TISA: platforms could choose to 'swallow' cost of tax owed from rebates rather than incur 'throw away' systems cost

Last month HM Revenue & Customs (HMRC) announced that rebating arrangements in the retail investment market are subject to tax.  The new tax regime kicked in on 6 April despite lobbying by the Tax Incentivised Savings Association (TISA) to postpone the implementation of the law by a year. As a result, platforms now face a decision over the way they account for the tax their clients owe, TISA's technical director Jeffrey Mushens told Out-Law.com. 

Mushens said platforms would have to evaluate whether it is worthwhile them spending money on new systems that are likely not to be required over time as a result of the industry's move towards providing products with clean share classes. 

"It may be cheaper for companies to swallow the cost of the tax [owed by] customers rather than build new systems," Mushens said. 

TISA is set to meet with HMRC in a bid to "work out what pragmatic way" the authority will approach the issue of tax returns, Mushens said. He said the sums involved were "pretty trivial" and that HMRC had been "as practical as they can" so far on helping to ensure that the "administrative burden" on businesses as a result of the tax rebates announcement is "as little as possible". 

Mushens said that moves are afoot within the platforms industry to "convert" customers from legacy share classes to clean share classes. In practice, he said that this would mean reducing the annual management charge investors have to pay for the operation of their accounts whilst stripping out the payment of rebates that those investors can often receive for selecting particular products to invest in or particular providers to invest with. 

He said that it could cost the industry £15 million to move customers from legacy arrangements to clean share classes, with some of the costs in doing so stemming from the "re-registration" process investors would have to be put through. He also said that there was an "associated cost" that businesses would incur because fund managers would have to create the new share classes for specific investments. 

"Converting from one share class to another – you would want it all done at once," Mushens said. 

Mushens also explained how the process of conversion could take a number of days to complete and force platforms to put in place arrangements to account for various charges, commissions and rebates owed during that time. He said, though, that TISA would discuss with HMRC about "whether tax should be levied on such trivial amounts" of rebates due in such circumstances. 

"It does not make any sense to impose detailed rules for trivial [amounts of] money for no benefit," Mushens said. 

TISA's technical director said that there would be positives from the industry's move towards clean share classes. He said the move would "encourage competition between the platforms" as well as new entrants to the market. It would also "make it clear" to consumers what they are paying for funds, and allow them to make arrangements with their financial advisers over how to pay for their advice as well as for using platforms, he added. 

Rules around rebating in a platforms context are due to be issued by the Financial Conduct Authority shortly. The regulator's predecessor, the Financial Services Authority, previously outlined plans to prohibit cash rebating and allow unit rebating to take place, but it has subsequently been reported that cash rebating may be permitted in a limited sense.