HM Revenue and Customs Brief 04/13
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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
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
Payments in respect of self invested personal pension (SIPP)
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).
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
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
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
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
For further information and help please see the draft
guidance from the link below. This will be incorporated in appropriate
HMRC manuals when finalised.
the draft guidance (PDF 35K)
HMRC has also published a technical note for tax
the technical note for tax professionals (PDF 31K)
About the Author
© Crown Copyright 2013.
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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