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Hargreaves Lansdown investors in limbo over £15m discount tax rebate

Written by: Paloma Kubiak
HM Revenue & Customs is to appeal a legal decision that could have opened the flood gates for clients of all investment service providers to get a partial refund on annual fund charges.

In March this year, Hargreaves Lansdown won a legal challenge against HMRC as the tax tribunal ruled that ‘loyalty bonus’ refunds – a discount on ongoing annual management charges – are not subject to tax.

This paved the way for 150,000 Hargreaves Lansdown investors being in line for a £15m discount tax rebate. It could also have had wider implications for customers of other fund shops who received similar discounts.

HMRC was given leave to appeal the decision within 56 days but a spokesperson confirms it has been given permission to appeal up until 11 June.

The spokesperson said: “We are disappointed by the judgment at the first-tier tribunal and HMRC will be appealing.

“The current rules will continue to apply until we are satisfied that the litigation process is complete.”

Loyalty bonus explained

Hargreaves Lansdown introduced a ‘loyalty bonus’ around 15 years ago, providing investors with a discount against the ongoing annual management charges (AMCs).

At the time, Hargreaves consulted HMRC on the tax position and it was confirmed that a refund of charges would not be subject to tax.

But in April 2013, HMRC deemed loyalty bonuses paid on funds held outside ISAs or SIPPs as taxable. As such, they were taxed as income and paid net of basic rate tax.

In September 2013, Hargreaves launched a legal challenge against HMRC – the cost of which was borne by Hargreaves Lansdown PLC – as it felt this tax charge was an “unwarranted attack on private investors” who were “penalised by the HMRC decision”.

It won the initial legal challenge but despite HMRC pressing ahead with an appeal, Chris Hill, chief executive of Hargreaves Lansdown, said: “Following the decision by the first-tier tax tribunal in our favour, we see no reason why we would not be successful at appeal.

“The process is likely to complete in the first half of 2019 and a successful outcome will see millions returned to clients, as well as a simplification of their tax affairs.”

What now for investors?

Until a further ruling, the money withheld could still potentially be tax and owed to HMRC, so Hargreaves said it will wait for a successful conclusion before arranging to return monies to clients.

It added that it will write to all affected clients as soon as it knows more.

In the mean-time, it will continue to pay a loyalty bonuses to clients. However, since 6 April 2013, these bonuses have been paid after deducting a 20% provision for the ‘discount tax’ being equivalent to the basic rate of income tax. This money is in part being held by HMRC and part by HL.

“The reason we did this was to avoid creating large and unexpected tax bills for clients in the future if our legal challenge proved unsuccessful.

“Investors were advised to include loyalty bonuses as income on their tax returns. Basic rate taxpayers suffer no further tax charge, higher and additional rate taxpayers could be liable to either an extra 20% or 25% tax,” Hargreaves said.

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