HM Revenue and Customs (HMRC) has ruled that investors should pay income tax on any cash or fund units they receive as rebates.
Any rebates handed to consumers from April 6 are annual payments and therefore count towards taxable income, HMRC said. The body will enable investors to pay an estimated level of tax deducted at source until the end of the year.
Historically investors have not declared their rebates as taxable income.
“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).” HMRC said.
The announcement is a blow for distributors such as execution-only brokers and platforms that rely on rebates - often branded as fund fee ‘discounts’ - to draw in clients.
If rebates are paid within an Isa this will not be taxable, HMRC added.
“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,” HMRC added in a statement.
“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.”
The FSA is expected to follow through on plans to ban the payment of cash rebates to clients later this year, insisting that clients be given extra fund units instead. HMRC said that income tax is payable by the client on the gross value of these units.
It was revealed in February that the FSA will continue to allow very small rebates to be paid in cash - if they come to less than £1 per month.
