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HMRC has lost an important test case in the First Tier Tax Tribunal on the taxation of trail commissions.

Just about five years ago HMRC delivered a bolt out of the blue with the announcement in Revenue & Customs Brief 04/13 that it thought trail commission – notably in the form of unit trust and OEIC annual rebates – was subject to income tax.  We commented at the time that the new HMRC insight had come some 16 years after SP4/97 appeared to have settled the issue of taxing rebated commission. At the time of HMRC’s revelation, Hargreaves Lansdown said that it would challenge the change of view.

The result of that challenge has just emerged in the transcript of Hargreaves Lansdown Asset Management Ltd and the Commissioners for Her Majesty’s Revenue and Customs, 2018] UKFTT 127, TC06383. Judge Thomas Scott, sitting in the First Tier Tax Tribunal, decided in favour of Hargreaves Lansdown (HL), although HMRC can – and probably will – appeal to the Upper Tier Tribunal.

A reading of the case highlights several subtle nuances which may mean the result will not be applicable to every instance of rebated commission. For a start HL referred to the payments as “loyalty bonuses” rather than rebated commission and gave themselves considerable discretion in how much – if anything – they would pay to fund investors.

The HMRC case revolved around the payments falling into the category of “annual payments not otherwise charged” under s683 ITTOIA 2005. Mr Scott referred to five cases as leading authorities in determining what constituted an “annual payment” as the legislation was less than precise. He highlighted four characteristics:


  • It must be payable under a legal obligation.
  • It must recur or be capable of recurrence, although the obligation to pay may be contingent.
  • It must constitute income and not capital in the hands of the recipient.
  • It must represent “pure income profit” to the recipient.


Despite some interesting (and creative) arguments from HL, the judge found that the loyalty bonuses satisfied the first two conditions, while HL accepted the third income point. On the fourth condition, HL won the day.

HMRC argued that the payment was “pure income profit” because all an investor had to do to receive it under HL’s terms was to hold the relevant investment at the end of the month. HMRC refused to accept that payment was dependent on the investor paying the fund’s annual management charge (AMC) for the month in question. HMRC’s stance was that the AMC was not paid by the investor, but by “the fund entity to the fund provider”.

HL argued the opposite and was helped by HMRC’s statement of case setting out in a “factual summary” that “The fund provider levies an initial charge when the investor makes an investment and then raises annual management charges on the investor”.

Mr Scott concluded that “the evidence makes it plain that the nature and quality of a Loyalty Bonus payment is that it is not a “profit” to an investor, but a reduction of his net cost.” As such it was thus not an annual payment and therefore not taxable.

As HL’s press statement makes clear, “the champagne is on ice” until any appeal is over – HMRC have 56 days to launch an appeal and will probably do so. At stake as far as HL is concerned is £15m of tax it has deducted at source. Overall there is potentially a much higher figure, as other platforms adopted a similar approach and some recipients will have suffered higher or additional rate tax on the payments. Whether the “reduction in net cost” argument stretches to rebated renewal commission on life policies, VCTs, etc is a moot point.


HMRC has issued updated guidance on the new IHT hallmark.

Updated guidance on the new IHT hallmark, which comes into effect on 1 April 2018, is now available. This will be incorporated into HMRC’s guidance on the DOTAS regime and will replace the guidance previously in chapters 12 and 13.

The revised guidance:

  • gives some background to the changes in the IHT hallmark
  • describes the new hallmark and explains how it works
  • provides details of the two conditions (please see our earlier bulletin) that have to be met for an arrangement to be notifiable
  • explains how the established practice exception applies
  • gives examples of arrangements which are not notifiable, that might be notifiable, and that are notifiable 


The ‘established practice’ exception

As mentioned above the new hallmark takes effect from 1 April 2018 so a proposal made before then would not have been notifiable at that time. However, where that proposal is implemented again on or after 1 April 2018 a duty to notify would arise under section 308(3) of Finance Act 2004. The established practice exception is intended to ensure that such a duty does not arise if the conditions in the exception are met.

Arrangements are excepted from being prescribed, i.e they will not be notifiable, if they:

  • implement a proposal which has been implemented by related arrangements, and
  • are substantially the same as the related arrangements.


‘Related arrangements’ are defined as arrangements which:

  • were entered into before 1 April 2018, and
  • at the time they were entered into, accorded with established practice of which HMRC has indicated its acceptance.


Interestingly in the guidance HMRC does refer to Discounted Gift Trusts stating that if an Insurance Company offered the arrangement under what was deemed to be acceptable in accordance with HMRC practice and clients set up the trust before 1 April 2018 and the trust continues to be offered on the same basis then it would seem likely not to be notifiable under the new IHT hallmark. However, if the Insurance Company decided that they want to make changes to the elements of steps which are required to achieve the intended tax advantage, this would be a new proposal which even though it may be ‘substantially the same’ this proposal and any arrangement that implement it are not excepted and must be tested against the new IHT hallmark It is important to note that changes to a proposal or scheme which do not affect the elements or steps that are required to achieve the intended tax advantage would not result in this being a new proposal.

Examples of arrangements which are not notifiable:

  • Lifetime gift to a spouse or civil partner
  • Regular gifts out of income, i.e using the normal expenditure out of income exemption
  • Transfers of value equal to the available nil rate band
  • Making a lifetime gift to a bare trust for a minor beneficiary
  • Gift and loan trusts/loan trusts
  • Excluded property trusts set up by a non-domiciled individual
  • Leaving property to an exempt beneficiary under a will
  • Entering into a deed of variation
  • Disclaiming an entitlement under a will
  • Purchasing shares which qualify for business relief once they have been owned for two years
  • Gifting land and paying a full market rent to use the land 


Examples of arrangements which might be notifiable:

  • Arrangements to gift shares which qualify for business property relief into trust and subsequently sell the shares back to the transferor
  • Creation of a reversionary lease
  • Employee benefit trusts


While it was reasonable to accept that schemes which were previously available were unlikely to be caught, the updated guidance goes one step further and provides welcome news to those who have long been marketing trusts, such as the discounted gift trust and loan trust. As mentioned above, provided these arrangements continue to be offered on the same basis they are unlikely to be caught by the new IHT hallmark. In addition, introduction of the new hallmark has not affected many of the popular IHT planning strategies such as deeds of variation and using the normal expenditure out of income exemption which continue to be available.


Policy paper on aligning the rules for income tax and employer NICs so that employer NICs will become payable on termination payments above £30,000.

HMRC has recently updated its guidance to take account of the treatment of termination payments.

From 6 April 2018, employers must calculate the part of a termination payment that represents post employment notice pay. This is intended to reflect earnings that the individual would have received, had their notice period been worked in full.

Employers will be required to operate PAYE on the post employment notice pay, and account for both employee’s and employer’s NIC. The part of a termination payment that is not post employment notice pay will be subject to income tax if, and to the extent that, it exceeds £30,000.  This means that the legislation ensures that redundancy payments remain exempt from income tax up to the £30,000 threshold.

Foreign Service Relief on termination payments will also be withdrawn from 6 April 2018 for most UK resident employees – but will be retained for seafarers.

Finally, the introduction of employer only NICs on termination payments above £30,000 will now take effect from 6 April 2019 rather than 6 April 2018.


The Office of National Statistics has published an article giving details of membership and contributions to workplace pension arrangements for UK employees by type, age, industry, public and private sector, occupation and size of company

In the article the ONS looks at membership and contributions to workplace pension arrangements for UK employees by type, age, industry, public and private sector, occupation and size of company. The publication gives updated figures for 2016 and provisional data for 2017.

The main points are as follows.

  • Employee workplace pension scheme membership has increased to 73% in 2017, from 67% in 2016, driven predominantly by increases in membership of occupational defined contribution schemes (including National Employment Savings Trust) within the private sector.
  • In 2017, there were 89% of public sector employees who were members of a workplace pension scheme compared with 67% of private sector employees, this gap continues to narrow following the introduction of automatic enrolment in 2012.
  • Those aged 22 to 29 years had the largest growth in pension membership from 65% in 2016 to 73% in 2017.
  • In 2017, full-time employees in both the public and private sectors had almost equal proportions of workplace pension scheme membership for men and women (92% in public sector, 78% in private sector).
  • In 2017, there were 94% of full-time employees with the highest gross weekly earnings (£600 and over) and 81% of lower earners (£100 to £200) in the public sector who were pension scheme members compared with 87% and 27% respectively in the private sector.
  • Workplace pension scheme membership for private sector employers with 1 to 99 employees increased from 35% in 2016 to 52% in 2017, yet this group still had the lowest proportion of employees with a workplace pension scheme within the private and public sectors.
  • Nearly half (48%) of private sector pension members in 2017 contributed greater than zero and under 2% of their earnings, an increase from 42% in 2016, this increase is likely to be driven by current minimum contribution levels for automatic enrolment.



Newsletter providing HMRC updates 

HMRC has recently published Newsletter 97 which covers:


  • Scottish Relief at source – annual return of individual information for 2017 to 2018 onwards
  • Relief at source excess relief
  • Reporting overseas transfers
  • New pensions online service newsletter
  • Finance Act 2018
  • Annual Allowance
  • Outstanding AFT changes


Of notable interest –

Relief at source excess relief – extension granted to scheme administrators that need time to update their systems. Transitional arrangements are to be put in place for 2018-2019.

On March 15 2018, Finance (No 2) Bill 2017 gained Royal Assent to become Finance Act 2018. Finance Act 2018 makes changes to the legislation for registering and de-registering pension schemes from April 2018. This affects pension schemes that:

  • are Master Trusts
  • have a dormant company as a sponsoring employer


The Pensions Tax Manual and other pensions guidance on GOV.UK will be amended in April 2018 to reflect the new legislation.

Annual allowance – new guidance published called pension schemes: work out your reduced (tapered) annual allowance to help scheme member’s work out their tapered annual allowance.


TPR and FCA have issued a joint call for input on “Regulating the pensions and retirement income sector: Our strategic approach” 

The call for input states “It is important for regulation in any sector to reflect the potential harms and risks in the current landscape. It must also consider future changes and developments that could lead to new risks. While our statutory remits as set by Parliament are different, the Financial Conduct Authority (FCA) and The Pensions Regulator (TPR) work in tandem to address risks and harms in the pensions and retirement income sector. This is especially the case where we share concerns or our remits intersect.

The pensions and retirement income sector includes how people build up (accumulate) and use (decumulate) their retirement savings. There are two main ways that people accumulate retirement savings – workplace pensions and non-workplace pensions. There are also a range of different products and services to manage and spend savings in retirement. Our intention in this paper is to cover all aspects of the sector”

The document then goes on the set the scene detailing where each regulator sits in the pension landscape and who covers which aspects. The call for input is designed to seek feedback on the way things work now and how the joint strategy can be improved in the medium term.

Each section discusses the regulators views and asks for opinion on them. The following is a list of the questions raised.

  1. FCA and TPR’s remits intersect in some areas. Do you see this working effectively, or are there areas where this could be improved?
  2. Do you agree that the areas we have identified are the right ones? If not, which themes would you add or remove from our list? In which areas could the FCA and TPR singly or jointly have the most impact?
  3. Given our regulatory remits, what more, if anything, should the FCA and TPR do to support people as they start to save in a pension?
  4. Is there more scope for TPR/FCA working, either singly or jointly, in this area? To what extent should the emphasis be on collaboration with a wider group of bodies to improve the advice and services supplied to schemes (e.g. administrators, investment consultants)?
  5. How can pension providers and schemes, employers and other firms in the sector improve the security of the money and data they hold? What role is there for FCA and TPR in further driving up standards?
  6. Are there any further opportunities for FCA and TPR to support the delivery of value for money, either singly or together?
  7. How can FCA and TPR work, singly or together, to ensure that information and advice helps people make appropriate decisions? When are people most vulnerable to taking poor decisions?
  8. Do you believe that the macro trends that we have identified are those most likely to drive change across the pensions and retirement sector? If not, what are the trends that matter? Which trends should be the highest priority for TPR and FCA?


In addition, there have also been three face to face workshops looking at these questions in round table discussions. The first of which was filmed and will be available on the FCA website in April.


‘The content of this newsletter is for information only. It does not represent personal advice or a personal recommendation and should not be interpreted as such.  Please do not act upon any part of it without first having consulted an Independent Financial Adviser’.


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