In the Autumn Statement on 3 December the government announced its plan to charge income tax on sums arising where managers enter into arrangements involving partnerships and other tax transparent vehicles.
A week later, on 10 December, HM Treasury published draft legislation; this is open for comment until 4 February 2015.
The proposals are far-reaching for the funds industry and would, if enacted in their current form, trigger income tax and NICs where any investment management services giving rise to ‘disguised fees’ are performed in the UK. The draft rules would apply to sums arising on or after 6 April 2015. As there is no grandfathering, existing funds are also affected.
We will be responding to HM Treasury and would be happy to assist our clients and contacts by including a composite response on behalf of those who would prefer not to submit separate responses. Please also do get in touch to discuss how these proposed rules may impact fee arrangements in relation to existing fund structures.
Summary of the new rules
In summary, any amount that an individual performing ‘investment management services’ receives (directly or indirectly) from a fund involving at least one partnership, will be treated as a ‘management fee’ liable for income tax and NICs, unless it falls within one of the specific exceptions. Other points to note on this:
- ‘investment management services’ are broadly defined and include researching potential deals and fundraising;
- the rules apply to the extent that any services are performed in the UK, and would therefore include a non-UK resident performing some services in the UK; and
- an anti-avoidance provision captures any arrangements the main purpose of which is to avoid the rules.
The expectation from the Autumn Statement was that ‘carried interest’ linked to performance, or returns from investments by partners, would not be affected. This is covered in the proposed legislation by specific exceptions. However, they are drafted very narrowly and as a consequence many profit sharing arrangements commonly used in fund structures could be brought into the UK income tax net by these rules.
The exceptions are as follows (i.e. where the amount received will not be treated as a disguised management fee and will therefore not be subject to income tax under these rules):
- carried interest, paid out of profits of the fund after investors have received all or substantially all of their investment and a preferred return (of at least 6%, compounded annually), either on a fund, or a whole deal by deal, basis;
- a return or repayment of an investment made by an individual; or
- the sum constitutes a return of investment by an individual that is reasonably comparable to a commercial rate of interest on the amount of the investment, and on terms reasonably comparable with external investors in comparable investments in the scheme.