IFM36310 - Disguised fees: Condition 1 - Performs investment management services
Condition 1 - Performs investment management services
ITA07/S809EZA(3)(a)
The first condition for a sum to be a disguised fee is that the individual must perform investment management services in respect of an investment scheme. The services may be performed directly or indirectly under any arrangement.
Performing investment management services
The phrase ‘performs investment management services’ simply takes its ordinary meaning.
All of the activities of all individuals in an investment management business, who are involved in the various structures targeted by the disguised investment management fees (DIMF) rules, can potentially constitute the performance of investment management services.
Timing of the services performed
The investment management services do not necessarily have to be provided in the year in which the fee arose to meet this condition. Where an individual has performed investment management services in the past or will perform such services in the future this also meets the requirements of condition 1.
Example
Amelia is a recently retired fund manager. She received a disguised fee for investment management services provided in the run up to her retirement. This fee was received in the year after which Amelia retired and no longer provides investment management services.
Despite the investment management services relating to the fee being undertaken in a previous year, the fee is still received in relation to the performance of investment management services, and condition 1 would be met.
Scope of the ‘investment management services’ definition
The definition of investment management services in section ITA07/809EZE(1) is intentionally wide, an individual need only perform these services ‘directly or indirectly’ (ITA07/S809EZA(3)(a)) to be performing investment management services. ITA07/S809EZE(1) sets out various examples but is not an exhaustive list. Therefore, other services could be within the scope of the definition.
Any activity which supports or facilitates the management of an investment scheme in a meaningful way is considered to be provision of investment management services.
Where the investors or management team have agreed to share part of the remuneration for managing the fund with an individual, the commercial rationale will most likely be that the individual is performing investment management services in respect of that fund.
Where an individual works in a business which involves performing investment management services and that individual receives a disguised fee (or carried interest), this will be compelling evidence that the individual performs investment services ‘directly or indirectly’.
It is expected that individuals who do not perform investment management services would be remunerated purely through salary and bonus rather than a sum arising from the fund.
Examples of investment management services include:
- Seeking funds for scheme purposes from participants or potential participants
- Researching potential investments for the scheme
- Acquiring, managing or disposing of property on behalf of the scheme
- Acting for the purposes of the scheme with a view to assisting a body in which the scheme has made an investment to raise funds.
Just because the services that a particular individual at a particular fund management house carries out do not fall within one of the above examples, does not mean that the individual is not performing investment management services.
Exposure to other funds
Where an individual at a particular fund management business receives a disguised fee (or carried interest) from a fund where management of that fund is not their primary responsibility, the sums arising are still within the DIMF (and carried interest) rules.
This may occur where a fund management business that manages several funds, has a commercial arrangement in place where the teams managing each fund share in the carried interest from every fund managed by the business.
If a manager performs services within one team that is related to another team’s fund and the teams are wholly and completely segregated, HMRC’s view is that the sums arising from the other fund would still be caught given that the legislation expressly refers to performing services ‘directly or indirectly’ (ITA07/S809EZA(3)(a)) and under any arrangements.
Where the arrangements governing the performance of investment management services allow an individual to access disguised management fees from another scheme, these fees will still come within the DIMF rules.
In respect of an investment scheme – equity participation
The scope of ITA07/S809EZA(3)(a) is intentionally wide but, if it can be demonstrated that shares or an interest in an asset manager firm have been granted solely to incentivise executives and the award is not in relation to the performance of the fund, then the DIMF rules may not apply. If however, the award has been made as part of a wider remuneration scheme to avoid the application of the DIMF rules, then the amount may still be charged as income. All facts and circumstances must therefore be taken into consideration in order to evaluate whether the DIMF rules apply.
Example 1
An individual fund manager, Frances, works for a US headquartered group, whose shares are listed on the US stock exchange. Frances is a member of a UK LLP (controlled by a corporate member owned by the group) which acts as the UK sub-advisor in relation to some of the funds managed by the group. The UK LLP has appropriate commercial substance (staff, contracts and other assets) and receives an arm’s length fee for the services it provides to other group companies. Frances receives a profit share from the LLP in line with market expectations and holds rights to receive carried interest in the funds she is involved with. Separately, Frances receives an award of shares in the listed US parent under a global share plan designed to incentivise and reward staff (including employees and members of LLPs) across the worldwide group in growing the business.
If Frances and the group are able to demonstrate that the share award in the listed US parent is not part of a wider scheme to deliver a disguised fee (IFM36300) to her, then neither the DIMF rules nor the carried interest rules (IFM37100) will apply to the holding of the shares or any resultant dividends received in respect of those shares.
Example 2
An individual fund manager, Sam, works for a UK based fund management group with full commercial substance in the UK (staff, contracts and other assets). Sam is one of four founders of the business and holds a 25% stake in the parent company of the group. Sam receives an arm’s length remuneration (salary, bonus and other benefits) for his work, which is taxed as employment income, and has a carried interest in the funds operated by the group in line with industry standards. The shares Sam owns in the business carry an entitlement to a 25% share in the residual profits of the business. The group receives priority profit shares, management fees and a small amount of carried interest from the funds it operates as per the contractual arrangements with the investors.
Dividends paid to Sam in respect of his shareholding in the parent company do not constitute a disguised fee (IFM36300). Later, when Sam disposes of his shareholding, the disposal proceeds will not constitute a disguised fee. The DIMF rules may apply however if Sam’s equity participation is part of a wider arrangement designed to deliver a disguised fee.