Recent developments and Platforms

Transcription

1 ADVISER FACTSHEET Tech Talk October 2013 Recent developments and Platforms This Tech Talk pulls together some of the more recent developments in the financial services arena. We consider the capital gains tax treatment of clean price fund conversions following Regulations issued in June before moving on to consideration of the deadlines for the ending of cash rebate payments imposed by the Financial Conduct Authority (FCA). Finally we detail the clarification of the VAT treatment of businesses providing investment management services. Contents Clean price fund conversions Ban on the payment of trail commission VAT and transactional discretionary fees Conclusions For professional advisers only

2 Clean price fund conversions The number of clean share classes offered by platform providers has significantly increased in response to RDR. This trend is set to continue following HMRC s stance on taxing rebate commissions from 6 April 2013 and the FCA s decision to impose deadlines for the ending of cash rebate payments. As investors convert to clean share classes this throws into focus the question of how conversions between different units/shares in the same fund are treated for tax purposes. The answer can be found in The Collective Investment Schemes (Tax Transparent Funds, Exchanges, Mergers and Schemes of Reconstruction) Regulations These regulations took effect from 8 June The key points to note are that capital gains tax (CGT) will not arise where: A collective investment scheme investor exchanges their units/shares in a scheme for other units/shares in the scheme of substantially the same value and, the scheme property and rights of investors (ignoring any changes as a result of a variation in management charges) are unaltered: or A scheme reorganises so that all investors in one or more unit class/share (or all classes) exchange their holdings for other units/shares in the scheme. In such cases the exchange is treated as a share reorganisation for CGT purposes which means that the original unit/share base cost and acquisition date is carried across to the new holding and there is no disposal. The regulations do include a CGT exemption for: A scheme reconstruction involving the issue of units/shares, where all investors in one or more classes of units/shares in Scheme A have their holdings cancelled and replaced by new holdings in Scheme B. This will typically be on the wind up of fund A; or A scheme reconstruction involving a conversion scheme occurs where the rights to a unit/ share exchange extend to investors in both the scheme being converted and its recipient scheme. Whilst these regulations took effect from 8 June 2013 it s unlikely that HMRC will treat the exchanges detailed in the regulations other than as a share reorganisation under sections of the Taxation of Chargeable Gains Act 1992 even if they were made prior to this date. This is supported by HMRC s guidance confirming that exchanges between accumulation units and income units within the same fund are not subject to CGT. These regulations clarify the CGT treatment where either an individual investor chooses to move between unit/share classes or schemes carrying out a bulk reconstruction provided the transaction is an exchange and not a sell/buy switch. There are no CGT implications for fund share class conversions where funds are held within tax wrappers such as a SIPP or ISA. For clarity, this CGT treatment applies to an exchange and not a switch. The regulations cover the issue of new units/shares to the same investor and is tied to the cancellation of old units and made in exchange for those units so the transaction is a single one. A switch involving a sale and purchase would not be covered by these regulations. The sale would be treated as a disposal on which a gain or loss would arise even if the repurchase was of a different class of units/shares in the same fund. 2

3 Ban on the payment of trail commission Revenue & Customs Brief 04/13 outlines HMRC s stance on the tax treatment of trail commission in both cash and units from product providers and other intermediaries passed on to investors. Prior to its publication earlier this year, it was widely held that such payments were not taxable in the hands of the investor. HMRC now considers these payments to be taxable at the investor s highest rate of income tax from 6 April The payer of the trail commission must deduct basic rate income tax at source. This means that any rebates also known as trail commission - passed on to the investor in either cash or units outside of a tax wrapper creates a taxable event. Revenue & Customs Brief 04/13 was swiftly followed by the publication of the FCA s Policy Statement 13/1 Payments to platform service providers and cash rebates from providers to consumers. In terms of cash rebates the key point to note is that from 6 April 2014 platforms will not be able to receive such payments. This ban will apply to advised and non-advised business. Currently it is not intended that the ban will apply to the SIPP market. The ban won t prevent investors from receiving 1 or less per month for each fund held on the platform. Also, the ban on cash rebates to investors doesn t prevent a platform from receiving a rebate from a fund manager provided this is passed on in full to the investor in additional units with the consequent tax implications for the investor. The deadline for the ban is extended by two years to 5 April 2016 in the case of payments from product providers for legacy business on platform. Legacy payments relate to those retail investment products held on a platform before these rules come into effect and which the platform is still holding when the rules are in force. This includes regular savings products where the amount invested doesn t vary and any changes made through rebalancing are as a result of instructions given before the implementation of the rules. At the end of the two-year transitional period, platforms will not be able to retain any rebates for legacy business. The transitional rules provide that the platform charge will only apply to new assets on the platform. An event triggering a move to platform charging includes when a fund is sold or changed. The implementation of deadlines for banning the payment of cash rebates is in response to the FCA s view that legacy commission could not be paid indefinitely as this would create an unlevel playing field between platforms. 3

4 VAT Following the European Court of Justice (ECJ) ruling in the Deutsche Bank case in 2012, HMRC issued Revenue and Customs Brief 11/13 providing guidance on VAT in relation to transactional discretionary fees. The Brief modifies the VAT treatment of certain supplies made by portfolio investment managers. This is to align the VAT treatment with the European Court judgement in the Deutsche Bank case. By way of background to the Deutsche Bank case, the bank provided discretionary portfolio management services to individual investors. These services comprised: The activity of analysing and monitoring the assets owned by the investors in accordance with a strategy agreed with them, and The consequential activity of purchasing and selling financial securities on their behalf The investors paid a single annual portfolio management fee which included a separately identified charge for buying and selling securities. The Court had to decide whether this charge was consideration for a separate exempt supply. The Court decided that the two elements of the service were of equal weight and together constituted a single taxable service. Consequently the entire fee is subject to VAT at the standard rate. However the ECJ only considered the VAT situation of periodic fees charged on a flat fee basis where there was no direct link to the transactions being executed. Where fees are charged strictly on a transaction by transaction basis (per purchase or sale of investments) VAT exemption will continue to apply. The portfolio management services must be contracted for on that basis and the transaction charges separately identified in any VAT invoice. This VAT treatment will apply regardless of whether the portfolio is managed on a full discretionary or advisory basis. This revised VAT treatment will apply from 1 December There were twists and turns before HMRC issued final guidance on VAT and adviser charging. Now with HMRC s guidance on the exclusion of transactional fees provided by investment portfolio managers from VAT this is another positive step to clarifying the VAT position in relation to financial services. Revised VAT treatment Whilst all portfolio management services are subject to VAT, the UK currently treats separate charges for effecting the purchase and sale of securities as exempt from VAT on the grounds that they are consideration for separate supplies. Following the ruling in the Deutsche Bank case, fees charged by portfolio managers on an annual or other periodic basis for the purchase and sale of securities can no longer be treated as exempt from VAT regardless of whether a separate charge is made. 4

5 Conclusions The financial services arena continues to evolve for advisers and their clients alike. With the publication of guidance on various subjects by both the FCA and HMRC affecting the platform market it s important for advisers to understand and then convey the implications to their clients. Further information Tracyann Kneen Technical Manager Tax and Trusts Please do not hesitate to contact the Technical Support Unit with any further queries on: Tax and Trust Technical Support: taxtrust.techsupport@jameshay.co.uk Please note that every care has been taken to ensure that the information provided in this article is correct and in accordance with our understanding of current law and HM Revenue & Customs practice. You should note however, that James Hay Partnership cannot take upon itself the role of an individual taxation adviser and independent confirmation should be obtained before acting or refraining from acting upon the information given. The law and HM Revenue Customs practice are subject to change. The tax treatment depends on the individual circumstances of each client. James Hay Partnership is the trading name of James Hay Insurance Company Limited (JHIC) (registered in Jersey number 77318); IPS Pensions Limited (IPS) (registered in England number ); James Hay Administration Company Limited (JHAC) (registered in England number ); James Hay Pension Trustees Limited (JHPT) (registered in England number ); James Hay Wrap Managers Limited (JHWM) (registered in England number ); James Hay Wrap Nominee Company Limited (JHWNC) (registered in England number ); PAL Trustees Limited (PAL) (registered in England number ); Santhouse Pensioneer Trustee Company Limited (SPTCL) (registered in England number ); Sarum Trustees Limited (SarumTL) (registered in England number ); Sealgrove Trustees Limited (STL) (registered in England number ); The IPS Partnership Plc (IPS Plc) (registered in England number ); Union Pension Trustees Limited (UPT) (registered in England number ) and Union Pensions Trustees (London) Limited (UPTL) (registered in England number ). JHIC has its registered office at 15 Union Street, St Helier, Jersey, JE2 3RF. IPS, JHAC, JHPT, JHWM, JHWNC, SPTCL, SarumTL and IPS Plc have their registered office at Trinity House, Buckingway Business Park, Anderson Road, Swavesey, Cambs CB24 4UQ. PAL, STL and UPT have their registered office at Dunn s House, St Paul s Road, Salisbury, SP2 7BF. UPTL has its registered office at Boundary House, Charterhouse Street, London, EC1M 6HR. JHIC is regulated by the Jersey Financial Services Commission and JHAC, JHWM, IPS and IPS Plc are authorised and regulated by the Financial Conduct Authority. The provision of Small Self Administered Schemes (SSAS) and trustee and/or administration services for SSAS are not regulated by the FCA. Therefore, IPS and IPS Plc are not regulated by the FCA in relation to these schemes or services.(04/13) JHSTT 02 OCT13 LD 65