You may have seen in the news recently that Hargreaves Lansdown has lost in the Upper Tribunal an appeal made by HMRC against an earlier decision in Hargreaves’ favour. If you invest via Hargreaves the below will give you a bit of background to the case and how the outcome affects you if you receive these loyalty bonuses.
A while back, on the 25 March 2013 HMRC published a Revenue and Customs Brief (No 4) to explain their view on the tax treatment of payment of ‘trial commission’ passed on to investors in collective investment schemes.
In this brief, HMRC explain that payments made to the investor originating from the annual management charge, which is traditionally where cash rebates come from, are (in tax terminology) ‘annual payments’ and subject to Income Tax under S683 Income Tax Act 2005.
HMRC advised in their brief that as a consequence of the above ‘payers are under an obligation to deduct basic rate Income Tax, in accordance with Chapter 6 Part 15 Income Tax Act 2007, from the payment of trial commissions and to account for this to HMRC. The investors should then account for any higher or additional higher rate tax due through their Self-Assessment tax return’.
HMRC stated in their brief that liability in respect of past payments would not be pursued as HMRC themselves had “in some cases advised investors that such payments are not taxable”.
Hargreaves Lansdown (HL) did not accept that this obligation applied to the payments which it made to investors.
Their appeal rested on the meaning of “annual payment” with the First Tier Tribunal finding in HL’s favour, the conclusion being that the Loyalty Bonus did not meet the full criteria of annual payments.
HMRC was granted permission to appeal to the Upper Tribunal and on the 9 August won.
HL and HMRC had come to an agreement at the start of the appeal process to retain an amount equal to the basic rate of income tax on the payment to investors and HMRC would then assess HL for that amount under section 957 or the Income Tax Act 2007.
If HMRC had not been successful, this would have meant a nice windfall for HL’s customers as the 20% retained would have been paid back to them. In light of the decision and as HL had been and continues to deduct 20% from their customer’s loyalty bonuses, very little will change in terms of how the Loyalty Bonus is administered. If you are a basic rate tax payer, there will be no further tax charge. Customers who pay a higher rate of tax could be liable to further tax at their marginal rate.
The decision in favour of HMRC also affects customers of other platform service providers.