In 2013 HMRC started to tax Hargreaves refunds of the annual management charge (AMC), which it paid out to clients as fund loyalty bonuses.
This tax was introduced despite an arrangement struck between the authority and Hargreaves 15 years ago that the bonus would not be taxable.
HMRC argued it had started to tax the bonuses as they operated as a form of trail commission rather than a simple rewards scheme.
The tax tribunal judge disagreed with this argument and ruled that refunds are not taxable.
The ruling means that around £15m will be returned to 150,000 investors, Hargreaves said, although HMRC has two months to appeal the decision.
Loyalty bonus
Tax tribunal judge Thomas Scott said in his judgement the evidence presented made it clear that the loyalty bonus was not a profit to investors but rather a reduction to net costs.
“It is quite unlike an annuity payment or interest in respect of which a recipient need do nothing but sit back and receive the payments.
“The assertion by HMRC that an investor does not need to pay or bear an AMC to receive a loyalty bonus and that there is nothing in the contract between HL and investors to impose the AMC ignores the plain terms on which HL offers and permits investment to be made.
Hargreaves Lansdown chief executive Chris Hill said the decision is a “victory for ordinary investors”.
“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,” Hill said.
