Hargreaves Lansdown has launched a legal challenge to HMRC's new "discount tax" on loyalty bonuses paid to its fund investors.
In March 2013, HM Revenue & Customs (HMRC) announced that tax would apply to any rebates that investors receive from fund platforms on funds held outside of individual savings accounts (Isas) and pensions. The tax applies at the investors' highest rate of income tax and came into force on 6 April 2013.
The rebates, also paid by other fund platforms such as Barclays and Bestinvest, typically originate from the trail commission, an annual sum paid by the fund to the platform for the life of the investment. If we assume a £100,000 portfolio enjoying an annual 0.5 per cent rebate of £500, the new tax is costing a basic-rate taxpayer £100 and a higher-rate taxpayers £200 a year. On a fund portfolio of £1 million, the annual charge for a higher-rate taxpayer would be £2,000.
Hargreaves says it will continue to pay loyalty bonus net of a provision for any discount tax and will add the money back into client's accounts if the challenge is successful.
Ian Gorham, chief executive of Hargreaves Lansdown, says: "The discount tax is anti-competitive. Loyalty bonuses have been hugely popular with investors and helped them save money on investing in their favourite funds.
"When we introduced loyalty bonuses we consulted on its tax position and it was clear, as a refund of charges, it should not be subject to taxation."
HMRC’ April 2013 statement explained: "The payments made to investors are (in tax terminology) 'annual payments' and therefore subject to income tax in accordance with S683 Income Tax (Trading and Other Income) Act 2005."
However, Hargreaves says it has consulted a leading tax counsel who has said that loyalty bonuses do not meet the criteria to be considered annual payments and should therefore not be taxed. The legal challenge is expected to take many months.
Meanwhile, rival fund platform Standard Life has taken a completely different approach, agreeing with HMRC to pay the fund rebate income tax liability for its customers until the end of December 2013 - meaning customers don't lose out.
However, the firm is working to remove the rebate mechanism from its pricing structure by the end of 2013 by converting all funds on its platform to low-cost rebate-free funds, commonly known as 'clean' funds.
This is because online fund platforms will be banned from receiving rebate payments from fund managers from April 2014. Under new rules from the Financial Conduct Authority (FCA), platforms will instead have to charge customers explicit fees for their services, which must be agreed with customers in advance. They will then have a further two years before they must charge fees for all existing business by April 6 2016.
Fund platforms Alliance Trust Savings and Charles Stanley Direct have already moved to a business model based on these 'clean' funds.
