IFM36356 - Disguised fees: Condition 2 (sums arising on or after 6 April 2015 and before 22 October 2015) - A management fee arising to the individual: Fact dependent circumstances

Fact dependent circumstances (sums arising on or after 6 April 2015 and before 22 October 2015)

There are limited circumstances where a sum may not be regarded as arising from the scheme. The following sections provide some guidance on circumstances when sums may or may not arise. The tax analysis for all situations must be based on the facts and circumstances surrounding the sum.

Dividends from genuine corporate management vehicles

Where an individual acts as an investment manager and holds shares in a company for which they work, they may receive dividends from those shares. These dividends would arise by virtue of the shareholding thereby reaching the individual in their capacity of shareholder. These dividends may not be regarded as arising from the scheme provided that:

  • the company carries on a trade of providing investment management or advisory services on a commercial basis with a view to profit; and
  • the individual receives an arm’s length rate of remuneration.

This specific analysis only applies to dividends.  It does not apply to other returns such as gains although the fact pattern relating to other returns such as gains or other distributions may result in these sums not being charged as a DIMF sum.

Where a genuine corporate management vehicle has sufficient substance to carry on the management activity (and actually does so using its own employees, contracts and other assets), the link between the individual and the scheme is likely to be broken. This is dependent upon the individual receiving an arm’s length rate of remuneration and the arrangement not being part of a wider structure to avoid the DIMF rules.

It remains largely a question of fact whether the dividends received are in fact fees for investment services. Interposing a passive company between an individual manager and the General Partner Limited Partner (GP-LP) or General Partner Limited Liability Partner (GP-LLP) vehicles (IFM36132) would not break the link and sums arising to the passive company would be treated as arising directly or indirectly to the individual.

In these circumstances the sums received will also be treated as arising directly or indirectly to an individual where such a passive company was owned, directly or indirectly, by a trust from which the individual manager could benefit (whether this was a personal trust or a trust used as part of an avoidance structure such as a “Member Benefit Trust”, which could benefit members of a partnership which carries on investment management activity).

Use of offshore vehicles

Additionally, particular attention should be paid to structures that rely on claiming that investment management activities are partially performed by a vehicle outside the UK in a low (or no) tax jurisdiction and the commercial substance of the arrangements should be tested.  To test if an offshore vehicle has substantive activity, consideration should be given to the transfer pricing of the transactions between parties.  Anti-avoidance provisions within ITA07/Part 13 (IFM36600) and other relevant legislation pertaining to arrangements should be reviewed.

Transparent structures

Where an intermediate structure is transparent for tax purposes, such as a partnership, this will not be effective in taking sums arising to the manager out of the DIMF rules.

Escrow arrangements

The exact analysis will depend on the terms of the arrangement. Generally, where an amount is placed into escrow and the fund manager cannot access the funds (or property representing the funds) that sum will not ‘arise’ to the manager. Instead the fee will ‘arise’ when the sum is released from escrow and the fund manager gains access to it. For this treatment to apply the arrangement must be a genuine escrow or deferral arrangement implemented for commercial reasons in agreement with the external investors to the fund.

Returns on scheme investments

In circumstances where shares held in companies by the investment scheme as investments:

  • give rise to dividends; and
  • those dividends are allocated to investment managers in order to satisfy the annual management fee;

these sums may be within scope of the DIMF rules.

Fund returns may also comprise of interest and capital gains and these may also be within the scope of the DIMF rules.

Where a charge to tax also arises on these amounts under another part of the Taxes Acts, ITA07/S809EZG may give relief for any double taxation, see IFM36700.

Allocation of shares or partnership interests

In circumstances where an individual is allocated shares in the fund management company, or a partnership interest, this allocation would not itself generally be regarded as arising from the investment scheme until there was evidence that demonstrated the sums were received in respect of investment management services. 

You should critically examine the facts to decide whether an allocation of shares or partnership interest is, based on the facts, a device to ensure that management fees are not charged to income tax. In such a case, application of the anti-avoidance rules should be considered (IFM36600).