IFM36210 - Deemed trade: Introduction

Deemed trade

Introduction

ITA07/S809ZA

Consequence of a disguised fee arising

The consequence of a disguised fee arising to an individual from an investment scheme (or schemes), is that the individual is charged to income tax in respect of the disguised fee. The disguised investment management fees (DIMF) legislation only applies where an investment scheme (IFM36230) is involved.

The individual receiving the disguised fee(s) is treated as carrying on a deemed trade, with the disguised fee(s) being the profits of the deemed trade (ITA07/S809EZA(1)).

Consequently, the disguised fees are brought into account for the purposes of both income tax and Class 4 National Insurance Contributions (NICs).

As disguised fees are treated as the profits of the deemed trade and not as receipts, no losses or expenses can be set against the disguised fees. For this reason the deemed trade cannot give rise to a loss, as it only applies to fees arising.

However the DIMF rules only re-characterise the nature of the receipt arising to an individual.  They do not alter, for tax purposes, the nature of the underlying activities carried out by the individual which give rise to the disguised fee. Nor do the DIMF rules alter the nature of the activities of any entity or arrangement by virtue of which the disguised fee arises.

For example, where a disguised fee arises from a typical General Partner Limited Partner (GP-LP) structure (IFM36132), although the individual receiving the fee is treated as carrying on a deemed trade, the rules do not re-classify that partnership as carrying on a trade (as may be relevant, for example, to entrepreneurs’ relief and interest relief). The GP LP is carrying on an investment business; sums received by the GP LP are not therefore reclassified as trade income.

Multiple sources of disguised fees

ITA07/S809EZA(1)

An individual may perform activities for more than one collective investment scheme (IFM36900) at the same time.

Irrespective of the number of investment schemes that an individual undertakes activities for, there will only be one single deemed trade which has profits comprised of the sum of all the disguised fees.

Contributions to registered pension schemes

As amounts of disguised fees are treated as profits of a deemed trade, they form part of an individual’s “relevant UK earnings” for the purpose of determining relief for contributions to registered pension schemes.

See the Pensions Tax Manual, PTM044100 for more details.  

VAT

Although the DIMF rules provide that a deemed trade exists for income tax purposes, it does not have any effect for VAT purposes, so it does not change the VAT treatment of any sums.