The ruling was made in March, meaning around £15m (€17m $20m) would be returned to 150,000 investors. HMRC had two months to appeal the decision.
The Lang Cat director Mike Barrett said the decision to appeal leaves investors, asset managers and platforms in limbo as the industry has been moving away from rebates in favour of alternative discount mechanisms, despite the fact they are more cost effective and encourage competition.
Barrett told IA sister publication Portfolio Adviser that he was not surprised that HMRC had appealed the decision but was surprised at the length of time it would take for the appeal to be resolved.
Hargreaves said a decision is due in H1 2019.
Barrett said: “The sooner it gets resolved the better because it does have an impact on end investors.”
While Hargreaves has led the charge, Barrett said the ruling would have implications for other platforms, such as AJ Bell and Fidelity in the direct-to-consumer space, and larger advised platforms, like Aviva, Standard Life and Old Mutual Wealth.
“It’d be a smaller amount, but customers on other platforms would benefit too.”
Champagne on ice
Hargreaves chief executive Chris Hill said he sees no reason why they should not be successful at the appeal.
“The ‘discount tax’ has always been an unnecessary and unwarranted attack on private investors,” Hill said.
Barrett agreed, stating the original ruling had been detailed. “There is only so much to be said about it. I don’t think there will be anything new brought into it, it will just be rehashing the same conversation again and again,” Barrett said.
However, for now Hargreaves has said “the champagne is on ice until any appeal is concluded”.
It has promised to write to affected clients as soon as it knows more.
Superclean versus rebates
HMRC started to tax Hargreaves refunds of the annual management charge (AMC), which it paid out to clients as fund loyalty bonuses, in 2013. This tax was introduced despite an arrangement struck between the authority and Hargreaves 15 years ago that the bonus would not be taxable.
HMRC argued it had started to tax the bonuses as they operated as a form of trail commission rather than a simple rewards scheme.
Barrett described rebates as the most effective mechanism for investors to get a discount on their investments, stating the alternative, superclean share classes permit barriers to exit because the fund group creates a specific share class for the platform in question.
“The investor gets a discount, but it creates a problem if they want to move elsewhere to AJ Bell or another platform, because the other platform probably doesn’t have that share class. The investor is likely to have to cash in their investments to transfer.
“It then increases the costs from the fund group’s point of view because they’re creating another version of the fund to have on multiple platforms.”
Barrett said it creates a more competitive marketplace “which is what the FCA are looking for”.
In the original ruling in March, tax tribunal judge Thomas Scott said the evidence presented made it clear that the loyalty bonus was not a profit to investors but rather a reduction to net costs.
“It is quite unlike an annuity payment or interest in respect of which a recipient need do nothing but sit back and receive the payments.
“The assertion by HMRC that an investor does not need to pay or bear an AMC to receive a loyalty bonus and that there is nothing in the contract between HL and investors to impose the AMC ignores the plain terms on which HL offers and permits investment to be made.”