Open consultation

Statement of Practice 1 (2001): treatment of investment managers and their overseas clients

Published 28 April 2025

1.There are 2 policy objectives underlying the Investment Manager Exemption. These objectives are firstly, that an overseas investor should not be brought into UK tax in relation to investment transactions simply because they are conducted on their behalf by a UK resident investment manager, and secondly, that any fees earned by a UK resident investment manager for services performed for the non-resident investors should be fully chargeable to UK tax.

2.The UK tax system seeks to achieve these objectives by granting what is termed the Investment Manager Exemption. The exemption enables non-residents to appoint UK based investment managers without the risk of UK taxation and is one of the key components of the UK’s continuing attraction for investment managers. HM Revenue and Customs (HMRC) is committed to maintaining this environment by improving the exemption to meet developments in the investment management industry through providing greater flexibility and better explanations for investment managers and expanding the scope of exempt activities.

3.The Investment Manager Exemption is replicated in various parts of the Taxes Acts. However, the Investment Manager Exemption is of greatest relevance in sections 818 Income Tax Act 2007 and 1146 Corporation Tax Act 2010 where it helps to determine whether certain profits can be excluded from UK taxation. This statement gives guidance on the application of the Conditions within the Investment Manager Exemption in all circumstances and, in particular, it sets out HMRC’s view on:

• the extent to which trading by a non-resident, through an investment manager in the United Kingdom, does not bring the non-resident into charge to tax on the income arising

• the factors to be taken into account in determining whether active management of a portfolio on behalf of a non-resident constitutes the exercise of a trade in the UK by that non-resident

• the circumstances in which an investment manager is considered to be acting in an independent capacity – Condition C

• the application of the customary rate of remuneration – Condition E

4.The term ‘investment manager’ is used throughout to denote an agent providing investment or asset management services, or services of a similar nature, in the UK to a non-resident. In practice that person may be termed ‘manager’, ‘adviser’, or similar.

5.The issues in this statement were originally addressed in Statement of Practice 1/01 (SP1/01). The statement was first revised on 20 July 2007 and further revised on 3 November 2016.

6.This statement replaces SP 1/01 as revised on 3 November 2016 with immediate effect, except to the extent that this statement requires a non-resident or its investment manager to make changes to current circumstances or contractual arrangements in order to comply with the terms of this statement, in which case the 3 November 2016 version of SP1/01 may be applied until DD MM YYYY.

7.Parts I and II set out the legislative background and deal with the relevance of trading. The guidance that will have most impact on the application of the Investment Manager Exemption is in Part 3 which deals with the particular tests that have to be satisfied for the exemption to apply.

Part 1: background

8.Non-UK residents can be chargeable to UK Income Tax or Corporation Tax on a variety of income sources. This statement is only concerned with trading income.

9.Non-UK residents are chargeable to UK tax in respect of income from a trade carried on wholly or partly in the UK. In the case of Corporation Tax there is an additional requirement that the trade must be carried on in the UK through a permanent establishment. The statutory definition of a permanent establishment is found in section 1141 Corporation Tax Act 2010 and was updated in FAXXXX.

10.The charge to tax on trading income of non-residents excludes profits earned through UK investment managers acting independently on behalf of non-residents. This is known as the Investment Manager Exemption. For Corporation Tax this limitation is enacted as part of the UK law on permanent establishments in Chapter 2, Part 24 Corporation Tax Act 2010 at section 1146. Following the changes in FAXXXX, non-resident companies which are not chargeable to Corporation Tax on their trading income by virtue of Chapter 2, Part 24 Corporation Tax Act 2010 are also outside the scope of Income Tax in respect of that income. This includes non-resident companies to which the Investment Manager Exemption applies.

11.For Income Tax, section 814(4) Income Tax Act 2007 ensures that any trading income of a non-resident individual or trustee, acting either alone or in partnership, to which the Investment Manager Exemption in section 818 applies is treated as disregarded income for the purposes of Chapter 1, Part 14 Income Tax Act 2007.

12.The Investment Manager Exemption consists of a set of Conditions which must be met for the relevant limitation on the tax charge to apply. HMRC’s practice in relation to these Conditions is described at Part 3 of this statement.

13.Reform of the UK permanent establishment legislation in Schedule XX FA XXXX resulted in revisions to the definition of a permanent establishment in section 1141 Corporation Tax Act 2010 as well as the independent agent exemption in section 1142 and the Investment Manager Exemption. This statement reflects these changes to the statute. The revisions to the permanent establishment legislation ensure that the general exemption for agents of independent status at section 1142 is open to non-resident companies who have investment transactions which fail the Investment Manager Exemption.

14.The Investment Manager Exemption does not apply to income from, or connected with, a trade carried on in the UK by the non-resident otherwise than through a broker or independent investment manager. For instance, income arising from the temporary lodgement of funds used in a manufacturing business carried on in the UK is liable to corporation tax or income tax in the normal way. The same applies where the transactions are part of a wider trade, such as insurance, carried on in the UK whether by the investment manager, another agent, or a branch of the non-resident.

15.Where the Investment Manager Exemption does not apply to income arising through the UK investment manager, it does not necessarily follow that the non-resident is liable to UK tax on that income. For example:

• certain UK securities are exempt from tax

• S1142 Corporation Tax Act 2010 provides that a company is not regarded as having a permanent establishment where it carries on business through an independent agent acting in the ordinary course of his business

• for those non-residents within the charge to income tax a Double Taxation Agreement may, depending on the terms of the agreement, limit the UK tax to the profits of the trade carried on through a permanent establishment

16.Sometimes a non-resident appoints an agent overseas who in turn appoints a UK subagent, often its affiliate, to manage the investment of all or part of the portfolio. The definition of a permanent establishment as updated in FAXXXX includes persons who take a principal role in negotiating contracts which are subsequently concluded elsewhere. HMRC recognises that this expanded definition could capture the activities of a UK investment adviser who advises an overseas investment manager but who is not regulated to undertake investment management activities in the UK themselves. Where such arrangements are in place and operate as arranged, such an investment adviser will not fall within the definition in section 1141.

17.However if, in an exceptional case, an investment adviser is found by HMRC to have exceeded their responsibilities and to have undertaken investment management activity which was purported to take place overseas, the definition in section 1141 may apply to such an adviser but HMRC accepts that such an adviser would then also fall to be treated as an ‘investment manager’ for the purposes of section 1146 Corporation Tax Act 2010. Such an adviser would therefore be eligible for the Investment Manager Exemption subject to the statutory conditions. Other aspects of subagent arrangements are considered in Part 3 of this statement.

Part 2: relevance of trading

18.The Investment Manager Exemption legislation has no relevance unless the non-resident is trading in the UK.

19.Whether or not a taxpayer is trading is a question to be determined by reference to all the facts and circumstances of the particular case. This applies as much to financial transactions as to other activities.

20.In determining the question of trading, any transactions carried out through an investment manager are to be considered in the context of the status and world-wide activities of the non-resident. It is not possible in this statement to consider every possible set of circumstances but, for example, an individual is unlikely to be regarded as trading as a result of purely speculative transactions.

21.For a company, a transaction will generally be either trading or capital in nature (this may also be the case for non-corporate collective investment vehicles whether open-ended or closed-ended). If the main business of a non-resident company is a trade outside the financial area, or an investment holding business, the activities in the UK would normally amount to trading only if they constituted or were part of a separate financial trade.

22.But if, exceptionally, activities which are an integral part of the profit earning activities of a non-financial trade are carried out through a UK investment manager (for example, hedging on the London terminal markets by a non-resident dealer in physical commodities) then that might amount to trading here. The view to be taken on a particular case will depend on all the facts of that case.

23.The active management of an investment portfolio of shares, bonds and money market instruments such as bills, certificates of deposit, floating rate notes and commercial paper does not constitute a trade. But every case must be considered in the light of its own facts.

24.HMRC view short positions as conceptually the same as long positions and synthetic positions as conceptually the same as the equivalent ‘real’ positions. Neither going short nor taking synthetic positions using derivatives are in themselves indicative of trading. Furthermore, synthetic positions that give exposure to part of an asset are conceptually the same as synthetic positions that give exposure to the whole of an asset. Thus a synthetic position that gives exposure only to a bond’s credit risk is no more or less likely to be a trading transaction than a synthetic or real position that gives exposure to the bond’s coupon, liquidity, credit and currency risks. These techniques may constitute investment in themselves or may form part of an investment activity.

25.Where futures and options are used by non-residents who are collective investment vehicles (whether open-ended or closed-ended), pension funds and other bodies which either do not trade or whose principal trade is outside the financial area, Statement of Practice 03/02 ‘Tax Treatment of Derivative Transactions’ will be applied.

26.If a non-resident carries on a financial trade outside the UK, any transactions carried out through a UK investment manager are likely to amount to trading in the UK. That is so whether there is a discretionary agreement or whether the manager acts on the instructions of the non-resident. The criteria for deciding whether a non-resident financial company is an investment company or a trading company are the same as those which apply to a resident company.

27.Where there is trading in the UK, no assessment is due on the non-resident when the Investment Manager Exemption applies. Liability of the non-resident is instead limited to tax deducted at source.

Part 3: particular provisions of the Investment Manager Exemption investment transactions

28.Application of the Investment Manager Exemption provisions is restricted to investment transactions. These were previously defined in line with the Investment Manager (Tax) Regulations 2014 as applied and modified by the Investment Manager (Investment Transactions) Regulations 2014 and the Investment Manager (Investment Transactions) (Cryptoassets) Regulations 2022. However, the revisions to the Investment Manager Exemption in Schedule XX FA XXXX replaced the link to those Regulations with a statutory definition of investment transactions. For the avoidance of doubt, the new definition encompasses any assets which fell within the aforementioned Regulations at DDMMYY.

29.The new statutory definition focuses on transactions undertaken by an ‘investment fund’ and places less emphasis on the characteristics of the underlying investment assets. An “investment fund” is defined at section 1150(7) CTA 2010 as either an AIF, within the meaning of the Alternative Investment Fund Managers Regulations 2013 (see regulation 3 of those regulations), or a collective investment scheme within the meaning of Part 17 of FISMA 2000 (see section 235 of that Act).

30.The transactions which are eligible for the IME are now defined at section 1150(3) as any transaction made by an investment fund other than one with excluded subject matter, namely transactions relating to UK land, commodities or other physical assets.

31.Transactions in UK land, including transactions of any nature which result in the acquisition of land, are not within the definition of investment transactions. Further, futures or options contracts relating to UK land are specifically excluded unless the contracts operate by reference to a ‘qualifying index’. A qualifying index is one which is:

• publicly available

• comprised of a significant number of properties so that it is not capable of manipulation, such as by being linked to specific properties

• is maintained by persons not connected with the non-resident or its investment manager

32.Transactions in physical commodities, including warrants on the London Metal Exchange which give the holder title to the metal, are not investment transactions for the purposes of the exemption. However, futures and options contracts in commodities that provide for physical delivery will not be treated as having an excluded subject matter provided physical delivery does not occur.

33.For the purposes of the Investment Manager Exemption investment transactions include shares, stock, commercial paper and warrants, futures (including forward) contracts, options contracts or securities of any description, any foreign currency, carbon emission credits, interest rate swaps, equity swaps, currency swaps, commodity swaps and commodity index swaps, cryptoassets, credit default swaps, whether settled physically or by cash, and other contracts for difference, but not contracts relating to land. Transactions in rights under a life insurance policy are also included.

34.Placing money at interest, including structuring and negotiating the terms of the placement, is an investment transaction. If commitment, placement or documentation fees are received by the non-resident for placing its own money at interest the fees will be regarded as part of the return on the loan. Participation as a syndicate member by providing funds for a syndicated loan is also regarded as placing money at interest.

35.However, taking a lead in arranging a syndicate to advance a loan, originating a loan in which the non-resident is not a lender, or managing such a loan, are functions outside the definition of an investment transaction for the purposes of the Investment Manager Exemption and any fees or similar remuneration or preferential rate (to whomever paid) for arranging or managing it are chargeable to UK tax if the arrangement or management is carried on in the UK.

36.In determining the extent to which any fees or similar remuneration are chargeable to UK tax, HMRC will have regard to the level of interest and other compensation payable to the non-resident, or its agent, in order to determine whether the relevant amount is an arm’s length amount. For example, where the non-resident receives interest at a rate higher than other syndicate members, the interest differential may be regarded by HMRC as a disguised arrangement or management fee or similar.

Provided the fee, or the equivalent of the fee, is taxed in the UK, the tests for the Investment Manager Exemption will not have been failed. Similarly, the investment manager may receive fees in connection with the syndication which are matched by a corresponding reduction in the management and/or performance fees payable to him by the non-resident. Provided the syndication fees are taxable in the hands of the manager the Investment Manager Exemption will not be jeopardised.

37.Where a transaction entitles the non-resident to receive an income flow and the income is derived from persons unconnected with the non-resident, its agents, or the holder of a security or other interest in the non-resident, then HMRC will regard such a transaction as an investment transaction.

38.Where an investment manager carries out on behalf of a non-resident:

• both ‘investment transactions’ in respect of which the conditions are met

• other transactions that are not investment transactions, or in respect of which the conditions are not met it is only those other transactions that are potentially fully exposed to income tax or corporation tax. The ‘investment transactions’ in respect of which the conditions are met are not tainted by the existence of these other transactions and will remain within the scope of the Investment Manager Exemption

The qualifying conditions

39.The Investment Manager Exemption applies in relation to investment transactions carried out by the investment manager on behalf of the non-resident if the investment manager meets certain tests. The tests are that:

• the UK investment manager is in the business of providing investment management services – Condition A

• the transactions are carried out in the ordinary course of that business – Condition B

• the investment manager acts in relation to the transactions in an independent capacity – Condition C

• the investment manager receives remuneration for provision of the services at not less than the rate that is customary for such business – Condition E

40.All 4 of these qualifying tests must be met and failure to meet any one of them results in the exemption not applying.

41.Previously there was an additional Condition, Condition D ‘the 20% test’, which could result in a limited charge. The revisions to the Investment Manager Exemption in Schedule XX FAXXXX removed the 20% test and, as a consequence, the partial charging provision in Section 1152.

42.HMRC acknowledges that investment managers operate within regulatory regimes, or may voluntarily adopt equivalent measures, which may place requirements upon them, and their principals and employees, including as to the receipt and retention of remuneration in the form of interests in collective investment schemes to which they provide investment management services.

Such requirements will be considered as part of the facts and circumstances to be taken into account in determining whether the qualifying tests are met, and in particular whether actions taken by the investment manager to comply with the requirements are reasonable, where this is relevant.

43.The remainder of Part 3 provides guidance on 2 of the tests: the independent capacity test and the customary rate test.

Condition C – The independent capacity test

44.The manager must act for the non-resident in an independent capacity. This means ascertaining whether, having regard to its legal, financial and commercial characteristics, the relationship between the manager and the non-resident is a relationship between persons carrying on independent businesses that deal with each other on arm’s length terms.

45.In line with international guidance on permanent establishments, it should be noted that a subsidiary may be considered independent of its parent company for the purposes of the independence test, notwithstanding the parent’s ownership of the share capital.

46.The relationship will be considered to be independent if the non-resident has the following characteristics:

• the non-resident is a ‘qualifying fund’ for the purposes of paragraph 9(1) Schedule 2, Finance Act 2022

• the non-resident is a widely held collective fund

• the non-resident is not a widely held collective fund but is either being actively marketed with the intention that it become one or is being wound up or dissolved

47.A fund will be regarded as widely held if either no majority interest in the fund is ultimately held by 5 or fewer persons and persons connected with them, or no interest of more than 20% is held by a single person and persons connected with that person. A fund may need to establish a track record before new investors are obtained and will therefore have 18 months from the commencement of trading in the UK to meet the widely held test.

48.Where investment management services are provided to a collective investment scheme constituted as a partnership, participants in the scheme will not be regarded as connected persons for this purpose if their only connection is membership of the partnership. This means that if the investment manager is a partner in the fund it will not be treated as connected with the other partners in the fund for the purpose only of the Independent Capacity Test, although there may still otherwise be connection under S993 ITA 2007 between the participants, for example as partners in another capacity.

49.’Actively marketed’ means there must be evidence of ongoing genuine attempts to obtain third party investment into the fund in order to meet the widely held test and that the terms on which interests in the fund are offered are not prohibitive or discriminatory for that class of business Operating on a business-as-usual basis with an expectation that the position will rectify itself is not sufficient.

50.If the fund has one of the above 3 characteristics the independent capacity test will be met without the need to refer to any other factors.

51.In other cases the independent capacity test will be met:

• where the provision of services to the non-resident and persons connected with the non-resident is not a substantial part of the investment management business. Where that part does not exceed 50% of the investment manager’s business, either by reference to fees or to some other measure (where that would be more appropriate), it will not be regarded as substantial. Further, if in the first 18 months from the start of a new investment management business the services provided to the non-resident exceed 50% of the business, they will not be treated as a substantial part of the business provided that they are consistently at or below 50% in subsequent periods
• where the provision of services to the non-resident represents more than 50% of the investment manager’s business 18 months after the start of a new investment management business but that was for reasons outside the manager’s control and the manager had taken all reasonable steps to bring it to, or below 50%. The investment manager will be expected to provide all relevant information to support a contention that the services are a substantial part of the manager’s business for reasons beyond the manager’s control and to demonstrate what steps have been taken to rectify that position

52.If none of the above tests are satisfied HMRC will have regard to the overall circumstances of the relationship between the non-resident and the investment manager in determining whether they are carrying on independent businesses that deal with each other on arm’s length terms. It is not possible to describe every scenario in which the relationship may still meet this test but the guidance in this Statement of Practice should provide certainty to the vast majority of non-residents trading in the UK through an investment manager and HMRC will also continue to provide advice for any other circumstances.

53.Some funds adopt a master/feeder structure. Where the investment manager manages an opaque master fund, such as a company, which has feeder funds then the independence test will be applied as if the master fund were transparent by looking at the beneficial ownership of each feeder fund (and applying the provisions of this Section A to the aggregate interests in the feeder funds) to determine whether the master fund is independent.

54.Similarly, if the investment manager acts for one or more sub-funds of an umbrella fund it is the beneficial ownership of the latter (applying the provisions of this section A to the interests in the umbrella fund) that will determine whether the independence test is met.

55.If Condition C is not met, the Investment Manager Exemption is failed. For Corporation Tax cases, the revision of the legislation in Schedule XX FAXXXX does allow a business which fails the Investment Manager Exemption to consider the general agent of independent exemption in Section 1142. However, HMRC considers it likely that a genuinely independent investment manager should meet the conditions of the Investment Manager Exemption.

Condition E – The customary rate test

56.The UK investment manager must receive remuneration at a rate that is not less than customary for the services. The legislation does not define what is ‘customary’ nor does it specify from whom remuneration must be received although, as already explained, HMRC will not regard a UK investment manager as acting in an independent capacity on behalf of the non-resident unless the relationship between them is that of persons carrying on independent businesses and dealing with each other at arm’s length.

57.The vast majority of non-residents easily meet the customary rate test. However, HMRC has occasionally encountered structures in which offshore arrangements have been used to evade or avoid UK tax. Commonly, such structures involve arrangements whereby fees charged to the non-resident are diverted to an offshore vehicle at a non-arm’s length rate. Such arrangements represent an abuse of the exemption, place compliant UK managers at a competitive disadvantage and may result in a non-resident failing to meet the terms of the exemption unless remedial action is taken.

58.An investment manager’s compliance with UK transfer pricing legislation is a matter for the investment manager and it is not the intention for Condition E to require a non-resident to undertake a full transfer pricing review on its agent. HMRC will simply have regard to remuneration structures which appear to significantly over- or under-reward an investment manager in comparison to customary remuneration in the market. The following paragraphs set out the considerations that HMRC will have when faced with cases where the remuneration seems unusual.

59.When determining whether a pricing structure applies the customary rate, HMRC will be guided by the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations when determining whether a pricing structure applies the customary rate and will look at whether the net effect of any provision made or imposed by means of a transaction or series of transactions provides the UK investment manager with a level of remuneration which would have been achieved at arm’s length. All circumstances will be taken into consideration, including whether that remuneration has been reduced below the arm’s length rate in any way either before or after payment to the UK investment manager.

Condition E – factors to consider

60.HMRC recognises that remuneration structures through which the non-resident pays fees in a particular class of investment management take numerous forms, with variations including, for example, investment terms intended to attract certain investors or to ‘lock in’ an investment. The arm’s length definition of customary rate for the independent investment manager means that such arrangements between unconnected parties would not jeopardise this test.

61.Transactions made at arm’s length may include directly or indirectly reduced or rebated fees for unconnected investors in the non-resident. Similarly, rebated, reduced or zero fee arrangements which are made between the manager and the unconnected non-resident for genuine commercial reasons, such as where the manager is receiving a separate fee in respect of the assets in which the non resident is investing, would be regarded as transactions made at arm’s length.

62.In determining whether remuneration has been reduced below the arm’s length rate in any way HMRC will consider both the remuneration received by the UK investment manager and any amounts payable to any person:

• for services provided to the non-resident

• in connection with the non-resident

• that relate to the performance of the non-resident

These amounts, which may be payable by either the non-resident or the UK investment manager, will be treated as reducing the remuneration received in the UK below the customary rate unless they can be shown to be at an arm’s length rate.

63.HMRC considers that in order to meet the customary rate test fees payable to a UK investment manager should be recognised for UK tax purposes when earned. A cash payment may be deferred or reinvested in the fund but this should not affect the recognition of the fee income. As a result, the UK manager would pay tax on the fee for the period when earned and no difficulty with the customary rate test is envisaged in these circumstances.

64.Where a UK investment manager, a partner, Limited Liability Partnership (LLP) member, director or employee of that manager, or a person connected with any of these, acquires a security or an interest of some other kind, in the non-resident or in another entity, for services provided by the manager:

• to the non-resident
• in connection with the non-resident

the customary rate test will only be met if it can be shown that the manager, partner or LLP member brings the security or other interest into charge to UK tax at its market value or, in the case of a director or employee, that the security or other interest is taxed as employment income in accordance with Part 7 ITEPA 2003. The definition of ‘security’ here will be that found in s420 ITEPA 2003. An interest is intended to apply to an interest in a security or securities and any other interest not within the s420 ITEPA definition.

65.Where an option is brought into UK tax charge at full market value at the time it is exercised HMRC will not regard this remuneration as less than the arm’s length rate for the purposes of the customary rate test.

66.Preferential investment terms involving reduced or rebated fees for directors or staff of the investment manager may be a benefit provided by reason of employment and thus may give rise to an employee income tax charge under ITEPA 2003. Similarly, where the investment manager is a partnership, preferential fee terms may be offered to partners who acquire interests in the non-resident, in which case the ensuing personal tax consequences will apply. HMRC will not ordinarily regard these terms as reducing the investment manager’s fees for services below the arm’s length amount unless significant UK tax avoidance or evasion is suspected, in which case all the facts and circumstances will be considered to determine whether the rate of remuneration is below the arm’s length amount.

Condition E – record keeping

67.The Investment Manager Exemption considers the obligations and liabilities of the non-resident and whether the non-resident is exempt from UK tax on its UK trading profits. As the test is considering whether the non-resident may be a taxable person and whether their UK agent has been rewarded with an arm’s length rate, where the non-resident believes the Investment Manager Exemption is met, they should retain records to support that conclusion, including that their investment manager’s remuneration is at a customary rate.

68.In cases where there is a question over whether a non-resident is chargeable to UK tax, it may be appropriate in some circumstances for HMRC to ask for information from the non-resident. This could include such records as statutory financial statements of the non-resident and its agents and a full and factual functional analysis of all services provided to the non-resident.

69.In circumstances where such information is requested to ascertain whether the remuneration has been at the customary rate HMRC would normally ask the UK investment manager, but in some circumstances may ask the non-resident, to provide such information as may reasonably be considered necessary. The information powers available to HMRC would include those relevant to the tax liabilities of the non-resident but HMRC will usually provide a reasonable opportunity for either the non-resident or the investment manager to supply the information voluntarily before the use of information powers is considered.

70.HMRC has published guidance in its International Manual on what documentation and evidence is required to demonstrate an ‘arm’s length’ reward. At the time of publication of this statement that guidance appears at INTM483030 and INTM450000 but it is advisable to check that the most up to date advice is being followed.

71.Where appropriate documentation, including a factual functional analysis and an acceptable transfer pricing methodology, is in place to support the arm’s length nature of the remuneration, the fact that HMRC may challenge the investment manager’s remuneration will not result in non-resident having failed the customary rate test.

72.HMRC would expect the non-resident and the investment manager to ensure that adequate measures are taken to prevent the fund or its investors being exposed to UK tax and this includes ensuring that the non-resident retains sufficient documentary evidence to support compliance with Condition E. Where the investment manager does not have the appropriate documentation and methodology in place at the time of making a return and the remuneration for that period is less than the arm’s length rate, it is possible that the customary rate test has not been met.

73.In cases where HMRC believes that the Investment Manager Exemption tests may not have been met, HMRC will give reasonable notice of possible action, and the reasons for it, to both the non-resident and its agents before any remedial action is taken.

74.Each case will be considered on its own facts and it is possible for the test to be met even in cases where there has been corrective action through adjustment to the customary rate will still enable the test to be met. It is not possible to describe every scenario but this general approach is intended to provide certainty on what the legislation requires and to reassure non-residents that a disproportionate outcome will not arise from a corrected failure to meet the test.