Trail Commission Rebates to be Taxed

HM Revenue and Customs (“HMRC”) published a brief on payments of “trail commission” on 25 March 2013. In this brief, HMRC explain their view on the tax treatment of payments of trail commission passed on to investors in Collective Investment Schemes and other investment products, including life insurance policies, by fund managers, fund platforms, advisers and any other person acting as an intermediary between the fund and the investor.

Trail commission is a percentage fee, usually set at 0.5%, paid to financial advisers in the retail market by their customers over the lifetime of certain investment products such as pensions, withprofits bonds and unit trusts. However, it is also paid to intermediaries, such as discount brokers and fund platforms, that recommend or enable the purchase of funds or other investments and could therefore be seen to apply to any commission or rebate paid by a fund manager to an investor or intermediary.

The industry has generally considered that payments of trail commission were not taxable in the hands of the recipient. HMRC, however, has now revealed in a technical note produced for tax professionals which accompanies the Business Brief 04/13 (HMRC Technical Note: Background to Revenue & Customs “Business Brief number 4/2013), that it has apparently never fully considered the fundamental nature of trail commission payments. The result of such consideration is that HMRC now regards commission trail payments as taxable and the brief sets out how they should be taxed. From 6 April 2013, these payments will be regarded as “annual payments”, and persons paying trail commissions after this date will be obliged to deduct basic rate income tax and account to HMRC in respect of such deduction – essentially requiring withholding on such commissions at 20%. Recipients should account for any higher or additional higher rate tax due through their selfassessment return. This surprising announcement gives payers of trail commissions just 11 days to develop appropriate internal systems and controls.

The impact of this announcement is not limited to recipients in the UK as it will also apply to payments to non UK residents.

HMRC have stated that they will not seek to collect tax that would have arisen in respect of earlier payments because such payments were generally considered to be tax free.