On 9 August 2019, the Upper Tribunal held2 that so-called “loyalty bonuses” paid to investors by an investment platform service provider (Hargreaves Lansdown, “HL”) were “annual payments” subject to withholding of basic rate income tax.

Very briefly, HL operated a platform through which investment products were made available to investors. HL passed on to investors any share of the annual management charge (AMC) rebated to HL. HL’s terms and conditions provided for the payment of “loyalty bonuses” to clients in certain circumstances. HL negotiated lower AMCs with providers and passed on the benefit of the reduction by paying a “loyalty bonus” to investors.

The Upper Tribunal’s decision overturns that of the First-tier Tribunal (FTT). The FTT had held that the loyalty bonuses did not represent “pure income profit” in the investor’s hands (a key requirement in determining whether any payment is an annual payment subject to withholding) on the basis that the loyalty bonus was, in fact, the passing on to investors of their share of the AMC rebated to HL and could not therefore amount to “profit”.

It was not surprising that HMRC appealed the FTT decision, which went directly against HMRC’s publicly stated view of “trail commissions”. HMRC’s stated view is set out in Revenue & Customs Brief 4 (2013), which can be viewed here.

The decision looked at two of the characteristics of an “annual payment”, as established by case law.

The recurrence condition

In order to constitute an annual payment, the payment must recur or at least be capable of recurrence (even if the obligation to pay is contingent). The Upper Tribunal (agreeing with the FTT on this point) held that the loyalty bonuses were paid on a monthly basis, under a binding contractual obligation, and the only contingency was whether the relevant investment continued to be held at the end of any particular month. The payments were therefore held to be capable of recurrence as the kind of investments acquired by HL were more likely to be longterm investments, and the fact that the arrangements might be terminated in the future should not affect the question of recurrence.

The “pure income profit” condition

On this issue, the Upper Tribunal disagreed with the FTT. The Tribunal held that the FTT erred in its approach by not basing its decision on the terms of the contractual arrangements in place. The pertinent question, according to the Upper Tribunal, is whether the payment is a taxable receipt in the hands of the recipient (here, the investor) without any deduction for expenses. In this regard it was noted that:

  • the AMC and payment of any rebate was purely a matter between HL and the relevant fund manager
  • the fact that an investor has to bear the AMC (in the sense it reduces the distribution of income or value of the investment) does not give rise to a deductible (for tax purposes) expense
  • the investor did not have to do anything (other than hold the relevant investment at the end of the month) in order to receive the loyalty bonus
  • in particular, the investor did not need to incur any expense in order to receive the loyalty bonus

On this basis, the Upper Tribunal held that the “loyalty bonus” was exactly that; it was a payment in return for an investor’s loyalty and as such amounts to “pure income profit”.

The decision can be viewed here.