HMRC has issued fresh guidance on the taxation of payments to clients through platforms used to facilitate fund discounts or to pay adviser charges in response to a number of requests for clarification after a surprise tax change last year.
In March last year, the UK’s tax regulator announced at just two weeks notice that it would begin taxing all rebates to clients as income. Payments, whether in the form of units in funds or cash rebates which have now been banned for new business, would be taxed as an ‘annual payment’.
It said it has had a number of queries and in a new additional guidance notice clarifies that a payment from a fund manager will usually be taxed if at any point it is paid to the customer directly, irrespective of whether it is subsequently passed on to cover advice or other charges.
The notice states that redeeming units from a fund to pay for financial advice would not be classified as an annual payment.
HMRC did state that tax will be liable on the excess of any fees or payments which are made to customers from fund managers or platforms and that are used to offset other intermediary costs such as advice fees.
Clients must also pay tax on any trail commission which is paid to them following the removal of a previous agency agreement. Such payments are not classified as annual payments when they are made to an adviser, as they are then treated as trading income.
Trail commission or other rebates paid to a platform or adviser and then passed on in part or in full would be treated as trading income for the intermediary and an annual payment for the investor.
As for who collect the tax, HMRC said this was the responsibility of the party that holds the agreement with clients and makes the ultimate payment. For example, where a platform collects aggregated rebates and passes these on as part of its own client agreements, it is the platform that must collect the tax.
It also gave a green light to providers that offered to pay tax on behalf of investors, saying the amount that would have been deducted in this situation is passed on to the client as a ‘gift’ for tax purposes.
After HMRC’s announcement last year, Standard Life announced it would pay taxes due on unit rebates until the end of December 2013 on behalf of all Standard Life Wrap and FundZone customers.
A number of platforms have moved clients onto clean share classes for all legacy business already ahead of the April 2016 deadline to move all existing business paying cash rebates.
