Victory for funds platform over £15m ‘loyalty bonus’ rebate

Over 150,000 investors with the fund management platform Hargreaves Lansdown are in line for a £15m windfall, after the company won a legal challenge to HMRC’s claim that their ‘loyalty bonus’ rebate payments should be taxed

Prior to April 2013, rebates of annual management charges (AMCs) to clients of the platform when discounting investments, also known as loyalty bonuses, were paid out tax-free. From that date, HMRC changed the rules so that rebates on annual charges, such as loyalty bonuses paid on funds held outside Isa or Sipps had to be taxed as income and paid net of the basic rate tax.

Hargreaves Lansdown challenged HMRC on the change, taking the case to the First Tier Tax (FTT) tribunal.[Hargreaves Lansdown Asset Management Ltd and the Commissioners for Her Majesty’s Revenue and Customs, 2018] UKFTT 127, TC06383].

The company continued to pay loyalty bonuses to clients. But since 6 April 2013, these bonuses have been paid after deducting a 20% provision for tax. This money is in part being held by HMRC and part by Hargreaves Lansdown, with the company saying it took this approach to avoid creating large and unexpected tax bills for clients in the future if the legal challenge proved unsuccessful.

Now the FTT has found in Hargreaves Lansdown’s favour, ruling that the loyalty bonus payments are not pure income profit and are therefore not annual payments.

The judge said: ‘In my judgment, the evidence makes it plain that the nature and quality of a loyalty bonus payment is that it is not a “profit” to an investor, but a reduction of his net cost. It is quite unlike an annuity payment or interest in respect of which a recipient need do nothing but sit back and receive the payments.’

The judge said HMRC’s assertion that an investor does not need to pay or bear an AMC to receive a loyalty bonus  was ‘a commercial nonsense’, saying the terms and conditions ‘could scarcely make it plainer’ that in investing through Hargreaves Lansdown in a particular fund, a schedule of charges will apply.

‘HMRC’s analysis seeks to recharacterize and unpick the various payment flows taking place on a fund investment in order to isolate the loyalty bonus and treat it as pure profit. That approach is not the way to establish objectively the nature and quality of the payment; the loyalty bonus is a mechanism for reducing net cost, nothing more and nothing less,’ the judge said.

He rules that loyalty bonus payments are not pure income profit, and said this applies to payments both before and after the new rules for the periods in the appeal.

Hargreaves Lansdown says the ruling should see money returned to investors, with no need to declare these discounts on tax returns in future, but warns ‘the champagne is on ice’ as HMRC has two months to lodge an appeal.

In a statement, Hargreaves Lansdown advised investors: ‘If HMRC don’t appeal, we’ll work with them to return the amounts withheld to clients. We’ll also stop deducting the 20% provision from future loyalty bonuses. Clients who’ve already completed a tax return including loyalty bonuses will be able to amend their return and reclaim any higher or additional rate tax that’s been paid.

‘If HMRC do appeal, we’ll wait until the appeal is decided before taking any action. In the meantime we’ll continue to deduct the 20% provision. Clients should include loyalty bonuses as income on their tax returns. We’ll write to clients once we know the result.’

Hargreaves Lansdown chief executive Chris Hill said: ‘We saw the “discount tax” that HMRC introduced in 2013 as unwarranted attack on private investors, so we launched a legal challenge, and I am delighted that the tax tribunal has supported our view.’

Hargreaves Lansdown Asset Management Ltd and the Commissioners for Her Majesty’s Revenue and Customs, 2018] UKFTT 127, TC06383

Report by Pat Sweet

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