Hargreaves Lansdown Asset Management Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 08 March 2018 |
| Neutral Citation | [2018] UKFTT 127 (TC) |
| Date | 08 March 2018 |
| Court | First Tier Tribunal (Tax Chamber) |
[2018] UKFTT 0127 (TC)
Judge Thomas Scott
John Tallon QC appeared for the appellant
Laura Poots, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Income tax – Payment of loyalty bonus by platform service provider to investors – Whether liability to deduct tax – Whether loyalty bonus payments annual payments – Held not pure income profit – Appeal allowed.
[1] This appeal relates to assessments issued to Hargreaves Lansdown Asset Management Limited (“HL”) on 14 September 2016 under section 957 of the Income Tax Act 2007. The assessments relate to the 13 quarterly accounting periods between 1 April 2013 and 30 June 2016.
[2] The only issue in the appeal is whether certain payments made by HL to its investors during those periods required HL to deduct and account for sums representing income tax on the payments because they were “annual payments” for tax purposes.
[3] HL is a well-known “platform service provider”. This means that its business is to provide a platform for the distribution to investors of investment products offered by different fund providers, and to provide administration services to investors.
[4] In 2013, HMRC announced 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 returns.
[5] HL did not accept that this obligation applied to the payments 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 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 section 957 of the Income Tax Act 2007.
[6] That is what was done, and, as a result, although HL is the appellant in this appeal, the substantive issue between the parties is whether or not the payments in question are “annual payments” within section 683 of the Income Tax (Trading and Other Income) Act 2005 (“ITTOIA 2005”).
[7] For the relevant periods, the applicable legislation, so far as relevant, is as follows.
[8] The basic charging provision, in section 683 ITTOIA 2005 (Chapter 7 of Part 5), states as follows:
(1) Income tax is charged under [Chapter 7 of Part 5] on annual payments that are not charged to income tax under or as a result of any other provision of this Act or any other Act.
…
(3) The frequency with which payments are made is ignored in determining whether they are annual payments for the purposes of this Chapter.
[9] The obligation to deduct at source is found in section 901 of the Income Tax Act 2007 (“ITA 2007”) as follows:
(1) This section applies to any payment made in a tax year if–
- it is a qualifying annual payment, and
- the person who makes it is not an individual.
…
(4) If the person who makes the payment has no modified net income for the tax year the person by or through whom the payment is made must, on making it, deduct from it a sum representing income tax on it at the basic rate in force for the tax year in which the payment is made.
[10] Section 899 ITA 2007 provides as follows:
(1) In this Chapter “qualifying annual payment” means an annual payment that meets the conditions in subsections (2) to (5).
(2) The payment must arise in the United Kingdom.
(3) If the recipient is a person other than a company, the payment must be–
- a payment charged to income tax under– …Chapter 7 of Part 5 of [ITTOIA 2005] (annual payments not otherwise charged) …
[11] Chapter 15 of Part 15 of ITA 2007 provides for persons who have made “section 946 payments” to make returns of those payments, and to collect income tax in respect of them. Section 946 ITA 2007 provides as follows:
The payments within this section are–
- …
- (b) a payment from which a UK resident company is required to deduct a sum representing income tax under– …section 901(4) (annual payments made by persons other than individuals) …
[12] The assessments in this appeal were made under section 957 ITA 2007, which states as follows:
(1) This section applies if an officer of Revenue and Customs thinks–
- that there is a section 946 payment which should have been included in a return under this Chapter and which has not been so included, or
- that a return under this Chapter is otherwise incorrect.
(2) An officer of Revenue and Customs may make an assessment, to the best of the officer's judgment, on the person who made the return, or should have made one.
[13] I considered various documents dealing with HL's business and its relationship with its investors, with a particular focus on the payments which are the subject of this appeal. I also considered documents and evidence dealing with the regulatory position regarding those payments. I heard evidence from, and questioned, Mr Ben Lundie, who is “Head of Vantage Development” within the HL group. Mr Lundie is responsible for managing HL's relationships and commercial negotiations with external fund management groups and companies offering products in which HL's clients might invest. I found Mr Lundie to be an entirely credible and reliable witness.
[14] It is first necessary to summarise certain regulatory changes regarding payments to investors which are relevant since the payments in this appeal were made both before and after those changes. The changes were made as a result of a consultation and review (the “FCA Review”) carried out by the Financial Conduct Authority (“FCA”).
[15] In April 2013 the FCA published Policy Statement PS13/1, titled “Payments to platform service providers and cash rebates from providers to consumers”. Included within that Policy Statement was the text of the FCA's Notification to the European Commission justifying the proposed reforms. That contained the following passage which is helpful background in this appeal, and which stated, so far as relevant, as follows:
14. Platforms are internet-based services used by advisers and retail clients to manage and administer investments online, offering a single view of the retail client's invested portfolio. They are normally investment firms and comprise a web based portal which can be accessed by either retail clients or advisers to execute investment transactions. Platforms are seen as a convenient channel through which investments can be arranged and then held in one place (for example to provide a single valuation for an entire portfolio) …
16. In the UK, platforms have in the past generally been funded by payments from product providers. These payments, commonly referred to as “rebates” in the UK, are a proportion of the fund manager's annual management charge (AMC) paid by the retail client. As a result, many platforms (including those used via an advice process as well as D2C platforms) have been able to market their services at no explicit cost to the retail client. In contrast, some other types of platform charge retail clients a separate fee for their services and any cash rebate is generally paid into the retail client's cash account.
[16] The reference to a “D2C” platform is to a “direct to consumer” promoter, such as HL.
[17] The FCA concluded that this fee structure created risks for investor protection and hindered transparency. Accordingly, it changed its rules from April 2014 with the effect that, subject to certain transitional arrangements, cash rebates by platform providers to investors would only be permitted if (broadly) a rebate received by a platform from a fund manager was passed on in full to the investor in the form of additional units in the relevant fund or, subject to conditions, in cash. Platform providers would no longer be able to retain a share of the annual management charges paid by the investor to the investment provider, but would be obliged to charge their clients a direct fee for their services.
[18] These changes were implemented in the FCA's “Conduct of Business Sourcebook”, with which HL was obliged to comply. The relevant provisions (the “New Rules”) stated as follows:
… a platform service provider must:
- only be remunerated for its platform service (and any other related services it provides) by platform charges …
Examples of remuneration that should not be accepted by a platform service provider include … a share of an annual management charge …
[This rule] does not prevent a platform service provider receiving a share of an annual management charge from an authorised fund manager if the platform service provider passes that share on to the retail client in the form of:
- additional units; or
- cash, provided that it does not offset or appear to offset any adviser charges or platform charges.
[19] On the basis of the documentary evidence and of the witness evidence of Mr Lundie I make the following findings of fact.
[20] HL's primary business is to present and explain a range of investment products offered by investment providers to retail investors and to help their clients to invest in their chosen products. It also provides nominee and custodian services, administrative services and financial advice and information. This platform of services is collectively referred to as the Vantage Service.
[21]...
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