An announcement by HM Revenue and Customs that investors should pay income tax on any rebates, including those relating to trail commission, could spell the end of unit rebates as a solution to the regulator’s platform remuneration conundrum, according to some commentators.
Earlier today, HMRC confirmed that any rebates given from 6 April will be considered in the same way as annual payments and therefore count towards taxable income.
This means that a whole year ahead of new rules coming in for platforms that could see cash rebates partially or wholly banned and unit rebates given primacy as a means of facilitating fund discounts on platforms, investors will be hit on any platform rebates they are currently receiving.
The FSA has delayed final rules on platform remuneration for a number of months while it mulls the best solution for platform rebates. It had initially proposed a ban on all rebates and a move to completely clean share classes, but later changed this and proposed unit rebates be allowed.
More recent rumours have suggested that de minimis cash rebates of £1 per unit may be allowed in the final rules. There are also suggestions that legacy trail rebates will be banned.
Final rules are expected some time in April and platforms will be given one year to implement the plans, which will come into force in Q2 2014.
Patrick Mill, managing director of Alliance Trust Savings, said the ruling from HMRC is “surely the final nail in the coffin for unit rebates”. Mr Mill, who has publicly advocated a move away from all rebates, suggested the best course now was a move to completely clean share classes.
He said: “Applying unit rebates from an industry perspective would be highly complex to both administer and to explain to customers.
“Taxation of rebates will apply to funds held out with a tax sheltered wrapper, such as a [self-invested personal pension] or Isa. So a higher rate tax payer could lose almost half of the value of the rebate in tax.”
Ed Dymott, head of business development at Fidelity Worldwide Investment, said the HMRC ruling held no surprises, save the implementation timetable.
He said: “We are disappointed that HMRC has chosen not to delay the implementation of these taxes in line with the RDR platform changes, having only two weeks notice will create challenges for the industry.
“Whilst going to consultation, the process itself does not allow for any challenge of the rules and many platforms will have to comply with the rules well before the consultation process has completed.
“However, we are pleased that HMRC has listened to a number of the concerns we expressed - not making this retrospective and introducing some flexibility in the withholding requirements on payments during 2013 whilst payers update their systems and processes.”
