A financial intermediary is not VAT registered; his turnover is about £100,000. He receives commission from mortgage providers for introducing customers to them and has heard that some intermediaries doing the same type of work are VAT registered and are accounting for VAT at the standard rate. Why is this?
In order for a supply of financial intermediary services to be exempt the intermediary must:
- bring together a person seeking a financial service with a person who provides a financial service;
- stand between the parties to a contract and act in an intermediary capacity, and
- undertake work preparatory to the completion of a contract for the provision of financial services, whether or not it is completed (VAT Notice 701/49, section 9.1)
Most practitioners receiving commission from mortgage lenders for introducing borrowers meet conditions 1) and 2).
However, it is the final requirement to undertake work preparatory to the completion of a contract that may not always be met, and if it isn’t met, then the commission would be taxable and standard rated rather than exempt.
For this financial intermediary this means that it really depends on how much work he is doing for the customer or lender. If the financial intermediary just recommends a mortgage provider to the customer and takes no further part, the commission will be for a taxable supply and count as taxable turnover for VAT registration.
If, however, the financial intermediary is helping to set the terms of the contract or make representations on behalf of a customer, then they are doing work preparatory to the completion of a contract and so the commission is exempt.
It may be that your client acts differently depending on the customer and so would be making both taxable and exempt supplies. If this is the case your client only needs to VAT register if the taxable turnover exceeds £83,000.