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HMRC rules rebates to investors are taxable

HMRC Letter 480

HM Revenue & Customs has ruled all rebates from asset managers to investors will be subject to income tax from April.

Money Marketing reported in December that HMRC was looking at the tax treatment of rebates, causing delays to the FSA’s forthcoming platform paper. There was an expectation within the industry that these payments would be taxed.

HMRC has confirmed this morning that cash and unit rebates paid from 6 April 2013 will be taxed, although the decision will not be retrospective.

In a briefing note published today, HMRC says: “This brief – in the main – concerns the tax treatment of payments made to investors in a Collective Investment Scheme, insurance policy or other investment product, by fund managers, fund platforms, advisers, or any other person acting as an intermediary between the fund and the investor.

“In particular, it concerns cases where all or part of any trail commission paid by the fund manager to other intermediaries is then paid to (or used to meet the liabilities of, or provide a benefit to) the investor. This typically happens as a result of an agreement between the investor and the fund platform, although it could be as a result of an agreement between the investor and their adviser or the fund manager.

“Such payments typically originate from the annual management charge paid by the Collective Investment Scheme to the fund manager.

“HMRC understands through its discussions with industry that industry have generally considered such payments to not be taxable in the hands of the investor. HMRC however considers that these payments are taxable and this brief sets out HMRC’s views on how payments from trail commission should be taxed.”

HMRC says it acknowledges the logistic challenges of introducing the new regime from April 2013 and will accept an approximation of the tax deducted at source up to the end of 2013 “providing that this is as accurate as reasonably possible”.

The note states that payments through Isas will not be taxable or count towards the annual Isa allowance. Sipp payments made to the Sipp and reinvested will not count as new member contributions. If payments are made to the member they will be treated as annual payments and the payers will be required to deduct tax at source.

The briefing note also highlights that the FSA may make some more changes to its rebate rules.

A HMRC spokesman says: “Tax will be due from April onwards on all commission paid by investment funds to investors. We will not collect tax on earlier years commission.

“Until the end of 2013 to allow the rules to bed in we will accept an estimate of tax deducted at source. We will work very closely with stakeholders to ensure the rules are applied fairly across the board.”


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There are 23 comments at the moment, we would love to hear your opinion too.

  1. Richard Armstrong 25th March 2013 at 10:44 am

    This is genius. How to create tax from nothing.
    The client pays by way of an annual management charge, they then receive a refund of some of that charge, and then they get taxed on the refund.

  2. Mark from Guildford 25th March 2013 at 10:54 am

    Fantastic, so I invest in the markets like many other people and get taxed for doing it. This is just another route to get as many people filling in tax returns as possible.

    Problem with that is that HMRC cannot even get my tax code right or collect the right amount of tax. So they are just compounding a problem that they cannot handle anyway. George Osbourne must be getting very very desperate.

  3. What a fiasco. A complete mess. Our system seems to have all the hallmarks of a Carry On film.

  4. Industry and provideres in general wake up! Grow some and challenge this and other dubious ‘rules’ imposed without democratic consent upon legitimate business activity.

    The regulator is killing business, providers take this to the highest court or better still speak directly to the PM and the Businss Secretary and make it clear just how many jobs you will export if the FCA is not called off.

    You cannot construct a regulatory environment for a massive service business from which the state has been content to collect taxation for many years, in-which there is no risk for the user and nobody is allowed to be remunerated in rendering the service.

    Only the naive and stupid would expect this to be a viable business model.

  5. This has the FSA’s fingerprints all over it. Must be worth an FOI request. One hopes (probably vainly) that the platforms will stand up for their customers and challenge this. It is absolutely ludicrous……..

  6. Better be careful when negotiating a discount on my next car! Oh I don’t get taxed on that discount!

    Couldn’t make it up. It’ll cost more to administer than it’ll bring in – enter Sid James & Hattie Jacques.

  7. I know what, they could tax my nectar points, my Topcashback/Quidco earnings and my 1% cash back on my credit card, they are missing a trick!

  8. So let follow the logic of this, if the rebate is taxable does that mean that the original charge can be reclaimed as an expense?

  9. Welcome to another unintended consequence of RDR.

    Be careful what you wished for Hector !!

  10. This world will live in is becoming ridiculous. Many of the so called rebates are nothing to do with the client, they were negotiated between platform and fund manager to make their contracts more competitive to the end user, the client.

    I have just negotiated a discount on my new car, they’ll be wanting to tax me on that next.

  11. Cool, so that makes the rest of the annual management charge an income tax deductable expense then! No, oh of course not, silly me.

  12. So instead of rebating to the clients investments, why not allocate extra units, of heaven forfend, reduce AMCs.

    That really would be revolutionary would it not and the consumer would see the benefit in either extra units (not cash rebates) or lower costs

    Never happen!

  13. I got a tax rebate recently – is that taxable?
    I know Dave, George & Nick are desperate, but this is scraping the barrel. We just don’t have the climate to be a Banana State.

  14. Good old FSA – lets complicate matters for Joe Public even further.

  15. Bonkers. You just couldn’t make it up. Rebates are already really hard to explain to my clients – I’m not looking forward to covering off tax as well.

    Also, imagine the cost to the platforms to bring in the ability to administer this. I bet it will run into millions.

  16. What a mess ? what a complete and utter mess ?

  17. Many of us have been telling the FSA and any who would listen that the RDR is a mess since they first started to discuss it. We wrote to our MPs and they made sure the TSC knew. The TSC todl the FSA to delay RDR by one year becuase all was NOT clear. Yet Hector decided to plow ahead ignoring the TSC and he has now jumped ship to Barclays for his bonus for a job well done (for Barclays) and he gets a Knighthood to boot with those left behind having to sort out his MESS.
    This is a disgrae. as others have said how can a discount be taxable in FS and NOT with Tescos points or Nectar points or any of these other incentives?

  18. What a mess. If you apply HMRC’s “logic” on a fund where the AMC is deducted from the income yield I can (sort of) understand why to levy income tax on a rebate as the client receives a higher income. However, some fund charges are deducted from capital, so presumably a rebate from such a fund should increase the capital gain and be subject to CGT?

  19. Good on the HMRC to tax the rebates..maybe this will push the fund managers and providers into moving to a true clean share class.. This will give absolute clarity to investors.. Having a rebate in no way shows complete clarity to me let alone an investor..funny how skandia and others alike liked the idea of going with the tax rebates and now wish to move to clean share class.. The likes of CoFunds ahead of the game here with adopting the clean share class from day one.. For you Ifas out there complaining about the rebates being taxed, have a good think about how clear the fund charges are to your clients???

  20. Tax Professional 27th March 2013 at 11:31 am

    HMRC’s argument states very clearly that the payer is liable to deduct income tax only in the case where there is a “legal obligation” to make the payment. See Point 12 of the Technical Note to Brief 04/13.

    Whether there is, in fact, a “legal obligation” can only be decided on a case by case basis, and will depend on the wording of contracts, advertising and verbal statements, as HMRC acknowledges in Point 12.

  21. Ironic comment about Cofunds being ahead of the game… Just a shame they are absolutely useless at everything they do with regards to our customers and service.

    Clean share classes do of course solve this and that was one of the main RDR results so it is quite funny to see so many up in arms about it, are you all with Skandia by any chance?

  22. For any kind of logic to apply – surely the element of the rebate that would be taxable would be that part that related to investment growth and not the original capital. Therefore, if a CIS grows at 10%, to make my maths easy, and a rebate of say 1% is paid – 0.9% would relate to capital and 0.1% to growth and hence be taxable. A princely tax rate of 0.02% ( at source).

    I really am grasping at straws to try and make some sense of this – and I think this is close….

  23. Today I used some taxed income to make a purchase at Homebase, the goods were subject to a 15% discount. No income tax payable on the discount.
    Why on earth is a rebated charge taxable in the financial services industry? Get real HMRC.

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