Out-Law News 3 min. read

Trail commission taxable but HMRC will not go after previously undeclared payments


Product providers will have to start deducting tax from the 'trail commission' they charge investors or their financial advisers from 6 April after HM Revenue & Customs (HMRC) said that the payments were taxable.

'Trail commission' refers to payments made by product providers as a part of the incentives they offer individuals to invest in their assets. It was previously common practice for advisers to agree with their clients to take receipt of such payments in return for offering investment advice to them.

However, the Financial Services Authority banned the payment of trail commission between product providers and advisers for retail investment products invested in after 31 December 2012 as part of its Retail Distribution Review (RDR). Trail commission arrangements on so-called legacy assets which were invested in prior to the RDR are permitted, but HMRC has now said that they qualify as "annual payments" under tax laws and that therefore they are subject to income tax deductions

The rules apply to Collective Investment Schemes and other associated investment products including life insurance policies.

"HMRC understands through its discussions with industry that industry have generally considered such payments to not be taxable in the hands of the investor," it said in a briefing note. "HMRC however considers that these payments are taxable."

HMRC said that it would not seek to collect unpaid taxes that have been previously undeclared in relation to trail commission. However, it said that from the start of the new tax year on 6 April tax will be owed for income received through trail commission.

"HMRC is required by law to collect the tax due on payments of trail commission (or other annual payments made by intermediaries) and will expect the payers to commence putting in place arrangements to deduct basic rate tax forthwith and where investors are liable to tax at either higher or additional rates include the payments on their Self Assessment tax returns for the tax year commencing 6 April 2013 onwards," it said.

Product providers will be given some leeway in terms of their reporting requirements because of the short-term deadline. HMRC said that it will expect firms to at least make an "approximation" of the tax to be deducted during the remainder of this year.

"HMRC recognises that payers will need to make new arrangements to allow them to deduct basic rate Income Tax from such payments and accepts that this may not be possible for payments made at the start of the tax year commencing 6 April 2013," it said. "However, HMRC expects that payments made with effect from 6 April 2013 will be made net of basic rate Income Tax."

"To allow for this short implementation period HMRC accepts that deduction of tax may initially involve manual calculations with some degree of approximation. HMRC also accepts that any such payments due very shortly after the start of the tax year may be delayed or, if this is not possible for contractual reasons, tax may be recovered from a later payment," HMRC added.

"HMRC will accept an approximation of the tax deducted at source up to the end of the calendar year 2013 providing that this is as accurate as reasonably possible and that the payer makes arrangements to update systems by the end of 2013 or, alternatively, to cease making such payments (for example by moving investors to share classes with reduced annual management charges instead of passing on trail commission)," it said.

HMRC also confirmed that unit rebating is subject to tax

"Payments of trail commission will no longer be paid on newly advised business (although will still continue for a time on existing holdings)," it said. "However it is possible that other payments may be made by fund managers to, or for the benefit of, investors although it is possible that the FSA will introduce further rules with regard to such payments. The tax analysis for these is the same as for payments of trail commission passed on to investors."

"As was the case prior to the start of the RDR changes, if payments are made to investors in the form of additional units (or cash), then the value of the additional units (or cash) is an ‘annual payment’ and the payer should account to HMRC for an amount in respect of basic rate Income Tax on the 'grossed up' value of the additional units (that is the amount that, after deduction of basic rate Income Tax leaves the net value of the additional units provided)," HMRC said.

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