Understanding Funds platforms

HMRC have filed for leave to appeal against the decision of the First Tier Tax Tribunal in the Hargreaves Lansdown case.  The case is about the tax treatment of payments made by the online investment platform to individual investors.  Hargreaves Lansdown wanted to offer its investors lower costs, which it negotiated with fund managers.  Initially most fund managers rebated monies to HL, which passed part of it on to investors, either in the form of additional units, or through cash payments.  The regulatory regime changed in 2014, such that platform providers were required to pass the whole of rebates to investors and then make separate charges to cover their own costs. 

In 2013 HMRC issued a Technical bulletin in which it set out its view that platform rebates were in fact annual payments to investors, subject to 20% withholding tax and higher/additional rate income tax where relevant.  Hargreaves Lansdown have challenged that view.

HMRC have fundamentally misunderstood what is going on.  Investors didn’t receive income from their investments – rather, they benefited from lower costs.  Judge Tom Scott ruled that the nature and quality of the loyalty bonus was that it was not a ‘profit’ to an investor, but a reduction of the net cost.

Whilst its disappointing that HMRC have appealed against this decision, let us hope that the Upper Tribunal will follow Judge Scott and help HMRC to a better understanding of the commercial – and thus tax – position.   Reducing investment costs is a good thing – and it shouldn’t be interpreted by HMRC as substituting income tax charges for capital gain tax.