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Phil Young: Dealing with HMRC rebate tax the right way

HMRC’s guidance on the tax treatment of cash and unit rebates means the debate is pretty much over.

Phil Young MM blog

What just happened?

A Technical Note with draft guidance was issued by HMRC on 25 March which stated that cash or unit rebates paid into unwrapped collective accounts are taxable as an ‘annual payment’ for income tax purposes. All platforms are affected by this. Basic rate tax will be deducted at source and investors should account for any higher rate or additional tax through Self Assessment (or claim back if appropriate). Payments coming from an offshore business will need payment in full for Self Assessment as they will not have had any UK tax deducted at source.

Rebates into Isas and Sipps (provided the rebate is paid into the Sipp not to the member) are unaffected, unwrapped collectives definitely are, bonds might be depending on how they are treated, but onshore bonds probably won’t because the life fund is already subject to corporation tax.

Why the rush?

HMRC argue there has been no change, this should have been happening already and any delay would require a change to legislation. So there. There will, at least, be no retrospective taxation of past rebates. There is representation being made to ministers, but it is safer to assume the position does not change. The preferable solution would have been to delay the deadline for 12 months until 6 April 2014 to coincide with the likely date for the FCA ban on rebates, then move to clean share classes.

What to do now

The tax liability is likely to be very small for most clients, although you will need to weigh this up. Moving from funds with rebates to completely clean share classes is not necessarily straight forward. Whilst the draft regulations state that it is not necessarily a CGT event, this depends on whether it is a sale and repurchase or a straightforward conversion, so it might be best handled as part of the normal review process. This is a judgement call you will need to make. I would recommend writing to all clients who have assets on a platform to inform them of the current situation.

In making that decision, and drafting your letter, you might want to consider the following:

  • What are you committed to under your client agreement? Are you responsible for tax advice, should you be referring to or liaising with your clients’ accountants?

  • Has your platform confirmed how all of its products will be treated yet? Some may be liaising with HMRC for a specific opinion.

  • How will you deal with, and charge for, advice requested as a result of your letter?

  • How many clients are likely to be materially affected by this?

You may also wish to cover this off in a suitability report if you are recommending share classes with rebates.

What to do next

This forces the issue on clean share classes, ahead of the FSA’s final word. The debate is pretty much over, and clean share classes will be the only viable option. Clean share classes sound better, but in many cases fund costs are being levelled up not down, and the ability for platforms or advisers to negotiate discounts is limited. Standard Life and Skandia have already made it known that they intend to use their clout to negotiate lower cost share classes, which is sensible for them. It’s unlikely that any IFA could negotiate its own share class without guaranteeing sufficient asset inflow to compromise its independence. Unintended consequences could be the emergence of a ‘restricted’ share class, and less price pressure on fund management fees. Not what advisers or investors want.

You’ll need to decide when to adopt clean share classes. In the interim, it’s is worth checking with your platforms what reporting they can offer to help can quantify your clients’ tax liabilities.

Phil Young is managing director of threesixty


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. There is a precedent for this which the Platforms will not like to hear. HMRC just want their tax and rightly so. WRAPs and Platforms (some not all) have been caught out here, they should have been following the rules in the first place and have not. They in turn have misled by mistake their clients and customers.
    Basically this is the problem for the platforms who made this mistake and if they want it delayed to match the platfrom changes next year, then they should pay the tax.
    This happened to NatWest on a smaller scale in 1996 as they were paying travelling expenses to peripatetic staff (like investment and mortgage advisers) incorrectly. NatWest negotiated back tax with HMRC and did not recover it from their staff as it was the banks mistake. What they did do is change how they paid travel expenses going forward which meant I was personally out of pocket by £40 per month (in 1996) and with two young children I argued this was a pay cut due to a bank error as I had changed branches at their request the year before on the understanding of how the travel was paid. This was the final straw of me leaving NatWest when they refused to budge over £40 per month travel expenses. at the time, Lloyds had very few FPC3 qualified staff so off I went. Lloyds managed to make NatWest look good and 20 months later I was an IFA again, but this time truly Independant as defined by Harry Katz. Looked over my shoulder a few times since and will continue to do so, but IFA still right.for me.
    Anyway back to original comment, there is a precdent solution. The guilty platforms agree a payment for this tax year and don’t change their systems and reporting until next year. That way those platforms who have a solution or didn’;t do it wrong in the first place don’t have to pay, just those who got it wrong.
    Oh dear L&G, perhaps the Cofunds deal last week wasn’t so clever after all 🙂

  2. @Phil Castle, interesting story but ALL platforms have this issue. The only difference is some have more clean share classes than others, and some advisers have moved more clients to clean share classes than others, so it isn’t a question of the problem residing with the minority in this case.

  3. @Phil Young – it might cost some more than others though!

  4. @ Phil Young, I am dissapointed no one else has joined this discussion of your article as I think every advise needs to think about the long term implication oif HMRCs statement as based in this, how long will, it be before HMRC say advice fees cannot be paid for on a pensjon be adviser charging? Another RDR unintended consequence or was it by design all along?

  5. I’m not sure everyone wants to look into the detail, but I think the idea you suggest of paying the tax and maybe even doing a deal with HMRC (even that’s possible) to pay it direct is well worth looking into.

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