HMRC rules fund rebates to consumers are taxable

HMRC HAS RULED it will tax fund rebates paid to consumers from April 2013.

In a statement, the revenue said the payments made to investors are annual payments and therefore subject to income tax, Accountancy Age’s sister publication Investment Week reports.

The ruling means payments are subject to basic rate income tax, which will be deducted from trail commission.

Higher rate tax payers will than have to account for additional tax payments via self- assessment.

The revenue said: “The payments made to investors are (in tax terminology) ‘annual payments’ and therefore subject to income tax in accordance with S683 Income Tax (Trading and Other Income) Act 2005.

“A consequence of this is that the payers are under an obligation to deduct basic rate income tax, in accordance with Chapter 6 Part 15 Income Tax Act 2007, from the payment of trail commission and to account for this to HMRC. The investors should then account for any higher or additional higher rate tax due through their self-assessment tax return.”

HMRC said both unit and cash rebates will be subject to taxation from 6 April this year.

It said: “As was the case prior to the start of the RDR changes, if payments are made to investors in the form of additional units (or cash), then the value of the additional units (or cash) is an ‘annual payment’ and the payer should account to HMRC for an amount in respect of basic rate income tax on the ‘grossed up’ value of the additional units (that is the amount that, after deduction of basic rate income tax leaves the net value of the additional units provided).

“Tax will be due from April onwards on all commission paid by investment funds to investors. We will not collect tax on earlier years commission.”

The implementation date is a shock as most fund groups had expected any tax on rebates to start from April 2014.

To help groups cope, HMRC said an estimate of the tax owed on fund rebates would be accepted in 2013 to allow time for fund groups to get processes in place.

“Until the end of 2013 to allow the rules to bed in we will accept an estimate of tax deducted at source. We will work very closely with stakeholders to ensure the rules are applied fairly across the board.”

Meanwhile ISA holders will not have to pay tax on commission which is rebated back to them. The Revenue said where payments of trail commission are made to an ISA account holder by the ISA manager then these, in line with all other income arising in ISA accounts, are not taxable and the managers are not required to deduct tax at source on the payment.

It added: “Additionally, provided that the payments are reinvested within the ISA without ever leaving the control of the ISA manager, then the payments will not count towards the maximum amount that may be invested in the ISA in any year.”

On SIPPs, HMRC said: “If payments of trail commission are made to the SIPP and reinvested within the SIPP without leaving the control of the SIPP trustee or administrator then they will not count as withdrawals from the SIPP, and they will not count as new SIPP member contributions.

“If payments are made to the member they will be annual payments and the payers will be required to deduct tax at source.”

Despite moving to close what it sees as a loop-hole in the tax system, HMRC said it would not be applying the tax retrospectively to legacy holdings.

It said: “HMRC has reached the conclusion that they would not be justified in seeking to collect tax for earlier years from either the payers who should have deducted tax at source from the payments or investors who should have declared any higher or additional rate liability in past year’s tax returns, where they have not already done so.”

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