Hargreaves Lansdown (HL) has won a challenge presented to HMRC over “discount tax”, which saw around 150,000 investors receiving at least £15m back after being taxed on their annual management fees, known as loyalty bonuses, since March 2013.

Hargreaves Lansdown chief executive Chris Hill commented: “HL was one of the first investment services providers to offer loyalty bonuses to reduce the cost of investing, and our clients have enjoyed significant savings for over 15 years.”

“We saw the ‘discount tax’ which HMRC introduced in 2013 as unwarranted attack on private investors, so we launched a legal challenge, and I am delighted that the tax tribunal has supported our view.

“The ruling will not only see money returned to investors, but will also simplify their tax affairs, as there will be no need to declare the loyalty bonus on their tax returns.”

Prior to HL introducing the ‘loyalty bonus’, the investment firm consulted HMRC on their tax position. According to HL, at the time it was clear that, as a refund of charges, they would “not be subject to taxation”.

However, HMRC changed its position in March 2013 when they announced that rebates of annual charges, such as loyalty bonuses, paid on funds outside ISAs or SIPPs should be taxed as income and paid net of basic rate. Following the change of position, HMRC said: “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.”

HL disagreed with the new rule, claiming that HMRC was launching an “unwarranted attack on private investors”. The firm submitted its appeal in September 2013 on behalf of all investors “penalised” by HMRC’s decision, with the cost of the challenge being met entirely by them.

Since 2013, HL has continued to pay the loyalty bonus to its clients, but investors have had to pay the 20% tax, which is being in part held by HL and part by HMRC to avoid creating “large and unexpected” tax bills for investors if the legal challenge proved unsuccessful.

HMRC has 56 days to appeal the decision, so HL has advised investors not to do anything differently in the meantime and to continue including the loyalty bonus as income in their tax return.

“HMRC has the right to appeal, so the champagne is on ice for now,” Hill concluded.

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