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HMRC appeals Hargreaves 'discount tax' ruling

Fate of millions of pounds set to be returned to investors will hinge on verdict, as taxman appeals ruling in favour of Hargreaves Lansdown.

HMRC appeals Hargreaves 'discount tax' ruling

HM Revenue & Customs (HMRC) is appealing against a court ruling over the tax applied to 'loyalty bonuses' paid by platforms, with the fate of millions of pounds that was due to be returned to investors hanging in the balance.

The taxman said it would be appealing March's court victory for Hargreaves Lansdown, when judge Thomas Scott ruled in favour of the online stockbroker in its challenge to taxes on the payments.

'We are disappointed by the judgment at the first-tier tribunal and HMRC will be appealing,' said an HMRC spokesman.

'The current rules will continue to apply until we are satisfied that the litigation process is complete.'

Hargreaves Lansdown chief executive Chris Hill was bullish about the platform's prospects in court.

'Following the decision by the first-tier tax tribunal in our favour, we see no reason why we would not be successful at appeal,' he said.

'The process is likely to complete in the first half of 2019 and a successful outcome will see millions return to clients and their tax affairs simplified.

'The "discount tax" has always been an unnecessary and unwarranted attack on private investors.'

Hargreaves Lansdown has paid the loyalty bonuses for more than 15 years and they form a crucial part of the platform's discount broking model.

They continue to be employed on share classes of funds dating back before the introduction of retail distribution review (RDR) rules in 2013, allowing investors to be reimbursed for the part of fund annual management charges (AMCs) once reserved for platforms and financial advisers, before those payments were banned.

And they are still a feature on most of Hargreaves' Wealth 150+ funds, where the broker has negotiated a discount on fund AMCs for clients.

Loyalty bonuses are used to rebate part of the fund's AMC to clients in order for them to secure the discounted price.

In March 2013, HMRC changed its stance on the payments, announcing they should be taxed as income and paid net of basic rate tax on funds held outside ISAs and Sipps.

Hargreaves has set aside £15 million in potential tax on around £75 million in loyalty bonuses paid on funds outside ISAs and Sipps since 2013. The fate of that money hinges on the outcome of HMRC's appeal.

That £15 million relates to basic rate tax on the payments. Higher rate taxpayers have had to declare the bonus payments on their tax returns and would be entitled to claim that money back should Hargreaves prevail.

The court battle also has implications for investors using other platforms

Cofunds powers a number of DIY investor platforms and, like Hargreaves Lansdown, features some funds with 'old' share classes where the commission once reserved for financial advisers and platforms is handed back to the investor via a rebate. The platform also administers rebates where DIY investor platforms are able to secure discounts from fund groups.

Platforms which rely on Cofunds technology include:

  • Charles Stanley
  • Chelsea Financial Services
  • City House Investors
  • Clubfinance Limited
  • Elson Associates
  • Financial Discounts Direct
  • ISA Ltd
  • Pantheon Financial
  • Power Robbins
  • Seymour Sinclair Investments 
  • Willis Owen

AJ Bell is another platform to offer discounts on selected funds, delivered through rebates to customers, and has been deducting basic rate income tax where customers hold those funds outside ISAs and Sipps.

Fidelity Personal Investing meanwhile offers more than 150 funds with discounts on the annual management charge, which investors secure through quarterly rebates.

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