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‘Loyalty bonus’ payments to investors were annual payments

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Loyalty bonus payments by a platform service provider to investors were liable to the deduction of basic rate income tax at source as being qualifying annual payments.

Background 

In March 2013, HM Revenue and Customs (HMRC) announced (in its Brief 04/13) that from April 2013 it expected financial intermediaries making certain payments to investors to deduct basic rate tax at source from such payments (with investors being expected to declare any higher rate liability on the payments in their tax returns).

The respondents (‘HL’), a ‘platform service provider’ to investors, did not accept that this obligation applied to ‘loyalty bonus’ payments which it made to investors. HMRC and HL reached a temporary agreement to avoid the necessity of multiple appeals. Under that agreement, HL would retain an amount equal to the basic rate of income tax on the payments to investors, and HMRC would then assess HL for that amount (under ITA 2007, s 957). HMRC raised assessments for the 13 quarterly accounting periods between 1 April 2013 and 30 June 2016. HL appealed. 

The substantive issue between the parties was whether the payments in question were ‘annual payments’ (ITTOIA 2005, s 683). If so, they would also satisfy the conditions to be ‘qualifying annual payments’ within ITA 2007, s 899, such that s 946 applied to the payments. HL would then have an obligation to deduct basic rate tax under s 901, as HMRC contended. 

The First-tier Tribunal (FTT) ([2018] UKFTT 127 (TC)) noted case law authorities established that an ‘annual payment’ had four characteristics: (1) It must be payable under a legal obligation; (2) It must recur or be capable of recurrence, although the obligation to pay may be contingent; (3) It must constitute income and not capital in the hands of the recipient; and (4) It must represent ‘pure income profit’ to the recipient. HL accepted that the loyalty bonus payments constituted income in the hands of investors, so there was no need to consider criteria (3). 

On (1), the FTT concluded that the loyalty bonus payments were made under a binding legal obligation. On (2), the FTT found that the payments had ‘the quality of being recurrent or capable of recurrence’. However, on criteria (4), the FTT noted that investor terms and conditions made it plain that in investing through the appellant in a particular fund, a schedule of charges would apply. The FTT concluded on the evidence that the nature and quality of the loyalty bonus payment was that it was not a ‘profit’ to an investor, but a reduction of his net cost. The payments were, therefore, not annual payments. HL’s appeal was allowed. HMRC appealed. 

Decision

The Upper Tribunal (UT) agreed with the FTT’s analysis of the concept of ‘pure income profit’. The UT considered case law authorities and found that it was for the tribunal to determine the question of whether the payments in question amounted to pure income profit in the hands of the payee in the light of all the relevant circumstances. 

The UT noted that one of HMRC’s key criticisms of the FTT’s decision was that the FTT based its findings on the premise that the investor had ‘paid or borne’ the fund manager’s annual management charge (AMC). The UT found that the FTT erred in its approach to the issue by not basing its decision on the terms of the contractual arrangements; that was an error of law and it was material to the FTT’s decision on the ‘pure income profit’ issue.  

In the UT’s view, 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. The term ‘loyalty bonus’ was, therefore, a correct description; the payment rewarded loyalty. The UT concluded that the loyalty bonus was pure income profit. 

Furthermore, in full agreement with the reasoning of the FTT, the UT concluded that the loyalty bonus payments were capable of recurrence. HMRC’s appeal was allowed.

Comment 

The UT’s judgment provides some useful guidance on the factors to consider in determining whether a payment is an ‘annual payment’ for income tax purposes. 

Revenue and Customs v Hargreaves Lansdown Asset Management Ltd [2019] UKUT 246 (TCC)

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