HMRC has recently clarified its view that certain payments to an investor in a Collective Investment Scheme (CIS), insurance policy or other investment product made by a fund manager, fund platform, adviser, or any other person acting as an intermediary between the fund and the investor, are taxable receipts in the hands of the investor.

In particular, this covers all or part of any trail commission paid by the fund manager to other intermediaries which is then paid to (or used to meet the liabilities of, or provide a benefit to) the investor, subject to there being a legal obligation to use the amount in this way. This typically happens as a result of an agreement between the investor and the fund platform and typically originates from the annual management charge paid by the CIS to the fund manager.

HMRC acknowledges a commonly held view that these receipts are not taxable and, while it accepts that it has not challenged this approach in the past, it has now confirmed that such receipts are taxable in the hands of the recipient.

Under the Retail Distribution Review (RDR), it is no longer possible to make payments of trail commission on newly advised business (although it may continue for a time on some existing holdings). However it is possible that other payments may be made by fund managers to investors. The tax analysis for these is the same as for payments of trail commission passed on to investors.

Where payments are regarded as 'annual payments' then basic rate income tax may need to be withheld by the payer, such tax being payable to HMRC.

What counts as an annual payment can be a grey area but, very broadly, it must be paid under a legal obligation (as trail commission often is), must be capable of recurrence, must be income in the hands of the recipient and must come to the recipient investor without them having to do anything in return (over and above the making of an investment). This analysis may not be straightforward.

If payments are made to investors in the form of additional units (or cash), then the value of those additional units (or cash) can also be an annual payment on which the payer should account for tax on the 'grossed up' value of the additional units (or cash).

There are also VAT issues to consider in respect of the above.

What's next?

HMRC will expect payers within the UK tax regime to begin putting arrangements in place to deduct and account for basic rate tax where required, and investors who are liable to tax at either higher or additional rates will need to include the payments on their self-assessment tax returns for the tax year commencing 6 April 2013 onwards. However, due to the change in approach, payers may be allowed some leeway in the early part of the 2013/14 tax year. HMRC also accepts that deduction of tax may initially involve manual calculations with some degree of approximation, provided that this is as accurate as reasonably possible and that the payer makes arrangements to update systems by the end of the period.

To discuss changes to systems and procedures to cope with these 'annual payment' rules please get in touch with me or another member of the financial services and markets group.

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