Taxman intensifies fund manager scrutiny

A number of investment managers could see
the profits from funds based offshore lose their tax exempt status if they fail
to meet certain criteria.

New draft guidelines have been issued by HM Revenue
& Customs
specifying the tests investment managers will have to satisfy
in order to qualify for the investment manager exemption.

John Neighbour, a KPMG tax partner, said the new
regulations would require most investment managers to adapt their arrangements
in order to maintain their tax exempt status.

‘These moves are the latest steps in the increasing level of scrutiny HMRC is
applying to the fund management industry,’ said Neighbour. ‘There is a
perception that some fund managers have played a little fast and loose, and HMRC
is tightening up the rules in response.’

The draft regulations will introduce a ‘customary remuneration test’ and an
‘independence test’.

The ‘customary remuneration test’ will require an offshore fund manager to
demonstrate that the remuneration received for this management service is not
less than ‘customary’ for that class of business.

This has been a notoriously grey area, but HMRC has said that it will make
its decision based on the transfer pricing concept of arms length pricing.

Neighbour said the arms length method would bring certainty to the definition
of ‘customary’, but warned that the method would make it more difficult to meet
the requirments.

‘Applying transfer pricing methodology means that UK fund managers will need
to ensure that they can demonstrate all amounts paid to parties related to their
funds are at arm’s length rates,’ Neighbour said.

The ‘independence test’, meanwhile, could introduce more uncertainty. The
previous guidance listed circumstances that would satisfy the independence test.
The new draft guidance, however, now states that no one factor will be treated
as decisive in determining whether the manager and the fund are independent.

The industry has until 12 January next year to comment on the draft.

Further reading:

the full document here

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