My client is an independent mortgage advisor, who is not VAT registered. Her turnover is above £85,000 and all of her income is either commission, which is paid by UK lenders, and flat fees received from customers seeking a mortgage. In the last 12 months, £75,000 of her turnover was derived from helping people seeking a mortgage. She is finding the right product for them based on their finances and helping with submitting applications. The remaining £14,000 is earned by directing customers to specific lenders, and my client gets a small commission from the provider if they take out a mortgage with them. Does my client have to VAT register?

If you are bringing together a person who is seeking a financial service with someone who is providing a financial service you may be able to treat the income arising from this as VAT exempt. Exempt supplies are not included in your taxable turnover when looking at VAT registration.

Financial intermediaries can treat their supplies as VAT exempt if they can meet the following criteria as per VAT Notice 701/49 sec 9.1:

  • ‘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’

When acting as an intermediary for arranging the sale of securities (such as shares, bonds, loan notes or debentures) no preparatory work needs to be undertaken.

The last point talks about preparatory work in relation to the completion of a contract. This means your client needs to take an active role in making representations on behalf of the customer or help the client to fill in/check/submit forms and applications or help set the terms of the contract. See the following link for more information: https://www.gov.uk/hmrc-internal-manuals/vat-finance-manual/vatfin7250

For the larger part of their turnover if they can meet the criteria above, they can treat that turnover as VAT exempt. The income from merely referring a customer to a lender will be a standard rated supply as there will no preparatory work conducted.

In this scenario your client’s taxable turnover stands at £14,000 for the year and the remainder is all exempt as a financial intermediary. There is no requirement to register for VAT, and she only needs to do so once her taxable turnover exceeds £85,000.

In association with Croner Taxwise

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