Were bonuses paid by an investment platform annual payments?
Our pick of this week's cases
In HMRC v Hargreaves Lansdown Asset Management [2019] UKUT 246 (9 August 2019), the UT found that payments of bonuses by an investment platform were ‘annual payments’.
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, as well as administration services to investors.
HMRC considered that HL was required to deduct and account for income tax on loyalty bonuses paid to individuals who invested in funds through HL’s platform because these payments were ‘annual payments’ (ITTOIA 2005 ss 683 and 901).
The UT observed that the four characteristics of annual payments are set out in case law: they are payable under a legal obligation; they are recurrent (or capable of recurrence); they constitute income in the hands of the recipient; and they represent ‘pure income profit’ to the recipient. It was accepted that the payments were income payments and that they were paid under a legal obligation. The two issues were therefore whether they were recurrent and represented ‘pure income profit’.
The tribunal considered the latter issue first. It observed that whether a payment represents ‘pure income profit’ depends on whether it is ‘a taxable receipt in the hands of the recipient without any deduction for expenses or the like’. The relevant entities were either open-ended investment companies (OEICs) or unit trusts. The OEICs were required to appoint authorised corporate directors to manage their assets. The OEICs therefore had the responsibility of paying the annual management charge (AMC), out of their assets, directly to these authorised corporate directors. Investors had no legal obligation to pay the AMC. Similarly, the trustees of the unit trusts, who had custody of the assets, made the necessary payments to the authorised fund managers out of the funds’ assets.
The tribunal concluded that although the AMC was borne by investors, as payments of the AMC by the fund reduced either the level of distributions or the value of their investments, it was not paid by them to the fund manager. This meant that investors did not need to incur any expenses, including the AMC, to receive the loyalty bonus, which was therefore ‘pure income profit’.
As to the recurrence issue, the UT found that the loyalty bonuses were paid on a monthly basis, under a binding contractual obligation. The fact that HL could reduce the loyalty bonus to zero did not alter the analysis. Similarly, the fact that the payment may or may not continue beyond the year did not prevent it being an annual payment. Furthermore, the commercial background suggested that the arrangements would continue beyond the year as the investments were long-term investments.
Why it matters: The UT found that the FTT had erred in its approach to the issue by not basing its decision on the terms of the contractual arrangements. It noted that the marketing documents suggested that the loyalty bonuses reduced the AMC borne by investors; however, the UT considered that the correct characterisation of the arrangements was that ‘the investor received a further income distribution in respect of his investment in the fund as a result of his continuing investment in the fund’.
Also reported this week:
A Rialas v HMRC : Applying the transfer of assets abroad provisions
Were bonuses paid by an investment platform annual payments?
Our pick of this week's cases
In HMRC v Hargreaves Lansdown Asset Management [2019] UKUT 246 (9 August 2019), the UT found that payments of bonuses by an investment platform were ‘annual payments’.
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, as well as administration services to investors.
HMRC considered that HL was required to deduct and account for income tax on loyalty bonuses paid to individuals who invested in funds through HL’s platform because these payments were ‘annual payments’ (ITTOIA 2005 ss 683 and 901).
The UT observed that the four characteristics of annual payments are set out in case law: they are payable under a legal obligation; they are recurrent (or capable of recurrence); they constitute income in the hands of the recipient; and they represent ‘pure income profit’ to the recipient. It was accepted that the payments were income payments and that they were paid under a legal obligation. The two issues were therefore whether they were recurrent and represented ‘pure income profit’.
The tribunal considered the latter issue first. It observed that whether a payment represents ‘pure income profit’ depends on whether it is ‘a taxable receipt in the hands of the recipient without any deduction for expenses or the like’. The relevant entities were either open-ended investment companies (OEICs) or unit trusts. The OEICs were required to appoint authorised corporate directors to manage their assets. The OEICs therefore had the responsibility of paying the annual management charge (AMC), out of their assets, directly to these authorised corporate directors. Investors had no legal obligation to pay the AMC. Similarly, the trustees of the unit trusts, who had custody of the assets, made the necessary payments to the authorised fund managers out of the funds’ assets.
The tribunal concluded that although the AMC was borne by investors, as payments of the AMC by the fund reduced either the level of distributions or the value of their investments, it was not paid by them to the fund manager. This meant that investors did not need to incur any expenses, including the AMC, to receive the loyalty bonus, which was therefore ‘pure income profit’.
As to the recurrence issue, the UT found that the loyalty bonuses were paid on a monthly basis, under a binding contractual obligation. The fact that HL could reduce the loyalty bonus to zero did not alter the analysis. Similarly, the fact that the payment may or may not continue beyond the year did not prevent it being an annual payment. Furthermore, the commercial background suggested that the arrangements would continue beyond the year as the investments were long-term investments.
Why it matters: The UT found that the FTT had erred in its approach to the issue by not basing its decision on the terms of the contractual arrangements. It noted that the marketing documents suggested that the loyalty bonuses reduced the AMC borne by investors; however, the UT considered that the correct characterisation of the arrangements was that ‘the investor received a further income distribution in respect of his investment in the fund as a result of his continuing investment in the fund’.
Also reported this week:
A Rialas v HMRC : Applying the transfer of assets abroad provisions
