Making a profit is hard enough at the best of times. However any firm having to find 17.5 per cent of its sales out of the blue is going to struggle and this is the threat facing those selling mortgage leads to intermediaries.
One professional colleague has recently settled a case with HM Revenue & Customs after it had decided the mortgage leads he had been selling were liable for Value Added Tax (VAT). Sales were charged on a back-dated basis and five years of sales have had to be accounted for.
The following figures are fictional, as the colleague has kept the particulars of the case private. If, however, one imagines the firm sold £50,000 worth of leads in a year, that is £250,000 in five years. If a straight 17.5 per cent VAT is charged on these sales, then one is talking about a bill for £43,750. This is not an insubstantial sum for the vast majority of firms and would see many going to the wall.
Two options
But what is the position for firms selling mortgage leads and what can they do to protect themselves in the future?
A quick look on the internet and there are any number of firms that sell leads to mortgage brokers ranging from well-known brands to smaller less recognisable operations. Some charge VAT on their leads while others do not, which in itself seems particularly strange. Surely there is a rule appertaining to the sale of mortgage leads and whether or not VAT should be charged on the sale?
Firms setting up in this area have two options. One is to charge VAT, the other is to ensure the contract is worded so as to stipulate that if there turns out to be a VAT liability on the sale of the leads, then the buyer is liable for that and not the firm itself. However the problem in this is that, few if, any brokers are going to be happy about entering into a contract that may see them being hit with an extra charge at some date in the future. Certainly when there are so many other providers of leads in the market, it is unlikely anyone would be happy to take such a risk. Many brokers are sceptical enough of the service leads providers offer them, without being told they are also going to be held liable should there prove to be a VAT charge in the years to come. However simply deciding not to charge VAT or make any provision for that charge should it arise in the future would seem a perilous option.
VAT liability
In determining the exact liability in light of tax, getting a straight answer is not easy. A simple yes or no does not seem possible and when one looks at the definitions and explanations surrounding VAT liability, one quickly understands why.
For a firm deciding the VAT liability of its services as a financial adviser, it should
first establish what the customer is seeking: advice only; intermediary services only or a mixture of both advice and intermediation. The provision of advice is a taxable service, and so for a firm offering advice only then there is a VAT liability on the money charged for that service.
However the provision of intermediary services for arranging most financial and insurance products is exempt from VAT. To be exempt of its liability, the intermediary service must contain three elements. It must bring together a party seeking a financial service with a party providing financial services, it must act between those parties and it must undertake work preparatory (except for intermediaries arranging insurance and securities) to the completion of a contract for the provision of financial services.
At first this seems as though it may exempt the sale of mortgage leads to brokers as this certainly counts as bringing two parties together. However, looking at things in a more detailed way, how does a seller of leads act between the two parties once it has brought them together? In most cases once the lead is sold then it is up to the intermediary to make contact and direct matters and the lead seller is completely out of the loop having sold on the contact details.
Confusion
According to the stipulations from HM Revenue & Customs, doing work preparatory to the completion of the contract is also necessary for services to be exempt from tax and how does this fit in with the way that lead sellers operate? Again once the two parties have been brought together through the sale of the lead, each firm gets on with their business and there is little more that is done with reference to that specific client or their needs.
While there remains confusion in this area of the market, new firms will be nervous about setting up, existing firms will be nervous about asking for a clear statement on the matter from HM Revenue & Customs, while brokers will remain puzzled as to why some firms charge VAT and others do not. However selling mortgage leads is a growing business and we should make sure it is resting on solid foundations for the future. A clear ruling on the VAT liability with reference to the sale of mortgage leads would be in everybody’s long term interest.
