HM Revenue and Customs (HMRC) is appealing a recent decision to award a £15m tax rebate to 150,000 Hargreaves Lansdown investors.
In March this year, Hargreaves Lansdown won its court challenge against HMRC over tax applied to the loyalty bonuses it has been paying investors for more than 15 years.
The loyalty bonus is issued as a discount on a fund’s management fees, which makes it cheaper for people to invest.
In 2013, however, HMRC announced that loyalty bonuses should be subject to income tax, reversing its previous position.
Now that HMRC has decided to appeal, court proceedings are expected to continue until the first half of 2019.
If the appeal is unsuccessful, customers of other fund supermarkets could also receive rebates on annual fund charges.
Which? takes a look at what HMRC’s appeal means for Hargreaves Lansdown investors.
Why could Hargreaves Lansdown investors get a tax rebate?
For more than 15 years, Hargreaves Lansdown has paid a ‘loyalty bonus’ to people who invest using its service.
A loyalty bonus is a discount to the management fees charged by different funds, which makes it cheaper for people to invest their money.
When the loyalty bonuses were first introduced, Hargreaves Lansdown consulted with HMRC to confirm whether or not they should be subject to tax.
At the time, HMRC confirmed tthey should be seen as a refund of management fees rather than taxable income.
In March 2013, however, HMRC changed its position and announced that loyalty bonuses paid to investors held outside of tax efficient savings products, such as stocks and shares Isas or self-invested personal pensions, should be taxed as income.
From April 2013, the loyalty bonuses were reduced, as the basic rate of income tax (20%) was deducted before they were paid to investors.
In September 2013, Hargreaves Lansdown challenged HMRC’s decision on behalf of the hundreds of thousands of its customers who were affected by the decision.
A recent tax tribunal decision ruled in favour of Hargreaves Lansdown, meaning that HMRC has to give all investors who paid tax on their loyalty bonuses a tax rebate – totalling £15m.
Around 150,000 investors are estimated to be affected.
HMRC is now appealing this decision as it believes the tax on loyalty bonuses is correct.
- Find out more: What is a Sipp?
What does HMRC’s appeal mean for investors?
HMRC’s appeal has prolonged the amount of time it will take affected investors to find out if they are entitled to a tax rebate or not.
A final decision isn’t expected to be made until the first half of 2019.
Hargreaves Lansdown will continue to deduct tax from loyalty bonuses to avoid high unexpected tax bills for clients should HMRC’s appeal be successful.
If HMRC loses the appeal, a full rebate on all tax collected from loyalty bonuses will be returned to investors and Hargreaves Lansdown will stop deducting tax from future loyalty bonus payments.
- Find our more: how much tax you pay
Do I need to declare loyalty bonuses on my tax return?
According to Hargreaves Lansdown, investors should continue to include loyalty bonuses on their tax returns until further notice.
Non-taxpayers and basic-rate taxpayers will not have to take any action as this will done automatically by Hargreaves.
Higher and additional-rate tax payers should declare loyalty bonuses paid in the ‘Fund & Share Account’ on their tax return.
Loyalty bonuses paid into an Isa or a Sipp do not need to be declared.
Hargreaves Lansdown chief executive Chris Hill said: ‘Following the decision by the first tier tax tribunal in our favour, we see no reason why we would not be successful at appeal. The process is likely to complete in the first half of 2019 and a successful outcome will see millions returns to clients, as well as a simplification of their tax affairs.’
“The ‘discount tax’ has always been an unnecessary and unwarranted attack on private investors.’
- Find out more: types of saving and investment income
Article updated 21st May 2018 to include information about HMRC appeal