Alliance Trust Savings’ announcement that it will no longer be charging VAT [PDF] on the account fees for its dealing and ISA accounts is a small but welcome saving for clients, with quarterly fees falling from £22.50 to £18.75. But it illustrates a peculiar inconsistency in how UK brokers treat account administration fees and VAT.
HMRC guidance says that charges for certain investment services are not subject to VAT, as this notice sets out. These include brokerage commissions and fees for stock custody, dividend handling and implementing corporate actions.
As a result, if a firm charges an investor a “custody fee” or an “account fee” to cover custody and servicing for their investments, that fee is exempt from VAT. However, if the fee is instead a broader administration fee that pays for other services, the fee will not be exempt.
Unsurprisingly, this creates plenty of room for ambiguity about what the client is explicitly paying for. Is the account fee solely for custody and processing, with other services – such as research and information – essentially a free part of the package? Or does it include payment for VATable services?
Different brokers have taken opposing views on this, with the result that functionally identical charges are described differently and have different VAT treatment depending on which firm you use. For example, if you use iDealing, you pay a flat-rate account fee of £20 per year, made up of £5 per quarter with no VAT. If you use Share Centre, you pay a very similar £21.6 per year – but in the form of a monthly charge of £1.5 plus VAT.
In general, firms that apply the same fee across both dealing accounts and ISAs seem to be treating the fee as VAT exempt. The reasoning here may be that if the ISA fee is different to the dealing account fee, then it clearly includes a charge for ISA administration, which would not be VAT exempt.
Alliance Trust’s revised fees are consistent with that approach (both dealing account and ISA have the same fee and have had all along). In contrast, the Alliance Trust SIPP charge is higher and remains subject to VAT. Does that reflect the greater admin burden of SIPPs and the fact that part of the fee must be paying for that?
That might make sense – but other brokers have taken a completely different view. For example, AJ Bell Youinvest calls its SIPP fee a “custody charge” and does not add VAT – even though this custody charge solely applies to SIPPs (its dealing accounts and ISAs have no fixed fee).
All of this may be entirely logical from a tax specialist’s point of view, but for an investor it can seem rather bizarre.