HMRC to tax fund ‘cashback’ from next week & supermarket “loyalty bonuses” could be next

Fund investors face paying income tax on “loyalty bonuses” paid by fund supermarkets from next week after HM Revenue & Customs ruled that the payments are “annual payments” and should therefore be taxed as income, starting in the new tax year – April 6.

Hargreaves Lansdown, the largest payer of loyalty bonuses on funds in the UK, called it “anti-competitive” and said it was a “worrying precedent” that could spread to other forms of cashback, such as those on supermarket loyalty schemes and credit cards.

It means that basic rate tax, of 20 per cent, will be deducted from the bonuses at source and higher-rate taxpayers will need to declare and pay additional amounts on annual self-assessment forms.

Money within Isa and Sipps (self-invested personal pensions) is tax-free and will not be affected.

The payments are made because fund supermarkets receive a renewal advice commission, which is typically 0.50 per cent a year although sometimes higher, from investment companies which operate the funds – even though these fund-selling websites do not give specific advice.

The Financial Services Authority has indicated its intention to ban such “trail commission” payments to fund supermarkets in 2014 and is expected to announce the detail of this at the end of next month.

Ian Gorham, chief executive of Hargreaves Lansdown, said: “It seems the Government is now seeking to tax small savers and investors. This is effectively a second tax on their income.

“Just as worrying is the precedent being set. Loyalty bonuses and cash back offers are common practice across many industries in the UK. The government may have set a precedent in taxing such loyalty schemes and savvy shoppers could well be next with Multi-buys, cashback credit cards and cashback websites all possible targets in the future.

“The discount tax is not good news for investors, businesses or the Government and joins the likes of other unpopular taxes such as the granny tax or pasty tax.”

HMRC said claims that cashback in other industries could be targeted next were “complete rubbish”. Aside from supermarkets, banks and credit card companies latching on to the demand for cashback schemes, a whole industry has been created around it.

Companies like Quidco, for example, will pay consumers the commission it receives when they buy certain goods or services online, such as buying electrical goods or a new holiday. Some consumers make hundreds of pounds a year this way.

A spokesman for HMRC said: “Tax will be due from April onwards on all commission paid by investment funds to investors. We will not collect tax on earlier years commission.

“Until the end of 2013 to allow the rules to bed in we will accept an estimate of tax deducted at source. We will work very closely with stakeholders to ensure the rules are applied fairly across the board.”

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