IFM36317 - Disguised fees: Condition 2 - A management fee arising to the individual (from 22 October 2015 onwards): Sums arising from 22 October 2015

Sums arising from 22 October 2015

The statutory framework applying from 22 October 2015 sets out when sums will be treated as arising to an individual fund manager.

Section ITA07/S809EZA(3)(c) was revised as from 22 October 2015.  Previously this section required management fees to arise “directly or indirectly” (IFM36351).  After 22 October 2015 the term “directly or indirectly” was removed and clearer definitions of “arise” were added to the legislation at ITA07/S809EZDA and ITA07/S809EZDB.

These definitions deal with two categories of sums:

  • sums arising to connected persons other than companies (ITA07/S809EZDA)
  • sums arising to connected companies or unconnected persons (ITA07/S809EZDB)

In addition to a sum arising to a person, ITA07/S809EZDB(1) requires that at least one of the enjoyment conditions are met.  Enjoyment conditions are detailed in IFM36330.

The definition of “persons” is read to include natural persons, or a body of persons corporate or unincorporate in accordance with the Interpretation Act 1978. Therefore partnerships meet the definition of persons for the disguised investment management fees (DIMF) rules.

Sums arising to connected persons other than companies

ITA07/S809EZDA covers scenarios where there is a connection between a fund manager (A) and another person (B).

Where a sum arises to person B, who is not a company, the sum is treated as though it arises to A for the purpose of the DIMF rules (if this would not otherwise be the case), at the time it arises to B.           

This treatment does not apply if the sum has been charged to tax under the DIMF rules or the carried interest rules (IFM36500) in the hands of B (ITA07/S809EZDA(1)(b) and (c)).

Example

Two brothers, Xander and Yvan, work in the same fund management business. A sum (that is a disguised fee) arises to Xander and has been taxed under the DIMF rules.

As brothers, Xander and Yvan are connected persons, the general rule for sums arising to connected persons would mean that the sum is treated as arising to Yvan at the point it arises to Xander. However as the sum has already been subject to income tax by virtue of the DIMF rules in the hands of Xander, it will not also be taxed in the hands of Yvan by virtue of them being connected individuals.

 

The meaning of connection for the purpose of the DIMF rules is taken from ITA07/S993, with a slight modification:

  • firstly, persons will not be connected solely by virtue of being members of a partnership, they would also have to be connected in another way.
  • secondly, members of a partnership are not treated as associated when determining whether a person has control of a company. This means that if a sum arises to a company owned by a partnership it will not be treated as arising to each individual member of that partnership.
Sums arising to a connected company or an unconnected person

ITA07/S809EZDB covers scenarios where a sum arises to either a connected company or unconnected person in relation to the individual (A).

Where that connected company or unconnected person receives a fee, for the purpose of the DIMF rules, the fee is treated as arising to A (if this would not otherwise be the case), if any one of the enjoyment conditions are met.

The fee is treated as arising to A at the same time it arises to a connected company or an unconnected person.  It is not treated as arising at the time that the enjoyment condition is satisfied, unless this is the same date that the fee arises to a connected company or an unconnected person (ITA07/S809EZDB(4)).

Amount treated as arising

The starting position is that the amount which arises to the connected company or unconnected person is treated as arising to the individual.

Where enjoyment conditions (a), (c), (d) or (e) are met only in relation to part of a sum, only that part is treated as arising to the individual.

Where enjoyment condition (b) is met in relation to the sum (i.e. the sum increases the value of the assets), an amount equal to the increase in value of the relevant assets is treated as arising to the individual.

The appropriate amount is treated as arising to the individual at the time it arises to the connected company or unconnected person. This is even the case if the enjoyment condition is not met until a later date. In these circumstances a claim can be made to reduce the tax charge upon the other person under ITA07/S809EZG(3).  This is explained further in IFM36700.