FTSE 100 fund platform Hargreaves Lansdown is preparing a legal challenge against HMRC's decision to impose an income tax on 'loyalty bonuses', which are cash back rebates on the fund management fees paid by its customers.

The tax came into force in April after HMRC ruled that the rebates were 'annual payments' and should therefore be taxed as income. This means that basic-rate tax, of 20%, should be deducted from the bonuses at source and higher-rate taxpayers will need to declare and pay additional amounts on annual self-assessment forms.

Hargreaves Lansdown chief executive Ian Gorham described HMRC's move as 'an attack on the small investor' and 'anti-competitive'. Although the rebates are small, at less than £10 a year for most investors, he warned the new tax regime could set a precedent for taxing other cash back schemes used for things like credit cards and consumer goods.

Gorham said: We feel it's important to take a stand on behalf of investors. When we introduced loyalty bonuses we consulted on its tax position and it was clear, as a refund of charges, it should not be subject to taxation.'

Hargreaves Lansdown, which administers over £34.2bn of assets, says it is holding back the cash it would owe through the new tax in a special fund. The company says it will make payment to HMRC if that is the court's ruling as a result of the legal challenge, which is expected to take many months.