Policy paper

Partnerships review: alternative investment fund managers: deferred remuneration

Published 10 December 2013

1. Partnerships review: alternative investment fund managers: deferred remuneration

1.1 Who is likely to be affected

This change will affect the income tax treatment of members of partnerships and limited liability partnerships (LLPs) that manage alternative investment funds including where they are delegated to do so (Alternative Investment Fund Managers (AIFM) partnerships).

1.2 General description of the measure

The legislation will introduce a mechanism for members of AIFM partnerships to allocate certain ‘restricted’ profits to the partnership. These are profits that those members cannot immediately access because of requirements under the Alternative Investment Fund Managers Directive (AIFMD) (2011/61/EU) to defer remuneration of ‘key staff’.

The legislation will impose a charge to tax on these businesses at the additional rate of tax (45 per cent) to be paid by the AIFM partnership.

1.3 Policy objective

The primary objective of this change is to address the tax issue arising from restricted access to profits. The new mechanism will provide affected members of AIFM partnerships with a fair solution without recourse to arrangements involving tax-motivated allocations of business profits, which will be prevented as part of the Government’s partnerships review (see details in the Tax Information and Impact Note on Partnerships with mixed membership).

1.4 Background to the measure

This measure is part of a wider review of certain parts of the partnership rules announced at Budget 2013. A consultation document Partnerships: A review of two aspects of the tax rules was published on the GOV.UK website on 20 May 2013 and the consultation closed on 9 August 2013.

This element of the partnerships review measure is flagged up in the consultation document under the heading: Partnership with mixed memberships - profits: Profit deferral and working capital arrangements. Further information was received during the consultation period on the AIFMD issue and the use of mixed membership structures by AIFM partnerships. This was fed into the design of the new mechanism and a recosting exercise.

2. Detailed proposal

2.1 Operative date

The legislation will have effect on and after 6 April 2014.

2.2 Current law

Individual members of partnerships (including LLPs) are charged to tax on their trading profits as they arise under Chapter 2 of Part 2 of Income Tax (Trading and Other Income) Act 2005. These profits are also subject to Class 4 National Insurance contributions (NICs) in accordance with section 15 of Social Security Contributions and Benefits Act 1992. This note only deals with the tax change while the NICs Bill 2013 deals with any associated NICs changes.

2.3 Proposed revisions

Legislation will be introduced in Finance Bill 2014 to provide as follows:

• it will allow any partner in an AIFM partnership to allocate all or part of their ‘relevant restricted profit’ to the firm. Relevant restricted profit is deferred remuneration (within the meaning of the AIFMD) together with any remuneration which is awarded in the form of instruments that must be retained for at a period of at least 6 months
• it will charge tax at the additional rate of income tax (currently, 45 per cent) on that income, with no reliefs or allowances to be available to set against it
• where the relevant restricted profit ultimately vests with the partner who initially allocated it to the partnership, this is treated as taxable income of the partner in the relevant tax year. Credit will be available for the tax initially paid by the partnership on the profit, and any overpayment of tax may be repaid
• for capital gains tax purposes, the partner is treated as receiving any securities at a base cost equivalent to the amount of remuneration they represent, net of tax. The same amount is treated as the disposal consideration

If the deferred remuneration does not vest in the partner who originally allocated the amount to the firm, the payment will be treated like any other partnership distribution. There will be no further tax liability and no entitlement to recover the tax paid on that element of the deferred remuneration. A power is provided to make regulations if required.

2.4 Summary of impacts for the review

The following table is a summary of impacts for the partnership review announced in Budget 2013 of which the change described above is a part.

Exchequer impact (£m)		2013 to 2014	2014 to 2015	2015 to 2016	2016 to 2017	2017 to 2018	2018 to 2019
	Budget	nil	+125	+365	+300	+285	+270
	Extra	nil	nil	+680	+430	+410	+400
	Total	nil	+125	+1045	+730	+695	+670
	The first row presents the figures published at Budget 2013 that were set out in Table 2.1 of the Budget Report and certified by the Office of Budget Responsibility (OBR) at that time. More details about the original figures can be found in the policy document published alongside the Budget. The second row presents the extra costing attributable to the AIFM sector and has been estimated using information gathered during the consultation carried out over the summer. These figures are set out in Table 2.1 of the Autumn Statement 2013 and have been certified by the OBR. The policy document published alongside the Autumn Statement provides further details.
Economic impact	This measure will result in a more level playing field through reducing distortions to competition and to the allocation of resources among sectors driven by tax planning. It may also result in an increase in labour costs and a decrease in post-tax profits levied on selected partnerships in certain industries. Overall, the impact on the economy should be small.
Impact on individuals and households	Those individuals who are affected members of partnerships will now be required to pay the correct amount of tax and NICs at broadly the right time. It is possible that there is a modest reduction in administrative burden for some individuals who will pay through PAYE rather than having to fill in a self assessment return. Overall the impact is expected on individuals and households to be negligible.
Equalities impacts	No impact is expected on any protected equality groups.
Impact on business including civil society organisations	This measure will have a negligible impact on businesses and civil society organisations. The existing evidence suggests that the majority of partnerships will not be affected by the consultation proposals. Those partnerships affected are likely to be limited in number and they are primarily large professional or AIFM partnerships. There would be someone off costs as professions and taxpayers need to understand the new rules and communicate them to their partnership members. For those AIFM partnerships which choose to use a new paper-based process to account for tax and NICs, administrative costs are expected to be negligible as they are already required to record and process the information in order to comply with the regulatory and tax requirements.
Operational impact (£m) (HM Revenue and Customs (HMRC) or other)	The AIFM process requires changes to HMRC systems and they are estimated to cost up to £1.6 million. There will also be some extra administrative costs to be borne by HMRC, currently estimated at £260,000 per annum. There would also be some additional operational costs associated with the monitoring and checking records of notional and actual partners of partnerships but these are expected to be minimal. For the relatively few public sector organisations using the partnership model, there would be administrative costs to understand the new rules.
Other impacts	Other impacts have been considered and none have been identified.

2.5 Monitoring and evaluation

The partnerships review measure will be monitored and assessed alongside other measures in the Government packages for fairer taxation and avoidance.

2.6 Further advice

If you have any questions about this change, please contact James Ewington on Telephone 03000 553788, email:partnership.review@hmrc.gsi.gov.uk.