In HMRC v Hargreaves Lansdown  UKUT 246 the Upper Tribunal held that loyalty bonuses were annual payments and should have had tax deducted at source.
- Under s901 ITTOIA 2005 qualifying ‘annual payments’ paid by someone who is not an individual must have basic rate tax deducted at source by the payer.
- S899 ITA 2007 defines a qualifying ‘annual payment’, where the recipient is an individual, as a payment which arises in the UK, is charged to income tax as annual payments not otherwise charged and is not interest, or an annual payment for dividends or non-taxable consideration.
Hargreaves Lansdown Asset Management (HLAM) negotiated lower Annual Management Charges (AMCs) with investment providers on behalf of their clients.
- They passed part of the saving on to investors paying a “loyalty bonus” as an AMC rebate.
- HMRC assessed HLAM to income tax on the basis that the loyalty bonuses were commission payments making them annual payments.
The First Tier Tribunal (FTT) allowed the appeal by HLAM despite agreeing that 3 out of 4 necessary characteristics for a payment to be an annual payment were present; the tribunal said the payments did not represent pure income profit, they were a way of reducing the investors’ costs via the AMC, so were not annual payments.
HMRC appealed to the Upper tribunal who, after undertaking a full analysis of the relevant contracts between HLAM and their investors, reversed the FTT decision:
- The “loyalty bonuses” did represent pure income profit.
- the AMCs were not directly paid by the investors and the payment of the rebate was a matter negotiated between HLAM and the relevant fund manager, with HLAM alone being entitled to that rebate.
- the bonuses were paid on the sole condition that the investor held the relevant investment at the end of the month, without the investor having to do anything in return except remain invested in the fund. In particular, the investor did not need to incur any expense to receive the Loyalty Bonus.
- The correct characterisation of the arrangements was that the investor received a further income distribution on their investment due to their continuing investment in the fund.
- The payments were recurring in nature as they were paid monthly under a contractual obligation.
The payments were found to be annual payments which should have had basic rate tax deducted at source.
This is consistent with how bank account reward payments are treated where they are paid on bank accounts which are not subject to fees but, as the FTT judge pointed out, is different to how HMRC treat credit card cashback, which is not held to be an annual payment. HMRC’s reasoning for this is that credit card cashback is contingent on the taxpayer having previously charged amounts to their credit card.
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