On 25 March, HMRC published a briefing on the tax treatment of payments of trail commission which is rebated to investors in collective investment schemes and other investment products such as life insurance policies. 

The briefing relates to any rebates of trail commission made to investors by fund managers, fund platforms, investment advisers or any other person acting as an intermediary between the investor and the fund. As well as applying to any payments which are made direct to the investor, it also relates to use of trail commission which is used to meet the liabilities of, or provide a benefit to, the investor. As a result, rebates paid in the form of additional units in a fund, or rebates which are used to meet adviser charges, are taxable in the same way as cash payments.

The use of rebates of commission has become increasingly widespread and the industry has generally not treated such payments as being taxable. As a result, rebate payments have been made without deducting tax and investors have not accounted to HMRC for the income tax due. HMRC’s briefing states, however, that such payments are (in tax terminology) “annual payments” which are therefore subject to income tax in the hands of the investor. As a consequence, the person paying the rebate (for example, the fund platform or financial adviser) is also required to deduct basic rate income tax from the rebate and to account for this to HMRC. Higher and additional rate tax payers will have an obligation to account for any higher or additional rate tax through their tax return.

HMRC consider that they have no discretion in this matter but are duty-bound to collect the tax unless the relevant minister decides otherwise. TISA is actively trying to have the position changed and we urge anyone affected to support TISA’s initiative. Eversheds consider that the most practical approach is to work on the basis that HMRC’s view is correct (although it may be possible to challenge its technical basis). Eversheds is also preparing a practical briefing which will analyse how different models used in the industry are affected by HMRC’s briefing and outlining some practical issues for fund managers, platforms and intermediaries.

Treatment of rebates on ISAs

HMRC’s briefing states that, where rebates of commission are made to an ISA holder within the ISA, these will not be taxable and there will be no requirement for the payer to deduct basic rate tax from the payment. This is because annual payments arising in an ISA account are exempt from tax. 

HMRC has also confirmed that, where commission rebates received in respect of an ISA account are reinvested in the ISA without leaving the control of the ISA manager, these will not count towards the maximum amount which can be invested in the ISA for the relevant tax year.

Treatment of rebates in SIPPs

Where an annual commission rebate is paid in respect of investments held in a SIPP, and is reinvested in the SIPP without leaving the control of the SIPP’s trustee or administrator, HMRC has confirmed that these will neither count as withdrawals from the SIPP nor count as new contributions by the investor.

However, if payments are made to the SIPP member, these will be taxable. In these circumstances, the SIPP trustee or administrator would therefore need to deduct basic rate tax from the payments and the SIPP member would be liable to account for any further tax through his or her tax return if he or she is a higher or additional rate tax payer.

Treatment of rebates in unwrapped accounts

Where a commission rebate is not made in respect of an ISA account or a SIPP account, it will be taxable. The intermediary paying the rebate will therefore need to deduct tax at source at the basic rate of income tax and an investor who is a higher or additional rate tax payers will need to account for any additional tax through his or her tax return.

Treatment of rebates in respect of offshore funds

Where investors receive rebates in respect of investments in offshore funds, the tax analysis will be the same. However, where a rebate is received directly from an offshore intermediary then it will not have been subject to deduction of basic rate income tax at source and the investor will therefore be liable to account to HMRC for all basic, higher or additional rate tax due reflecting the investor’s marginal rate of income tax.

Past payments

HMRC recognises that it has not previously identified and challenged the industry’s view that commission rebates are not taxable and, therefore, that a practice of non-taxation of trail commission rebates has developed. HMRC also acknowledges that it may have previously given unclear advice to intermediaries who pay commission rebates.

In light of this, and the relatively small amounts involved in typical individual payments, HMRC has fortunately concluded that it would not be justified to seek to collect unpaid tax from previous years from either the payers who should have deducted basic rate tax at source or from the investors who received the payments.

Future payments

HMRC has made the point that it is required by law to collect tax due on rebates of trail commission or other annual payments made to investors by intermediaries and expects intermediaries who are required to deduct basic rate tax at source and investors who are higher and additional rate tax payers to begin doing so from the beginning of the 2013/2014 tax year. 

The practical implications of deductions for platforms and other intermediaries

HMRC has made clear that it expects payments which are taxable and which are made on or after the 2013/2014 tax year, which begins on 6 April 2013, to be made net of basic rate income tax. 

This leaves very little time for platforms, advisers and other intermediaries who rebate commission to consider whether their arrangements are affected and, if so, to put in place systems to deduct basic rate tax from rebates and to account for these to HMRC. 

As a concession, and recognising the very tight timetable within which intermediaries will need to begin deducting basic rate tax from trail commission rebates and the fact that this may well need to be done manually before systems are updated to do this, HMRC’s briefing says that it accepts that the deduction of basic rate tax may initially involve “some degree of approximation”. 

HMRC also recognises that payments due at the very beginning of the new tax year may be delayed to allow the deduction of tax to be calculated and made or, where this is not possible for contractual reasons, that the deduction may need to be recovered from a subsequent payment. 

HMRC says that it will allow approximations of relevant deductions until the end of the 2013 calendar year provided that these are as accurate as reasonably possible and that the payer either makes arrangements to update its systems by the end of 2013 or, alternatively, ceases to make such payments.  Where an intermediary ceases to make payments, it may do this by moving the investor to share classes which have reduced annual management charges instead of paying trail commission and there should be no capital gains or stamp tax costs as a result.