IFM36220 - Deemed Trade: Territorial scope of the deemed trade

Territorial scope of the deemed trade

Location of the deemed trade

ITA07/S809EZA

Where the application of the disguised investment management fees (DIMF) rules have created a deemed trade for an individual, that deemed trade is treated as carried on in the UK to the extent that the individual performs the services in the UK, and outside the UK to the extent that the services are performed outside the UK.

Where an individual who is resident in the UK for tax purposes performs services both within and outside the UK, the entirety of the profits from the deemed trade are chargeable to UK tax in accordance with ITTOIA05/S6.

For an individual who is non-resident in the UK for tax purposes, the trade is regarded as carried on in the UK when the services are performed in the UK and carried on outside the UK where the services are performed outside the UK.

Even where an individual only performs very limited services in the UK, for example coming to the UK for a small number of business meetings during the course of the year, the legislation provides that a deemed trade exists for that individual.

This means that the business profits article of most double taxation treaties could apply, and so a tax charge will only arise if a permanent establishment (PE) exists (INTM264050).

Example

ABC LLP is a US limited liability partnership. Thomas is one of three partners who live and work in the US and has not been to the UK in the tax year. Sam is a fourth partner who lives and works in the US but has visited the UK for three days in relation to the acquisition of a UK business by a collective investment scheme (IFM36900) to which ABC LLP provides investment services. Neither Thomas nor Sam is UK resident for tax purposes. Each of the four partners received £10,000 that would, if the individuals had lived and worked in the UK, be treated as a disguised fee.

Thomas has not performed any services in the UK, so is not brought into charge under the DIMF rules. Sam has performed services in the UK, so is potentially within the charge.  It is unlikely that a few days in the UK will have the effect of creating a UK PE but Sam will have to consider this carefully and make a decision based on the facts. If there is no PE, then a charge will not arise under the DIMF rules.

 

Many asset manager firms are international businesses with operations in more than one financial centre. Where an individual performs any investment management services in the UK they are potentially within the scope of the DIMF rules. Therefore, this may cause concern to non-resident individuals who come to the UK very rarely and do not perform any significant investment management activity whilst in the UK.

Each case will be a question of fact. However, where individuals have little or no presence in the UK it is not expected that a situation will be created in which they will be subject to the DIMF rules. This is the case even where the wider business or group they work for does have a substantial UK operation. For example:

• A fund management business headquartered outside the UK has a UK operation and an individual from the headquarters occasionally visits the UK; or
• A fund management business that is UK headquartered has fund management divisions based in other jurisdictions and an individual involved in such offshore operations occasionally comes to the UK.

Where an individual is resident in a country with a double taxation agreement with the UK, even where they perform some investment management services in the UK, it does not follow that they will automatically be charged under the DIMF legislation. The general approach and practices followed in relation to double taxation treaties applying to the taxation of trade profits also apply to the individual’s deemed trade.

In the context of DIMF, the deemed trade concerned is a trade of the individual rather than being the same trade as carried on by the entity which engages the individual. In considering whether the individual has a PE for the purposes of a relevant double taxation treaty you must consider the individual’s deemed trade, not that of the entity that engages them.

Whether the engaging entity itself or its wider group already has a UK PE is therefore a separate question entirely. This means it is possible for the entity which engages the individual to have a UK PE while the individual fund manager will not be treated as having a personal PE for the purposes of the relevant treaty. An individual may therefore be able to rely on that treaty to be out of scope of liability under the DIMF rules. Further advice on permanent establishments and double taxation treaties is available in the International Manual (INTM260000).

Where the activities of an individual do amount to a PE such that a double taxation treaty does not preclude liability from UK tax, it will be necessary to determine the amount of profit attributable to that PE. Establishing the extent to which the individual is performing investment management services in the UK will be a fact specific question which needs to be determined, given reference to all the facts and circumstances.