IFM36351 - Disguised fees: Condition 2 (sums arising on or after 6 April 2015 and before 22 October 2015) - A management fee arising to the individual: Overview
Condition 2 (sums arising on or after 6 April 2015 and before 22 October 2015) - A management fee arising to the individual
ITA07/S809EZA(3)(c)
The requirements for Condition 2 (IFM36316) were slightly different prior to 22 October 2015 (IFM36351), as from 22 October 2015, there is legislation (ITA07/S809EZDA and ITA07/S809EZDB) which defines when a management fee arises to other persons or connected companies. Prior to 22 October 2015 a management fee had to arise ‘directly’ or ‘indirectly’ to an individual.
If the sum you are considering has arisen on or after 22 October 2015 it is necessary to read (IFM36316) which details the changes.
What is a management fee?
[### Condition 2 (sums arising on or after 6 April 2015 and before 22 October 2015) - A management fee arising to the individual
ITA07/S809EZA(3)(c)
The requirements for Condition 2 (IFM36316) were slightly different prior to 22 October 2015 (IFM36351), as from 22 October 2015, there is legislation (ITA07/S809EZDA and ITA07/S809EZDB) which defines when a management fee arises to other persons or connected companies. Prior to 22 October 2015 a management fee had to arise ‘directly’ or ‘indirectly’ to an individual.
If the sum you are considering has arisen on or after 22 October 2015 it is necessary to read (IFM36316) which details the changes.
What is a management fee?
](https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm36340) and ITA07/S809EZB provides details of how a management fee is defined. Broadly the intention is that a management fee includes any sum arising from a scheme that is not a return of capital invested by the individual, profits on that investment, or carried interest (IFM36500).
Has the management fee ‘arisen’ to the individual?
Until a sum arises it cannot meet condition 2. Prior to 22 October 2015 the meaning of “arisen” was not explicit in the legislation. The word took its ordinary meaning. Generally sums arise to an individual when they are allocated to that individual and that individual actually has access to the sum allocated.
Example - allocation and access to management fees:
Michelle is a fund manager. She has two sums allocated to her as a reward for management services provided to an investment scheme. She has immediate access to the first sum and on receipt she chooses to reinvest the fee into the fund. The second sum is allocated to her but, at this stage, payment is to be deferred for a period of time, after which it will then become accessible.
The first sum that Michelle receives has been allocated to her and made accessible. The evidence therefore indicates that the sum has arisen to Michelle. In considering if the sum has arisen to the individual it is irrelevant how the individual has chosen to apply the sum after it is made available (i.e. here it has been reinvested).
The second sum that has been allocated to Michelle has been deferred; the evidence therefore indicates that this sum has not yet arisen to her. It will arise to her at the point it is not only allocated, but also made available to her.
The above example also applies where reinvestment of sums arising is mandatory or is otherwise automatically achieved by the agreements which govern the fund arrangements. The fee is being used to meet an obligation of the individual so sums applied in this way will be treated as arising to the individual at the point they are reinvested. For example, the individual may be required to pay up a co-investment commitment (IFM36400).
Any application of sums that would otherwise be paid to the investment manager does not stop them having arisen to that individual. The disguised investment management fees (DIMF) rules cannot be circumvented in this way.