermediary work around product distribution. Where there is no evidence of product arrangement or where one or more elements of the bundled service (other than the intermediary service) are separately contracted for, the service provided to the customer will be subject to VAT. From a practical perspective, the ability of an IFA to evidence intention will be key; exemption is likely only to apply where the IFA can demonstrate that the aim of any advice was the purchase or sale of a product.

The UK’s stance is broadly replicated in The Netherlands and Germany. In anticipation of the Dutch ban on commissions scheduled to come into effect on 1 January 2013, intermediaries have begun to introduce revised payment flows as well as to vary the contractual responsibilities which each member of the supply chain (i.e. IFAs, fund managers, wealth managers etc.) will take on. These include fixed or timespent fees for advisory services and the inclusion of fees in a subscription package. The Dutch Revenue has recently published its view on this issue, stating that if the introductory nature of the service remains unchanged, VAT exemption can continue to apply, provided that the customer pays the fee to the intermediary. As with the UK, exemption can continue to apply even if the parties do not actually purchase the product, provided that the intermediary’s aim can be evidenced. We expect that the German fiscal authorities will take a similar stance, albeit no detailed guidance has yet been issued.

The French Tax Authorities have historically held that the exemption should apply to the distribution and placement of shares in schemes compliant with The Undertakings for Collective Investment in Transferable Securities (UCITS). However, a recent publication of the French Autorité des Marchés Financiers (AMF), the French regulator, indicated that, from a regulatory standpoint, the distributors of UCITS funds (including IFAs) could not be viewed as providing placement services for the issuer unless those shares are actually taken up by the investor. Rather, the regulator viewed French IFAs as providing both order transmission and advisory type services. Whether these activities can fall to be exempt or not will be a matter of some debate, particularly in light of recent litigation which confuses the issue further.

Distinguishing ‘advice’ and ‘intermediation’

While the distinction between ‘general advice’ and more broadly bundled activities may be clear on paper, it will be interesting to see how these policies operate in practice. Despite this initial guidance from Tax Authorities, there remain many services where the line between exempt intermediary services and taxable advice will need to be clarified. This uncertainty is particularly acute given that the services of wealth managers and similar have come under the scrutiny of Tax Authorities following recent European litigation.

In the Deutsche Bank case, the Court of Justice of the European Union (CJEU) ruled in July 2012 that portfolio management services (which included financial transactions effected on behalf of the customer), constitute a single, taxable service. The CJEU decided that, whilst the services in question involved a number of elements, these were so closely linked that it would be artificial to view them separately. They should be treated as a single supply, the whole of which was subject to VAT.

However, in the same month, HMRC in the UK lost a case with a similar fact pattern. In the Bloomsbury Wealth Management case (Bloomsbury) HMRC argued that Bloomsbury’s services, which were broadly similar to Deutsche Bank’s, consisting of advice and order execution did not qualify for VAT exemption. Bloomsbury discussed the customer’s needs and wants at the outset, suggested a course of action, placed orders on his or her behalf, and monitored the investments’ performance. The Tribunal rejected HMRC’s argument, contending that the advisory element was only part of an overall service better characterized as the arrangement of a suitable investment in discussion with the customer. In concluding that the services were exempt, the Tribunal thought it important that a fee was only charged when a product was actually purchased. Whether the two cases provide a distinction without a real difference is likely to be the focus of much discussion, especially when applied to the new regulatory-driven changes which impact on how and where fees can be charged.

Ambiguous court rulings are not limited to the UK. In France, discretionary portfolio management services were viewed as VAT exempt by the Court of Appeal of Versailles, which viewed them as services focused on the buying and selling of securities - a view the CJEU expressly dismissed. While this may be overturned given the CJEU’s decision in Deutsche Bank, there are no clear guidelines as yet in existing local case law or tax guidelines to determine the respective weight of “intermediary” versus “advisory” functions undertaken by an IFA or investment manager in France.


Any new business models developed following regulatory changes must consider the potential VAT impact. Whether or not VAT is chargeable may make one provider more attractive than another. Conversely, if the provider has to bear the VAT cost rather than passing it on, its margins will disappear. Moreover, given VAT is potentially chargeable at each step in the supply chain, each party must understand its route to market, service offering and whether it carries any risk of challenge from the relevant Tax Authority or from its underlying customer if VAT is wrongly accounted for. This could result in the charging of penalties and interest as well as having to fund any VAT it cannot contractually (or commercially) collect it from its customers. In one scenario, erroneous charging of VAT which is taken directly out of the investment fund could leave investors out of pocket.

For further information, please contact:

Richard Iferenta

KPMG in the UK

Tel: +44 20 7311 2837

Gert-Jan van Norden

KPMG in the Netherlands

Tel: +31 2065 61025

Philippe Breton*


Tel: +33 1 5568 1434

1COM (2011) 656 final, Brussels, 20.10.2011

(*) Fidal is a separate and distinct organization from KPMG International and KPMG member firms and should be described as such.

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