Should VAT be charged on commissions or mortgage referral fees?

If you act as an independent financial adviser and perform a range of services, such as financial health checks, mortgage referral services, and investment advice. What VAT obligations do these services have? Should commissions and mortgage referral fees be subject to VAT?

The VAT liability of these services would depend on whether you are acting as a financial intermediary for VAT purposes.

What are the VAT exemption conditions for financial intermediary?

The VAT exemption conditions for financial intermediary are a lot stricter than that of an insurance intermediary. VAT Notice 701/49, section 9.1 states: ‘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’.

All three of the above conditions must be met for the supply to be exempt from VAT. In relation to the last condition, HMRC manual VATFIN7250 states that this includes helping a client to fill in an application form, checking and then forwarding them to the provider of the financial services, or includes a distinct act of mediation (see VATFIN7230), such as negotiating the terms of a contract.

The services being provided by you will need to be considered in relation to the conditions above to ascertain whether you are acting as a financial intermediary and whether the services qualify for VAT exemption purpose.

If the conditions are met, exemption will apply whether you charge a fee to the individual or receives a commission from the financial institution.

Only standard rates will apply to any advisory services. A useful checklist is provided by VATFIN7665 to help identify situations where initial advice might turn into an exempt intermediate service.