An ISA is a tax-free annual investment product and was launched
on 6 April 1999 to replace the Personal Equity Plan and the Tax
Exempt Special Savings Account (TESSA). When launched, it was made
up of three "components" – cash, insurance, or stocks and
shares and could be a mix of these components. An ISA comprising of
one component only was called a "mini" ISA, whilst an ISA allowing
for more than one component was referred to as a "maxi" ISA.
(a)
Cash mini ISA. There are usually no charges
connected with a cash ISA. The ISA manager's service to the
investor is exempt as the operation of a bank account. But where
the ISA is based on cash unit trusts it is treated as a stocks and
shares mini ISA for VAT purposes and the ISA management charges are
taxable.
(b)
Insurance mini ISA. An insurance ISA is an
investment linked to a life insurance policy insuring the life of
the ISA holder. For information on the liability of insurance
related services please see Notice 701/36 Insurance.
(c)
Stocks and shares mini ISA. A stocks and shares
mini ISA is generally intended for savers who do not need immediate
access to their savings. The VAT treatment for the stocks and
shares components of both ISAs and PEPs is the same
(d)
Maxi ISA. This could comprise a mixture of cash,
insurance and stocks and shares components but most tend to consist
solely of stocks and shares. Where a maxi ISA consisted of multiple
components, each component, although packaged together for tax
purposes, was usually managed and charged for separately. The VAT
liability of supplies made in respect of the stocks and shares
component of a maxi ISA was the same as that for a stocks and
shares mini ISA.
From 6 April 2005, the ISA structure was changed. The
separate ISA insurance component was removed and insurance products
were given the same ISA treatment as other collective investment
schemes within the ISA stocks and shares component. This means that
there are now only two ISA components – cash or stocks and
shares.
The VAT liability of the various charges to customers of
each of these ISAs is as follows:
These operate like bank accounts and therefore consideration received by the provider is exempt under Item 8.
Customers may be charged for execution of the purchase of shares or for portfolio management once the shares are purchased and held in their ISA. Arranging the purchase of securities is exempt under Group 5, Item 5. Portfolio management is excluded from the exemption and is therefore taxable.
Very little is known about the charges made to customers in relation to insurance ISAs as few insurers offered this product. However, contributions to insurance ISAs would have been premium for an insurance contract under VATA 1994, Schedule 9, Group 2, Item 1. Please refer any other charges, such as initial or annual management charges to the Financial Services policy team for guidance.
The CTF was introduced in April 2005 and is an account that may
be either a "stakeholder account" or a "non-stakeholder account".
This account must be held with an "account provider" who is
approved as such by the relevant section within HMRC. The
Government provide the initial contribution in the form of a
voucher and others may also contribute to the account.
There is a maximum 1.5% annual charge if the CTF is a
Stakeholder account which is deductible from the child’s fund
which is normally charged by the CTF provider. Non- Stakeholder
accounts have a range of charges. CTFs may be provided as savings
accounts and charges for their operation will therefore be exempt
under VATA 1994 Schedule 9, Group 5, Item 8, but where they are
provided as other wrapper products please see the appropriate
section of the guidance for the VAT liability of that product.
A PEP was a way to encourage people to invest in shares by offering a tax-free method of investment. It was introduced in 1987 and replaced by the ISA from 6th April 1999. As with an ISA, a PEP was used for investing for a specific purpose such as a mortgage or retirement. A PEP was treated the same as a share ISA for VAT purposes. As at 6 April 2008, all remaining PEPs became stocks and shares ISAs.
