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HM Revenue and Customs Brief 04/13


HM Revenue and Customs -Tax Authorities

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Issued: 25 March 2013

Payments of trail commission

This brief explains HM Revenue & Customs’ (HMRC's) 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.


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 from 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.


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.


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.

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 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).

Further information

For further information and help please see the draft guidance from the link below. This will be incorporated in appropriate HMRC manuals when finalised.

Download the draft guidance (PDF 35K)

HMRC has also published a technical note for tax professionals.

Download the technical note for tax professionals (PDF 31K)

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© Crown Copyright 2013.

A licence is needed to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs.

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Article Published/Sorted/Amended on Scopulus 2013-03-26 10:04:02 in Tax Articles

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