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Rebates, tax and falafels

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So in a move which surprised pretty much no-one, HMRC today ruled that rebates, whether in cash or in units, will be taxable. What fewer folk were expecting was that this will take effect from 6 April this year.

This only applies to monies held outside an ISA or pension (thanks!) and isn’t retrospective (big thanks! Mazel tov!), so as far as platforms go we’re mainly talking about General Investment Accounts.

My beef with the taxation thing has always been that what the investor is getting is a refund of some of their charges. That’s the way that cashback sites like Quidco work; also the way my Amex credit card works. I don’t get taxed on my rebates from those, so why should I get taxed on fund rebates? I shouldn’t, is the answer. Or if I should, then I should also get to claim the charges against tax, on a sauce/goose/gander basis.

However, as is often the case, when we read the wording more carefully, we get a sense of where common understanding has diverged from the taxman’s. Let’s summarise.

EVERYONE ELSE THINKS: Charges are something an investor pays and the platform just sends money from one place to another. Rebates are a refund of charges paid, pure and simple.

HMRC THINKS: that the platform (or anyone else) sitting between the investor and the fund manager is acting as an intermediary, and that the fact they get money in rebates that they pass on to the investor is up to them. As a result, it’s a payment to the investor rather than a refund of charges (because it’s the platform that’s paid the charges, not the investor, keep up at the back) and so tax please thank you kindly very much.

In my book this is utter mince, and probably tatties too, but then I don’t run the Exchequer and there’s a good reason for that. Hello, tax relief on whisky and hi-fi equipment.

Taking this as a given (the rebate thing, not the whisky/stereo thing), whats the result? I think there might be 4 key outcomes:

  1. Firstly, let’s remember that ISAs and pensions are still fine, as long as the rebates go back into the wrapper. If we’re all about getting clients the lowest cost possible, then there’s an argument for maintaining the status quo for some funds / some platforms in those wrappers. Not saying I buy that argument, but it’s there.
  2. Clean share classes will become the norm from which deviation will need to be justified, at least in a market context. Assuming unit rebates are the only form allowed, we’re looking at a sucky form of rebates, which then get taxed, which makes them really suck. Technically speaking.
  3. Some clients will get a tax bill for year 2013/14 as there is no way for advisers to get everyone out of bundled share classes in time, even if their platform offers them. Communication is required to these clients very quickly.
  4. We’ll start to see a new debate on how to get down below the clean share class price. Investment Week gives a Skandia example of the Aberdeen Asia Pacific fund which gets a 96bps rebate (21bps better than clean). This is an outlier; most are just 5bps or so better than the clean price. But for those outliers, maybe rebates minus tax is OK. Or maybe we can find a better way altogether which doesn’t get Hector all fired up.

I’?m kind of split on all this. I much prefer clean share classes, but I don’t know another industry where scale doesn’t get you some kind of price advantage. That’s, like, the whole capitalist thing and while I’m totally up for a different system, man, I’m not sure many fund managers will run your money in return for falafels just yet. I get that when you’re creating model portfolios, especially across wrappers, using just one share class is far easier for everyone involved. I also think that in an environment where complex charging (which will be a focus for the FCA) drives up admin costs, there’s a good chance to tend to simplicity here and maybe have the chance to recognise that in lower admin costs in the fullness of time.

One thing’s for sure. This further complicates life for advisers with clients on platforms who haven’t gone wholesale for clean share classes. It’s one of those areas where the platforms can really prove their worth for advisers AND CLIENTS this time by mapping out very clearly what they’ve got and what the relative costs are. This will help advisers have the conversations they need to have with clients, and maybe we can minimise the number of folk getting skewered with an additional tax bill.

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About Mark Polson

lang cat founder and boss. Expert on all things platforms, pensions and investments. Prolific writer and public speaker, even when people ask him not to be. Knows more about Scandinavian black metal than you, and isn't afraid to prove it.