Was a payment by an investment platform an ‘annual payment’?
Our pick of this week's cases
In Hargreaves Lansdown Asset Management v HMRC [2018] UKFTT 127 (8 March 2017), the FTT found that loyalty bonus payments made to investors were not annual payments under ITTOIA 2005 s 683.
Hargreaves Lansdown (HL) is a ‘platform service provider’; it provides a platform for the distribution to investors of investment products offered by different fund providers. It also provides administration services to investors. In 2013, HMRC announced that from April 2013 it expected financial intermediaries making certain payments to investors to deduct basic rate tax at source. HL considered that this obligation did not apply to the payments of ‘loyalty bonuses’ which it made to investors. Given the substantial number of investors receiving such payments, and the relatively small amounts per investor, HMRC and HL reached an agreement, intended to avoid the necessity of multiple appeals. Under that agreement, HL retained an amount equal to the basic rate of income tax on the payments to investors, and HMRC assessed HL for that amount under ITA 2007 s 957. HL appealed against the assessment and the issue was whether or not the relevant payments were annual payments.
The FTT observed that case law (and in particular Campbell [1970] AC 77) had established four characteristics of an annual payment. Firstly, it must be paid under a legal obligation. This condition was satisfied, as the factsheets issued to investors provided for a payment by HL to investors who satisfied the relevant criteria. Secondly, the payments were capable of recurrence since they did recur over a period of many months. Thirdly, it was accepted that the payments were income in the hands of the investors.
The main issue the FTT had to decide therefore turned on the fourth characteristic of an annual payment; such a payment must be ‘pure income profit’, in circumstances where there is no condition for the payment preventing it from being pure income profit. The FTT found that once the investor has made his investment in a fund through HL, he did not need to do anything more of substance in order to satisfy the non-withdrawal ‘condition’ and receive the relevant loyalty bonus. The requirement to maintain the investment (or maintain it at a minimum level) did not suffice to prevent the loyalty bonus from being pure income profit.
However, the FTT also found that the nature and quality of a loyalty bonus payment was not that of a ‘profit’ to an investor, but a reduction of his net cost. The terms and conditions, and the marketing material made it clear that a schedule of charges applied to any investment in a fund. The loyalty bonus was therefore unlike an annuity payment or interest, in respect of which a recipient ‘need do nothing but sit back and receive the payments’.
Why it matters: The FTT thought that the notion put forward by HMRC – that HL would meet a binding legal obligation to pay the loyalty bonus each month, without the recipient having to pay the relevant charges in relation to his investment – was ‘commercial nonsense’.
Also reported this week:
Sippchoice v HMRC - Contribution in kind to a SIPP and income tax deduction
Was a payment by an investment platform an ‘annual payment’?
Our pick of this week's cases
In Hargreaves Lansdown Asset Management v HMRC [2018] UKFTT 127 (8 March 2017), the FTT found that loyalty bonus payments made to investors were not annual payments under ITTOIA 2005 s 683.
Hargreaves Lansdown (HL) is a ‘platform service provider’; it provides a platform for the distribution to investors of investment products offered by different fund providers. It also provides administration services to investors. In 2013, HMRC announced that from April 2013 it expected financial intermediaries making certain payments to investors to deduct basic rate tax at source. HL considered that this obligation did not apply to the payments of ‘loyalty bonuses’ which it made to investors. Given the substantial number of investors receiving such payments, and the relatively small amounts per investor, HMRC and HL reached an agreement, intended to avoid the necessity of multiple appeals. Under that agreement, HL retained an amount equal to the basic rate of income tax on the payments to investors, and HMRC assessed HL for that amount under ITA 2007 s 957. HL appealed against the assessment and the issue was whether or not the relevant payments were annual payments.
The FTT observed that case law (and in particular Campbell [1970] AC 77) had established four characteristics of an annual payment. Firstly, it must be paid under a legal obligation. This condition was satisfied, as the factsheets issued to investors provided for a payment by HL to investors who satisfied the relevant criteria. Secondly, the payments were capable of recurrence since they did recur over a period of many months. Thirdly, it was accepted that the payments were income in the hands of the investors.
The main issue the FTT had to decide therefore turned on the fourth characteristic of an annual payment; such a payment must be ‘pure income profit’, in circumstances where there is no condition for the payment preventing it from being pure income profit. The FTT found that once the investor has made his investment in a fund through HL, he did not need to do anything more of substance in order to satisfy the non-withdrawal ‘condition’ and receive the relevant loyalty bonus. The requirement to maintain the investment (or maintain it at a minimum level) did not suffice to prevent the loyalty bonus from being pure income profit.
However, the FTT also found that the nature and quality of a loyalty bonus payment was not that of a ‘profit’ to an investor, but a reduction of his net cost. The terms and conditions, and the marketing material made it clear that a schedule of charges applied to any investment in a fund. The loyalty bonus was therefore unlike an annuity payment or interest, in respect of which a recipient ‘need do nothing but sit back and receive the payments’.
Why it matters: The FTT thought that the notion put forward by HMRC – that HL would meet a binding legal obligation to pay the loyalty bonus each month, without the recipient having to pay the relevant charges in relation to his investment – was ‘commercial nonsense’.
Also reported this week:
Sippchoice v HMRC - Contribution in kind to a SIPP and income tax deduction
