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The end of disguised investment management fees?

New anti-avoidance provisions have brought management fees squarely into the firing line, and those most likely to be affected are individuals dealing with investment management for private equity or investment funds, involving either limited partnerships or limited liability partnerships.

Limited partnerships comprise both general partners, who deal with the day-to-day management of the business, and other partners, who do not take an active role in the management of the business. This structure was introduced to promote economic growth, offering an alternative but similar structure to limited companies. Despite having, among other things, comparatively light regulatory governance, limited partnerships generally lagged behind the popularity of limited companies in the marketplace. They nevertheless have become prevalent among private equity funds and other investment funds.

Previously, avoidance schemes have enabled annual fees to be paid as priority partnership shares on which income tax was not payable. To combat this, section 21 of the Finance Act 2015 introduced new provisions into the Income Tax Act 2007, which are relevant to disguised investment management fees arising on or after 6 April 2015. The scope of the legislation also covers arrangements entered into before this date, if the sum is payable on or after it, but it does not apply to carried interest (i.e. returns reflecting performance of investments) nor co-investments (i.e. investment by managers). There are also general anti-avoidance provisions designed to prevent the provisions being circumnavigated by other arrangements. So, for example, no regard is to be given to any arrangement which seeks as its main purpose, or one of its main purposes, to secure that the provisions do not apply.

As a brief synopsis, the new provisions provide that an individual (for instance, an investment manager) is liable to pay income tax on disguised fees arising through a trade if the fees were profits, including unrealised profits, of that trade and the individual was the person receiving or entitled to those profits.

So, just what is a ‘disguised fee’? In essence, it is equal to the proportion of a management fee that is untaxed, where it arises from an investment scheme (i.e. a collective investment scheme or an investment trust) to an individual who performs, directly or indirectly, investment management services under an arrangement involving at least one partnership. It is worth bearing in mind that a management fee can, in addition to actual money, also include something with a monetary value, such as a loan, an advance of expected future profit shares or an allocation of profits. In general, guaranteed sums will constitute management fees which are taxable and if any proportion goes untaxed, it will become taxable under these provisions.

The term ‘investment management services’ has been widely drafted and covers services seeking to raise funds for the scheme or acting with a view to assisting a body in which the scheme has made an investment to raise funds, researching potential investments for the scheme and dealing with property for the scheme (e.g. acquiring, managing or disposing of property). The provisions do make a distinction as to where the services are performed, so that services performed in the UK are treated as trade being carried on in the UK and, conversely, services performed outside the UK are treated as trade being carried on outside the UK. This is a move away from earlier draft legislation under which the trade was treated as being carried on entirely in the UK, even if only part of the services were performed in the UK.

What will the impact be? Well, as alluded to above, the new provisions are only intended to target those businesses making use of income tax avoidance schemes where a limited partnership or limited liability partnership is involved. HM Revenue & Customs have already anticipated that the new measures will not have a significant economic impact, nor will they significantly impact on organisations carrying out normal commercial transactions.

CONTACT PETER

If you would like more information or advice relating to this article or a Corporate law matter, please do not hesitate to contact Peter Goodman on 01727 798061.

© SA LAW 2017

Every care is taken in the preparation of our articles. However, no responsibility can be accepted to any person who acts on the basis of information contained in them alone. You are recommended to obtain specific advice in respect of individual cases.

Chris Wilks is an experienced corporate partner who focuses on advising small and medium sized companies and individual investors.
Chambers & Partners
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