In Hargreaves Lansdown Asset Management v HMRC [2017] TC6368 the First Tier Tribunal (FTT) agreed that loyalty bonuses paid to investors were not annual payments; tax did not have to be deducted at source.

S901 ITTOIA 2005 provides that qualifying ‘annual payments’ paid by someone who is not an individual must have basic rate tax deducted at source by the payer. The payer must then make a return of the payments and pay the tax over to HMRC.

S899 ITA 2007 defines a qualifying ‘annual payment’, where the recipient is an individual, as one which:

  • Arises in the UK
  • Is a payment charged to income tax under s683 ITTOIA (annual payments not otherwise charged)
  • Is a payment which is not interest, or an annual payment for dividends or non-taxable consideration.

In its 2013 Revenue and Customs Brief 4 HMRC stated that ‘trail commission’ payments made to 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, which typically originate from the annual management charge paid by the Collective Investment Scheme to the fund manager, are qualifying annual payments.

Hargreaves Lansdown Asset Management (HLAM) provides a platform for the distribution to investors of investment products offered by different fund providers, and administration services to investors.

  • HLAM was able to use its size to negotiate lower Annual Management Charges (AMCs) with investment providers on behalf of their clients.
  • They would pass part of this saving on to investors who had paid an AMC and retained investments at the end of a given month, by paying a “loyalty bonus” as a rebate of the AMC.
  • HMRC assessed HLAM in respect of sums representing income tax for 13 quarterly accounting periods between 1 April 2013 and 30 June 2016 on the basis that the loyalty bonuses were actually commission payments (and specifically trail commission) making them annual payments which should have had basic rate tax deducted by HLAM.

The FTT, in allowing the appeal by HLAM noted that an annual payment is a payment which has four characteristics:

  • It must be payable under a legal obligation
  • It must recur or be capable of recurrence, although the obligation to pay may be contingent
  • It must constitute income and not capital in the hands of the recipient.
  • It must represent “pure income profit” to the recipient.

Whilst the first two characteristics were found to be present, (and HLAM agreed the payments were income, meaning the third was not considered), the tribunal agreed that the payments did not represent pure income profit and were instead a mechanism of reducing the investors’ net contractual costs in respect of their investments.


The tribunal judge offered some mild criticism of HMRC’s approach in seeking to recharacterize and unpick the various payment flows taking place here, in order to isolate the Loyalty Bonus and treat it as pure profit, with a hint perhaps at double standards, saying “I make no comment on HMRC’s published practice of treating credit card “cashback” payments as not being annual payments.”

UPDATE: HMRC have confirmed that it will appeal the decision.


Bank Account reward and cashback payments

Interest: paid to directors and individuals

External links:

Hargreaves Lansdown Asset Management v HMRC [2017] TC6368


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