IFM04440 - AIFs: Property authorised investment funds (PAIFs): deducting and accounting for tax from distributions: the reasonable belief test with respect to gross payments

The ‘reasonable belief’ test enables the PAIF to pay Property Income Distributions (PIDs) gross, even when it is not in a position to know beyond doubt the status of the recipient. The payer can act on the basis of assurances given by the recipient or by an intermediary if it considers these assurances to be sufficient grounds for reasonable belief. For example, where a shareholder or intermediary completes a declaration that they are either the beneficial owner of a shareholding or that they are holding the shareholding on behalf of the beneficial owner in a PAIF and they confirm that they (or the beneficial owner) are eligible for gross payments under regulation 69Z24 SI 2006/964, HMRC would consider that to be evidence of ‘reasonable belief’. HMRC will not be able to advise on whether an investor is eligible for gross payment of a PID.

Where it is ultimately found that the recipient was not entitled to receive the payment gross, the PAIF should put the position right without delay (regulation 69Z24(4)SI 2006/964). As soon as the mistake is discovered, the PAIF should send in an amended tax return and pay over the additional tax due (regulation 69Z35 SI 2006/964). If the PAIF does not do so, HMRC can make an assessment on the PAIF to recover the tax.

In a case where the PAIF does not believe that the conditions specified are satisfied, but proceeds to make the payment gross, or where the belief is clearly unreasonable, then a penalty under section 98 of the Taxes Management Act 1970 may be payable.

Where the PAIF has no information about whether the beneficial owner of a share is entitled to gross payment it should deduct tax from the PID.