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Investors face tax on share loyalty bonuses

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5th Apr 2013
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Fund investors face paying income tax on "loyalty bonuses" paid by fund supermarkets from 6 April, reports Nick Huber.

HMRC has ruled that the payments are "annual payments" and should therefore be taxed as income, starting in the new tax year.

Hargreaves Lansdown, the largest payer of loyalty bonuses on funds in the UK, called it "anti-competitive" and said it was a “worrying precedent” that could spread to other forms of cashback, such as those on supermarket loyalty schemes and credit cards, a claim dismissed by HMRC, the Daily Telegraph reported.

It means that basic rate tax, of 20%, will be deducted from the bonuses at source and higher-rate taxpayers will need to declare and pay additional amounts on annual self assessment forms.

Money within Isa and Sipps (self-invested personal pensions) is tax-free and will not be affected.

The payments are made because fund supermarkets receive a renewal advice commission, which is typically 0.50% a year although sometimes higher, from investment companies which operate the funds - even though these fund-selling websites do not give specific advice.

Then, some of these companies pay some of this money back to investors. Hargreaves Lansdown, for example, passes a small portion of the renewal advice commission – 16% of what it receives overall - back to investors as a "bonus" on some funds.

Ian Gorham, chief executive of Hargreaves Lansdown, was quoted as saying by the Telegraph: “It seems the government is now seeking to tax small savers and investors. This is effectively a second tax on their income.

“Just as worrying is the precedent being set. Loyalty bonuses and cash back offers are common practice across many industries in the UK. The government may have set a precedent in taxing such loyalty schemes and savvy shoppers could well be next with multi-buys, cashback credit cards and cashback websites all possible targets in the future.

HMRC dismissed claims that cashback in other industries could be taxed. A spokesman told The Telegraph: "There is no question of tax becoming payable on cashbacks received from credit, debit and loyalty cards or any other kind of cashback payment. Trail commission is taxable because it is a further taxable distribution from the fund but in a different form and this means there is no read across to cashbacks."

Tax will be due from April onwards on all commission paid by investment funds to investors. HMRC will not collect tax on earlier years commission, the spokesman added.

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By David Heaton
07th Apr 2013 14:27

Has HMRC forgotten SP 5/95?

Is this the same 'annual payment' discussion that was had when SP 5/95 tried to say that commissions and cashbacks on own purchases were Case VI income?  SP 5/95 had to be withdrawn and replaced by SP 4/97 because it was recognised that a discount or rebate of commission on a personal purchase could not be taxable income.  What has changed?

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By The Limey
08th Apr 2013 23:07

The difference is that this is part of the return on an investment.

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