Introduction Details of the Section
2.Subsection (1) introduces a new Chapter 5E into Part 13 of the Income Tax Act (ITA) 2007. Chapter 5E contains eight sections, 809EZA to 809EZH.
3.Section 809EZA (1) explains the consequences that follow when a disguised fee arises to an individual from an investment scheme. These are that the individual is treated as carrying on a trade, and the fees are the profits from the trade.
4.Section 809EZA (2) explains where the trade is treated as being carried on. If any of the investment management services giving rise to the fees are performed in the UK, then the trade is treated as carried on in the UK to the extent that the services are carried on in the UK. Where services are performed outside the UK, then the trade is treated as carried on outside the UK to the extent that the services are performed by the individual outside the UK.
5.Section 809EZA (3) sets out the circumstances when a disguised fee arises. These are that an individual carries out investment management services under any arrangements, a management fee arises in whatever form for those services, the arrangements include at least one partnership, and the management fee is untaxed to any extent.
6.Section 809EZA (4) sets out the circumstances where a management fee is regarded as being untaxed for the purposes of subsection (3).
7.Section 809EZB (1) defines a management fee. The conditions for a sum to be a management fee are that it arises from an investment scheme, and is not the repayment of capital invested by the individual, an arm’s length return on that capital, or carried interest.
8.Section 809EZB(2) defines an arm’s length return. A sum is an arm’s length return if comparable investments are made by external investors, the return is reasonably comparable to that received by external investors on comparable investments, and the terms of the investment are reasonably comparable to those governing returns to external investors.
9.Section 809EZC explains the meaning of carried interest for the purposes of Section 809EZB.
10.Section 809EZC (1) defines carried interest as a profit-related return, subject to later provisions.
11.Section 809EZC (2) explains when a sum arising to an individual does so as a profit related-return. The conditions are that there are profits on the investments for the period, the sum is variable by reference to profits on the investments, and that the investments must be the same as those which are used to determine returns to external investors. Where any part of the sum does not meet those conditions, it is not a profit-related return.
12.Section 809EZC (3) provides that where sums arise to an individual as a profit-related return, and there was no significant risk that at least a certain amount would not arise, that certain amount is the “minimum return”. That minimum return is not carried interest.
13.Section 809EZC (4) sets out more details of how the minimum amount is to be calculated. The amounts to take into account are the actual sum which arises, and any other sums which might have arisen under the arrangements as profit-related return. The test must be carried out both by looking at each sum which might have arisen individually, and by looking at all sums arising in the tax year as a whole.
14.Section 809EZC (5) provides when the risk mentioned in subsection 3(b) is to be assessed. It is to be at the latest of the time when the individual became party to the arrangements, the time when the individual starts to perform investment management services in respect of the arrangements, or the date of any material change to the arrangements. The material changes to be taken into account are those which relate to the sums which may arise to the individual by way of profit-related return
15.Section 809EZC (6) provides that when deciding that there is a risk that a sum will not arise to an individual, a risk that it will be prevented from arising, caused by insolvency or otherwise, must be ignored.
16.Section 809EZC (7 and 8) set out how sums which are not carried interest are to be treated. If there are sums which are not carried interest they have to be attributed to the actual sums which arise to the managers.
17.If there are amounts which are not carried interest, and they can be attributed to particular actual sums which have arisen, then the part which is not carried interest is apportioned to those actual sums. But where amounts have arisen which are not carried interest, and which cannot be attributed to any particular actual sum, then those amounts are divided between the actual sums arising on a just and reasonable basis.
18.Section 809EZC (9) provides that for the purposes of section 809EZC(7) any part of the sum which is not carried interest, and which can attributed to a particular actual sum, is to be attributed to that sum to the extent that there was no significant risk that it would not arise.
19.Section 809EZD sets out an additional definition of carried interest for the purposes of section 809EZB.
20.Section 809EZD (1) provides that where a sum falls within section 809EZD(2) or 809EZD(3), then it is to be treated as meeting the conditions in section 809EZC and therefore it will qualify as carried interest.
21.Section 809EZD (2) provides that carried interest is a sum paid to an individual from scheme profits, paid after all, or substantially all, of the investments have been repaid, and any preferred return has been paid to external participants in the scheme.
22.Section 809EZD (3) explains how this is applied where the scheme profits and preferred return are calculated on the basis of particular investments.
23.Section 809EZD (4) defines the preferred return, providing that it is a return equivalent to at least compound interest calculated at the rate of 6% per annum on the sum invested for the period during which it was invested in the scheme.
24.Sections 809EZE defines various terms used in the Chapter.
25.Section 809EZF provides that no regard is to be had to any arrangements which are intended to bring about the result that the section does not apply.
26.Section 809EZG provides for the avoidance of double taxation on sums charged under s809EZA.
27.Section 809EZG (1) sets out one of the situations when the section applies. It applies when income tax is charged in respect of a disguised fee under s809EZA, and at any time income tax or another tax is charged under another section in respect of that disguised fee.
28.Section 809EZG (2) sets out the other situation when s809EZG applies. It applies when a charge has arisen under s809EZA in respect of a loan, and tax arises under another section on an amount which must be used to repay that loan.
29.Section 809EZG (3) provides that to avoid a double charge to tax, the individual may claim a consequential adjustment.
30.Section 809EZG (4) provides that an officer of Revenue and Customs must make any consequential adjustments which are just and reasonable.
31.Section 809EZG (5) (a) sets a limit on the consequential adjustment as a result of s809EZG(1), which may not exceed the lesser of the income tax charged under s809EZA and the other tax charged.
32.Section 809EZG (5) (b) sets a limit on the consequential adjustment as a result of s809EZG(2), which may not exceed the lesser of the tax charged under s809EZA, and the charge in respect of the amount of the loan repaid.
33.Section 809EZG (6) sets out how the adjustments may be made.
34.Section 809EZH provides for Regulations to be made to amend the Chapter, to alter the schemes to which the Chapter applies, the persons who are participants, or the sums which constitute carried interest.
35.Subsections (2 and 3) of the section make consequential amendments.
36.Subsection (4) of the section provides that the amendment has effect in respect of amounts arising on or after 6 April 2015, whenever the arrangements were made.