It says that it was disappointed by the judgment and warns that the current rules – which have required such rebates to be taxed as income and paid net of basic tax since 2013 – will continue to apply “until we are satisfied that the litigation process is complete”.
In the decision, released in March this year, Judge Thomas Scott ruled that loyalty bonuses – which the investment firm gives to its clients by way of a discount on management charges – are not pure income profit and are therefore not annual payments. They are purely a mechanism for reducing net cost.
As such, they should be treated as non-taxable in the way they were before the change in the rules .
He dismissed HMRC’s argument that the annual management charge (AMC) is no different from any other expense borne by an entity in which an investment might be made.
“The end result is indeed reflected in the value of the investor’s holding in both cases, but if an investor buys shares in a company directly he is not usually charged an annual fee for the privilege of acquiring the shares and continuing to held them,” he said.
“The language used in the documentation relating to the AMC can only sensibly be read as indicating that the AMC is an annual charge to investors for investing in a fund. The mechanic for collecting that charge does not alter the burden and responsibility on the investor to bear the charge.”
Hargreaves Lansdown chief executive Chris Hill sees no reason why the firm will not win the appeal since the “discount tax” has always been “an unnecessary and unwarranted attack on private investors”.
A successful outcome for the firm would see at least £15m returned to around 150,000 investors.
The firm says that it consulted HMRC on the tax position of the loyalty bonuses before introducing them, and was told that they would not be subject to taxation because they were a refund of charges.
Since the 2013 change, Hargreaves Lansdown has continued to pay the bonuses but after deducting a 20% provision for the “discount tax”. The firm has held on to part of the money and the rest has gone to HMRC, it explains, in order “to avoid creating large and unexpected tax bills for clients in the future if our legal challenge proved unsuccessful”.
Commenting on HMRC’s decision to appeal, the firm said that “the champagne is on ice” until the case is concluded. “Until that stage, the money withheld could still potentially be tax and owed to HMRC, so we will wait for a successful conclusion before arranging to return money to clients.”
It predicted that the case would be completed in the first half of 2019.
Bristol-based Hargreaves Lansdown was founded by ICAEW chartered accountants Peter Hargreaves and Stephen Lansdown in 1981. It is the largest direct-to-investor provider of investment services and manages £88.8bn of investments for 1.075 million clients.