Advice has a value in and of itself. We know from Dynamic Planner’s Financial Happiness Index and associated academic research that people who take advice are happier, more resilient, more confident and more self-reliant. However, for simplicity, the cost of advice has been inextricably linked with products and, more specifically, their growth in value.
CP26/10 proposes to free up advisers and their clients to agree the nature, frequency and price of the services they offer and choose.
This makes sense. The way in which advice provides value, delivers a good outcome and enables clients to meet their financial objectives is not linear or evenly distributed across a relationship. One or two advice moments can be life changing, while annual reviews when everything is going well can be an inconvenience for the busy client. The costs to the adviser of the actual advice in those key moments is low, but the cost of being there for the whole journey, so that you’re present in when it counts, is huge.
So, there is a disconnect between when the client is willing and able to pay, the work and costs the adviser incurs and the value of the review. But that’s okay, isn’t it, in a relationship throughout which the adviser supports the client to meet their financial objectives?
Unfortunately not. There are other reasons behind the way things are today, namely VAT and consumer credit – neither of which are covered in CP26/10 or in the FCA’s purview.
Consumer duty and VAT law directly contradict each other. VAT law is built on the exchange principle, ie consideration in exchange for supply. As such, it’s a transactional tax applied to relationships that are increasingly experiential and outcome-focused. Even at a high level, that has issues:
- Timing: When the work is done versus when it is paid for. VAT requires characterisation at payment; value may have been delivered years earlier or not yet at all.
- Amount: How much work is done versus how much is paid.
- Shape: Continuous supply or a series of discrete events
The exemption that covers financial intermediation and dealing in securities is under Schedule 9 Group 5 VATA 1994. In the intervening years, the nature of the advice and of the advice industry has changed significantly. There have been opportunities to review the approach at each regulatory change, as well as when we left the EU and even in the recent Tax update 2026: Simplification, modernisation and fairness summary. However, nobody has wanted to disrupt the status quo and open up Pandora’s box. So I thought it might be fun to open the lid and take a peek.
The HMRC guidance sets out six stages of the advice process:
- Fact-finding
- Researching investment options
- Reports and forecasts
- Recommending products
- Arranging products
- Ongoing monitoring
This seems familiar and reasonable for a new business sale. But what about situations when:
- The best outcome from the ongoing service is not to ‘deal’.
- The service, or most of its cost and value, is review, planning, reporting, pure financial planning, cashflow modelling or IHT advice etc.
- You make both an initial and an ongoing charge in the same VAT period for the same thing.
- Both the adviser and the DFM MPS manager claim the exemption for the same ‘dealing’.
- It’s actually the platform executing the deal.
- The cost of initial advice and set up and/or decumulation is offset by ongoing charges in between.
- All the charges are taken from pension funds, but the advice is holistic.
I am no expert, but the more you pull on these threads the more complex and vulnerable the status quo appears. The recent CP26/23 consultation highlights rather than alleviates the issues by clearly requiring all the firms in the distribution chain to demonstrate fair value for the same client relationship. This has generally been ignored, and the box has not been opened because:
- Most advisers aren’t VAT registered, sitting below the £90,000 threshold – but the 2024 RMAR shows the average individual adviser fee revenue was £152,000.
- It is obscured by the bundled costs disclosure rules, but as regulation and technology evolve, it is becoming more transparent.
- It’s not been worth it to the HMRC, with the VAT at stake per firm small compared to the complexity of an unusual industry. But consolidation makes us easier to tax, as it does to regulate.
If Andy Burnham and his new chancellor wanted to raise revenues without new legislation or public outrage, they might take a look and see:
- Current VAT collected on advice: £50m to £100m
- If they enforced current rules: £150m to £250m
- If all advice was VATable: £550m to £700m (net of reclaims)
Is that the full picture, though? Not quite. For that, we would need the Burnham government to look deeper into the box and see all the complexity and costs of the status quo, and the additional costs of full enforcement or full taxation. And to realise that, surprisingly, the abolition of VAT on all advice has the best net overall economic benefit of £190m a year, by saving the huge operation costs.
That’s before the positive impact on the savings culture, the advice gap and consumer outcomes. The advice and advice innovation possible from CP26/10 will be far more effective than fiddling with Cash ISA rules, but VAT on advice will kill innovation and growth. So we need to argue for abolition, in CP26/10, CP26/23 and wherever we can.
Chris Jones is financial services director at Dynamic Planner
