UK: Weekly Tax Update - 2 April, 2013

Last Updated: 16 April 2013
Article by Smith & Williamson

1 General news

1.1 Finance Bill 2013

The draft legislation for Finance Bill 2013, actually known as Finance (No 2) Bill (as it is the second Finance Bill of this sitting of Parliament), can be found via following link: www.publications.parliament.uk/pa/bills/cbill/2012-2013/0154/13154.pdf

1.2 Liechtenstein Disclosure Facility (LDF)

We have received the following letter from HMRC. "It is not uncommon for LDF disclosures to be submitted with elements missing. This results in unnecessary delays whilst the Single Point of Contact (SPOC) pursues the relevant items. I am therefore writing to you to advise you of the more robust stance we will be adopting with effect from 1 April 2013 when determining whether a disclosure certificate can be issued in an LDF case.

From the above date, disclosures which do not comply with the Memorandum of Understanding (Schedule 7 Paragraphs 10 & 11) and the FAQs (4.1, 4.4 and 4.10) will be regarded as incomplete and consequently, a disclosure certificate will not be issued until such times as the omitted item(s) has/have been provided. You will be notified if a disclosure is regarded as being incomplete and will be informed of the reason for this view. If the omission is not remedied within a reasonable period of time then this will be interpreted as non co-operation and consideration may be given to the withdrawal of the beneficial LDF terms. Subsequent recovery action by HMRC in such circumstances will thereafter be in accordance with the legislation.

The most frequently omitted items are:-

i. A narrative explanation detailing the background to the omissions, how they have come about and how they have been quantified. The extent of the narrative is entirely dependent upon the nature of the disclosure and its complexity.

ii. Computations showing how the taxable figures employed in the disclosure have been arrived at.

iii. A fully and accurately completed certificate of full disclosure.

iv. A statement of assets and liabilities completed as at the end date of the final year/period that has been included within the disclosure or the 1 April past, if this is more recent. If either of these dates presents difficulties then you should discuss the position with your appointed SPOC in advance of submitting the disclosure with a view to agreeing a suitable date.

v. A fully and accurately completed letter of offer.

vi. Full payment of the amount as specified in the letter of offer. Please note that payment must be made to coincide with the submission of the disclosure to HMRC and can be achieved by any of a number of methods as outlined in the disclosure pack (NB: The "How to Pay" section of the disclosure pack should be read in detail to ensure there are no complications or delays with your clients payment which may In turn delay the acceptance of your clients disclosure).

Dependent upon the method of payment adopted, there can be a slight delay in the payment being credited to your client's account. To avoid any doubt when the disclosure is being handled by the Liechtenstein Helpdesk as to whether or not payment has actually been received, which could potentially delay the issue of the disclosure certificate, it would be of considerable assistance if you could confirm the amounts paid, the corresponding dates and the method of payment adopted in your letter that accompanies the disclosure.

If your client has a means problem, you should raise this with your SPOC as soon as this becomes apparent so that full consideration can be given to the possibility of a time to pay arrangement. However, at the very latest, this should be explained in your letter that accompanies the disclosure report when you should also provide evidence of your client's inability to make full payment as well as setting out proposals as to how full payment can be achieved (whilst recognising any forward interest that might be due).

The disclosure pack will be amended to recognise the above changes and remove any ambiguities that may have arisen between it and the MOU/FAQs.

Please also note that the following changes with regards the LDF Helpdesk opening hours, and a revised method of submitting applications for registration will also come into effect on 1 April 2013

  • The helpdesk's opening hours will be 8.30 - 16.30 Monday to Friday.
  • All emailed applications to register for the LDF should be submitted not to the LDF Helpdesk Team members directly, but to the following email address – mailto:ldfteam.siliverpool@hmrc.gsi.gov.uk.

Any queries in relation to any of the above should be directed to your SPOC in the first instance."

1.3 Payments of trail commission

HMRC has issued the following Brief 04/13 explaining its view on the tax treatment of payments of 'trail commission' passed on to investors in Collective Investment Schemes and other associated investment products including life insurance policies.

Background

This brief - in the main - concerns the tax treatment of payments made to investors in a Collective Investment Scheme, insurance policy or other investment product, by fund managers, fund platforms, advisers, or any other person acting as an intermediary between the fund and the investor.

In particular, it concerns cases where all or part of any trail commission paid by the fund manager to other intermediaries is then paid to (or used to meet the liabilities of, or provide a benefit to) the investor. This typically happens as a result of an agreement between the investor and the fund platform, although it could be as a result of an agreement between the investor and their adviser or the fund manager.

Such payments typically originate from the annual management charge paid by the Collective Investment Scheme to the fund manager.

HMRC understands through its discussions with industry that industry have generally considered such payments to not be taxable in the hands of the investor. HMRC however considers that these payments are taxable and this brief sets out HMRC's views on how payments from trail commission should be taxed.

The correct tax treatment

The payments made to investors are (in tax terminology) 'annual payments' and therefore subject to Income Tax in accordance with S683 Income Tax (Trading and Other Income) Act 2005.

A consequence of this is that the payers are under an obligation to deduct basic rate Income Tax, in accordance with Chapter 6 Part 15 Income Tax Act 2007, from the payment of trail commission and to account for this to HMRC. The investors should then account for any higher or additional higher rate tax due through their Self Assessment tax return.

Payments made by Individual Savings Account (ISA) managers in respect of ISA accounts

Annual payments arising in an ISA account are exempt from taxation. As a result, where payments of trail commission are made to an ISA account holder by the ISA manager then these, in line with all other income arising in ISA accounts are not taxable and the managers are not required to deduct tax at source on the payment. Additionally, provided that the payments are reinvested within the ISA without ever leaving the control of the ISA manager, then the payments will not count towards the maximum amount that may be invested in the ISA in any year.

Payments in respect of self invested personal pension (SIPP) accounts

If payments of trail commission are made to the SIPP and reinvested within the SIPP without leaving the control of the SIPP trustee or administrator then they will not count as withdrawals from the SIPP, and they will not count as new SIPP member contributions.

If payments are made to the member they will be annual payments and the payers will be required to deduct tax at source.

Note on Financial Services Authority (FSA) Retail Distribution Review (RDR)

Payments of trail commission will no longer be paid on newly advised business (although will still continue for a time on existing holdings). 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).

Note on Policies of Life insurance

The routing of adviser charges via the insurance company may have implications for the chargeable event gain rules. It is possible that there would be a part surrender as described in the draft guidance (see the 'Further information' section below).

Past Payments

HMRC understands that the practice of passing on trail commission to investors began, in a small way, some time ago and has become more widespread since. HMRC understands that payers have not deducted tax from these payments and that payers have, in some cases, advised investors that such payments are not taxable.

HMRC has not identified and challenged this approach in the past and may possibly have given unclear advice to some payers. Therefore a practice of non-taxation of these payments in the hands of investors has developed.

Taking the above into account and the small amounts of typical individual payments HMRC has reached the conclusion that they would not be justified in seeking to collect tax for earlier years rom either the payers who should have deducted tax at source from the payments or investors who should have declared any higher or additional rate liability in past year's tax returns, where they have not already done so.

Future Payments

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 (see section 'Payers' below) 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.

Investors

Individuals receiving payments of trail commissions (or other payments from intermediaries) for the tax year commencing 6 April 2013 and completing a tax return must include these as other income from which basic rate Income Tax has been deducted at source. The gross amount of the payment should be shown in Box 16 and the tax deducted in Box 18 on main tax return form (SA100).

There will normally be no need for basic rate taxpayers who do not currently complete a Self Assessment tax return to complete one as a result of receiving payments net of basic rate Income Tax from intermediaries.

An exception to this will be that any taxpayer receiving such payments from an offshore distributor will always need to include them on a Self Assessment tax return as they will not have had any UK tax deducted at source.

To view the complete update, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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