FTSE 100 fund platform Hargreaves Lansdown laid down the gauntlet to tax collectors yesterday after launching a legal challenge on the taxation of fund cash back rebates.
The Bristol-based firm, currently one of the country’s best performing companies, said it will challenge a discount tax introduced by HMRC on payments made to its customers.
Chief executive Ian Gorham said the HMRC tax was “an attack on the small investor”.
“We feel it’s important to take a stand on behalf of investors,” he said. “When we introduced loyalty bonuses we consulted on its tax position and it was clear, as a refund of charges, it should not be subject to taxation.”
Although the rebates are small, Hargreaves has warned the new tax regime could set a precedent for taxing other cash back schemes used for things like credit cards and consumer goods.
HMRC introduced the income tax change in April.
The revenue said it could not comment for legal reasons. It has previously said it had introduced the tax because the rebates are, in tax terminology, annual payments and therefore subject to income tax.
Hargreaves Lansdown has decided to launch the legal challenge after consulting a leading tax counsel who disagreed with the HMRC decision. The company, which administers over £34.2bn of assets, is holding back cash it would owe through the new tax. It has said it will return all of the tax due to HMRC if the decision is reversed through the legal challenge, which will take many months.
HMRC vs Hargreaves Lansdown on tax
Q Discount tax? What on earth is that?
A It’s a tax on the money you get back from the funds you invest in. When you put your savings into a investment fund, it normally pays you back some of your money in a rebate. There’s about 1,000 funds around which pay a rebate. But the so-called “loyalty bonus” you get is quite small, about £10 a year.
Q So HMRC is taking back the money I’m due?
A Sort of. It has started to tax the payment. It announced plans for the tax in March and started collecting it in April. The rebate, which is paid back to you usually every month, is an annual income and therefore should be subject to income tax, HMRC says.
Q What are Hargreaves Lansdown getting involved for then?
A If you’re a customer, it passes on the rebate to you. It says it wants to “take a stand” for its investors. It says it’s anti-competitive and could set a precedent for other cash back schemes used on things like TVs for example. HMRC, however, says the payment should be subject to income tax.
Q So Hargreaves Lansdown is going to court to make sure the tax collectors stop taking the money?
A No. They’ve decided they’re going to just stop paying it full stop. The tax due to HMRC is being held in a fund while the issue is sorted. The revenue is expected to launch a legal challenge to enforce the payment.
Q How will it end?
A In court. Hargreaves will either be forced to pay the money to HMRC or, if it wins the argument, return it to clients.