Hargreaves Lansdown has lost a legal battle with HM Revenue & Customs over the taxation of loyalty bonuses offered on its platform, dealing a blow to customers who had hoped to benefit from a tax rebate totalling £15m.
A London tax tribunal on Friday ruled in favour of HMRC’s so-called “discount tax”, which applies to fund discounts paid to private investors in the form of loyalty bonuses.
Hargreaves, one of the first platforms to introduce loyalty bonuses 15 years ago, mounted a challenge against HMRC after the tax was introduced in 2013, calling it an “unnecessary and unwarranted attack” on private investors.
The UK’s largest fund supermarket claimed an initial victory in March 2018 when a first tier tax tribunal ruled that fund discounts were not taxable — a judgment that opened the door to 150,000 Hargreaves customers receiving an average windfall of £100 each.
But Friday’s judgment overturned this decision following an appeal by HMRC, which argued that fund rebates were annual payments for income tax purposes.
Hargreaves chief executive Chris Hill said the company was “disappointed” by the upper tribunal’s decision, which it had “reluctantly accepted”. He added: “A successful outcome would have seen at least £15m returned to around 150,000 clients.”
HMRC said it was “pleased” with the upper tribunal’s decision.
Loyalty bonuses involve customers being paid a rebate of part of a fund’s ongoing management charges. Hargreaves awards them to customers who invest in any of its Wealth 50 list of favourite funds, passing on the discounts it negotiates with fund managers.
When Hargreaves introduced the bonuses, investors received the payments free of tax. In 2013, HMRC changed the rules and said bonuses should be paid net of basic rate tax if held outside a tax-efficient wrapper such as a stocks and shares Isa or a Sipp (self-invested personal pension). Hargreaves had been seeking to reclaim the basic rate tax that had been deducted from the payments.
Since 2013, investors have had to declare bonuses on their tax returns. Basic rate taxpayers would have nothing further to pay, but higher and additional rate taxpayers would have to pay the income tax owed. Had Friday’s ruling been in the fund platform’s favour, these investors would have been entitled to claim the tax back.
Following Friday’s judgment, the platform said basic rate tax would continue to be deducted at source and investors would continue to declare loyalty bonuses as income on their tax returns — unless their investments were held within a tax wrapper.
Hargreaves, which footed the bill for the legal challenge, added: “We have reviewed the findings of the tribunal with our lawyers and concluded that overturning the court’s ruling is extremely unlikely and we will not be appealing [against] the decision.”