IFM36720 - Avoidance of double taxation: Consequential adjustment

Consequential Adjustment

ITA07/S809EZG(1)-(2)
Claiming the adjustment

Where the double taxation provisions under ITA07/S809EZG(1) or  ITA07/S809EZG(2) apply, a claim for relief may be made under the corresponding provision in respect of the tax charged.

The adjustment under the first provision (ITA07/S809EZG(1)) is made in respect of the other tax charged in respect of the disguised fee, not the tax charge that arises due to the disguised investment management fees (DIMF) rules.

The adjustment under the second provision (ITA07/S809EZG(2)) is made in respect of a second DIMF charge that arises when a loan, which has been used to pay a disguised fee, has been discharged. 

The legislation only gives authority for the adjustments to be made to the charges as explained above rather than to the primary charges under the DIMF rules. Therefore a claim cannot be made in relation to a foreign tax suffered in relation to a disguised fee. This does not prejudice a taxpayer’s ability to claim double taxation relief under normal rules.

Giving effect to the adjustment
ITA07/S809EZG(6)

Consequential adjustments may be made in respect of any period by way of:

  • an assessment;
  • the modification of an assessment;
  • the amendment of a claim; or
  • or otherwise.

There is no time limit imposed on the making of a consequential adjustment.

Where the claim is just and reasonable, an officer of Revenue and Customs must make the consequential adjustments claimed.

Value of the consequential adjustment that can be claimed under the first double tax relief provision ITA07/S809EZG(1)
ITA07/S809EZG(5)(a)

The value of the consequential adjustments claimed must not exceed the lesser of:

  • the income tax charged on the individual by virtue of the DIMF rules in respect of a disguised fee; and
  • the tax that is charged on the individual otherwise than due to the DIMF rules in relation to the same disguised fee

(In most situations we expect that the latter is likely to be the lower figure)

Expenses

In circumstances where the General Partner Limited Partner (GP-LP) or the General Partner Limited Liability Partner (GP-LLP) structures are in place in a limited partnership fund (LP Fund) some of the monies flowing through the GP-LP or GP-LLP may be applied in meeting genuine commercial expenses of the LP Fund. The amount applied to these expenses will not be treated as arising to the individuals managing the fund, provided they would be deductible when calculating the profits of a trade of the GP-LP or GP-LLP under normal UK tax principles.

However, in most cases it is unlikely that such expenses would be deductible from investment income and gains arising to members of the GP-LP or GP-LLP from the LP Fund.

The fund manager may therefore be charged to capital gains tax, for example, on the gross gain treated as arising under Statement of Practice D12. Only the net amount actually arising after genuine expenses have been paid is charged under DIMF rules.

HMRC accept that the CGT charged on the gross gain can be reduced under ITA07/S809EZG (up to the amount of tax charged under the DIMF rules in the unlikely situation that the CGT charge exceeds the former). This is the case even though the charge under the DIMF rules will be on the net sum arising.

This treatment will only be permitted as just and reasonable in relation to genuine commercial expenses where those expenses would have been deductible in calculating the profits of a trade of providing investment management expenses in line with the clear purpose of the DIMF rules. It cannot be used to access relief on expenses which would not have been deductible when calculating trading profits.