IFM36730 - Avoidance of double taxation: Claim under the first provision

Claim under the first provision

ITA07/S809EZG(1)
ITA07/S809EZG(5)

ITA07/S809EZG(1) applies to give relief where a charge is made under the disguised investment management fees (DIMF) rules and a second possible tax charge also arises in relation to the disguised fee. From 8 July 2015 relief may be claimed where the double tax charge is charged on another person.  This change was introduced by the Finance (No.2) Act 2015.

Example: Fund disposal of an investee company

A fund disposes of an investee company. The proceeds from the disposal are, as a matter of fact, allocated to the individual at the level of a General Partner Limited Partner (GP-LP) entity and used to meet an annual fee. This gives rise to a charge under the DIMF rules. The individual’s share of the proceeds are £2m. The individual is also liable to capital gains tax on the share disposal.

The individual has been taxed twice as a result of the DIMF rules and the CG charge on disposal. The individual may therefore be able to make a claim for a consequential adjustment to the CGT charge.

Example: Following the change in the definition of fees ‘arising’ from 22 October 2015

Following the changes made to the definition of arise with effect from 22 October 2015 (discussed below) a disguised fee arises to a fund manager’s husband (the fund manager having procured that part of the interest in the GP-LP to which she was entitled was instead issued to her husband). The gains and income which the husband is allocated at the level of GP-LP are taxable in his hands in accordance with their original characteristic for tax purposes, for example as a capital gain or dividend income. However, the sum is also treated as arising to the fund manager by virtue of the DIMF rules and is charged in her hands as a disguised fee to trading income.

The provision gives relief in respect of the ‘other tax’ which is the tax paid by the fund manager’s husband in this example. In order to facilitate a just and reasonable claim an officer of HMRC may deem the fund manager’s DIMF charge to have been paid by her husband as an administrative easement. This easement, however, is only for administrative purposes and in no way should the application of the easement provide a tax advantage for either party.  If a tax advantage is achieved then this may lead to penalties.
 

In both examples, if the claim is allowed, then the adjustment will be limited by ITA07/S809EZG(5) to the lower of:

  • the tax charge under the DIMF rules; and
  • the other tax involved.