Disguised Investment Management Fees (DIMF)

DIMF

The DIMF legislation was introduced in 2015 to ensure that management fees are correctly charged to income tax in the UK where they relate to investment management services provided in the UK. The rules are anti- avoidance legislation that specifically target asset managers and have been intentionally written to cover a wide array of scenarios. They operate by creating a deemed trade outside of the typical corporate construct such that individuals are personally liable to UK tax where a disguised fee ‘arises’ to them (even where they have not physically received amounts but have the power to enjoy) from an investment scheme in relation to investment management services undertaken in the UK.

Under the DIMF legislation, the imposition of arrangements to place a corporate structure between Partners and the flow of investment management fees will be broadly disregarded, where it is reasonable to assume that the income would have arisen direct to the Partners in the absence of the arrangements, and the arrangements have as their main purpose the avoidance of tax.

Other challenges to the aggressive movement of assets and income to low tax jurisdictions under UK tax legislation

In additional to the DIMF legislation discussed above, aggressive restructurings are also susceptible to challenges under the following areas of UK legislation.

Transfer Pricing Rules

The transfer pricing rules require that transactions between affected persons (broadly entities under common control) that do not following the arm’s length principle (i.e. the price that would have been made between independent enterprises) and confer a potential advantage to UK taxation on one of the persons, should be recalculated based on an arm’s length fee.

If Partners continue to provide the majority of the investment management activities in the UK then the profits from this activity will be assessable to UK income tax on the individual partners regardless of their residence position. In addition, the transfer of income rights away to offshore entities under a restructuring could also be caught by the same rules, potentially giving rise to a gain in the UK equal to the market value of the disposal.

Transfer of Assets Abroad (‘TOAA’)

The ‘transfer of assets abroad’ rules are longstanding anti-avoidance legislation that seek to ensure UK resident taxpayers are unable to restructure their affairs by transferring an asset abroad such that that income is no longer taxed in the UK. They operate either by reference to an income charge or a benefit charge. The income charge ensures where an individual is the transferer and has the power to enjoy the income (regardless of whether they actually receive it or not) then they continue to be assessed on the income. The benefits charge places a charge on individuals who are not considered transferers to they extent they receive a benefit (for example an interest free loan) from that income. A commercial motive defence is available to the legislation however HMRC guidance specifically suggests this needs to be claimed in the personal tax return.

Mixed Membership Rules

The mixed membership rules were introduced in 2014 to profits being diverted by an individual member to a non-individual member in order to reduce tax on the individual’s profit share. Any excess profit allocation is simply reallocated back to the individual partners. Resigning from an LLP and replacing it with a corporate entity would not easily circumvent this rule due to the embedded avoidance provisions. The Partners could still be regarded as partners of any LLP they resigned from such that the excess profits are allocated to them directly.

Statement of Practice D12 (‘SoP D 12’)

SoP D12 governs how capital gains arise between partners of an LLP. The basic premise is that assets / rights in partnership can be transferred between the partners on a nil gain/loss basis. However, where the partners are connected and the transaction is undertaken other than by way of a bargain made at arm’s length, the assets / rights transferred would give rise to a gain based on market value.

Disguised remuneration

The disguised remuneration legislation was extended to self-employed individuals (e.g. partners in a LLP) in April 2017 such that ‘relevant benefits’ are subject to UK tax as trading income. Relevant benefits include any payment including by way of loan. Broadly speaking the rules apply where there is an arrangement, that gives rise to a benefit as a result of a third-party payment where it is reasonable to suppose there is a tax advantage to a self-employed person.

Compliance

The UK’s self-assessment tax regime (applicable to individuals, partnerships and companies) requires that the taxpayer takes ‘reasonable care’ when completing their tax returns and maintain suitable records in support. HMRC will take the taxpayer’s individual circumstances into account when considering whether they’ve taken reasonable care. Failure to take reasonable care is taken into account when HMRC consider applying penalties on a taxpayer.

There is an expectation that external advice will be sought from appropriately qualified professionals for material or uncertain tax positions. It is the taxpayer’s responsibility to make sure they provide their advisors with accurate and complete information. Failure to do so that leads to inaccuracies are also subject to penalties.

In relation to any material restructuring of a UK corporate LLP or entity, which moved assets offshore to a low tax jurisdiction, there would be an expectation that external advice has been sought and retained, not only at the Group level, but also at the individual level. HMRC does not formally set expectations or regulate agent-client relationships – this is the domain of professional bodies – but they do have a published standard for tax agents that includes:

- Integrity;

- Professional competence; and

- Due care and professional behaviour.

All three of these requirements also form part of a standard known as ‘Professional Conduct in Relation to Taxation’ (PCRT) that the largest accountancy and tax professional bodies share.

June 2021