Statement of Practice 1 (2001): treatment of Investment Managers and their overseas clients

Question 1

Part I: background

Accepted Answer

7. Non-UK residents are chargeable to UK tax in respect of income from a trade conducted in the UK through a branch or agent, in the case of income tax, or a permanent establishment in the case of corporation tax. However, Chapter 1, Part 14, ITA 2007 limits the charge to income tax on any profits earned by UK investment managers on behalf of non-residents to any tax deducted at source. The equivalent limitation from corporation tax is provided by S1142 CTA 2010.

8. Those provisions limit the charge to tax provided a number of tests are met. Amongst other things these tests provide certainty that the exemption applies if the UK investment manager is acting for the non-resident in an independent capacity. If the tests are met, the tax chargeable is restricted to the tax, if any, deducted at source. HMRC’s practice in relation to the tests is described at Part III of this Statement.

9. FA 2003 introduced the concept of a permanent establishment into UK legislation. The term is now defined at S1141 Corporation Tax Act 2010 and includes an agent acting on behalf of the non-resident other than an agent of independent status acting in the ordinary course of the agent’s business.

10. The Investment Manager Exemption legislation now only has relevance for corporation tax by providing greater clarity about what constitutes independence of investment managers in relation to the non-residents for which they act. For income tax it raises the threshold for chargeability so that the same criteria apply when there is no treaty protection in the form of a permanent establishment article.

11. The legislation does not apply to income from, or connected with, a trade carried on in the UK by the non-resident otherwise than through a broker or independent investment manager. For instance, income arising from the temporary lodgement of funds used in a manufacturing business carried on in the UK is liable to corporation tax or income tax in the normal way. The same applies where the transactions are part of a wider trade, such as insurance, carried on in the UK whether by the investment manager, another agent, or a branch of the non-resident.

12. Where the Investment Manager Exemption does not apply to income arising through the UK investment manager, it does not necessarily follow that the non-resident is liable to UK tax on that income. For example:

certain UK securities are exempt from tax
for those non-residents otherwise within the charge to corporation tax S1142 Corporation Tax Act 2010 provides that a company is not regarded as having a permanent establishment where it carries on business through an independent agent acting in the ordinary course of his business
for those non-residents within the charge to income tax a Double Taxation Agreement may, depending on the terms of the agreement, limit the UK tax to the profits of the trade carried on through a permanent establishment

13. Sometimes a non-resident appoints an agent overseas who in turn appoints a UK subagent, often its affiliate, to manage the investment of all or part of the portfolio. That situation is considered in Part III of this Statement.

Question 2

Part II: relevance of trading

Accepted Answer

14. The Investment Manager Exemption legislation has no relevance unless the non-resident is trading in the UK.

15. If the transactions carried out through the investment manager are part of the trade carried on by the non-resident then, unless the tests in S835M ITA 2007 or S1146 CTA 2010 are satisfied (see Part III) the income from that trade, including any profit from the realisation of securities, for example, is taxable.

16. Whether or not a taxpayer is trading is a question to be determined by reference to all the facts and circumstances of the particular case. This applies as much to financial transactions as to other activities.

17. In determining the question of trading, any transactions carried out through an investment manager are to be considered in the context of the status and world-wide activities of the non-resident. It is not possible in this statement to consider every possible set of circumstances but, for example, an individual is unlikely to be regarded as trading as a result of purely speculative transactions.

18. For a company, a transaction will generally be either trading or capital in nature (this may also be the case for non-corporate collective investment vehicles whether open-ended or closed-ended). If the main business of a non-resident company is a trade outside the financial area, or an investment holding business, the activities in the UK would normally amount to trading only if they constituted or were part of a separate financial trade. But if, exceptionally, activities which are an integral part of the profit earning activities of a non-financial trade are carried out through a UK investment manager (for example, hedging on the London terminal markets by a non-resident dealer in physical commodities) then that might amount to trading here. The view to be taken on a particular case will depend on all the facts of that case.

19. The active management of an investment portfolio of shares, bonds and money market instruments such as bills, certificates of deposit, floating rate notes and commercial paper does not constitute a trade. But every case must be considered in the light of its own facts.

20. HMRC view short positions as conceptually the same as long positions and synthetic positions as conceptually the same as the equivalent ‘real’ positions. Neither going short nor taking synthetic positions using derivatives are in themselves indicative of trading. Furthermore, synthetic positions that give exposure to part of an asset are conceptually the same as synthetic positions that give exposure to the whole of an asset. Thus a synthetic position that gives exposure only to a bond’s credit risk is no more or less likely to be a trading transaction than a synthetic or real position that gives exposure to the bond’s coupon, liquidity, credit and currency risks. These techniques may constitute investment in themselves or may form part of an investment activity.

21. Where futures and options are used by non-residents who are collective investment vehicles (whether open-ended or closed-ended), pension funds and other bodies which either do not trade or whose principal trade is outside the financial area, Statement of Practice 03/02 ‘Tax Treatment of Derivative Transactions’ will be applied.

22. If a non-resident carries on a financial trade outside the UK, any transactions carried out through a UK investment manager are likely to amount to trading in the UK. That is so whether there is a discretionary agreement or whether the manager acts on the instructions of the non-resident. The criteria for deciding whether a non-resident financial company is an investment company or a trading company are the same as those which apply to a resident company.

23. Where there is trading in the UK, no assessment is due on the non-resident when the Investment Manager Exemption applies. Liability of the non-resident is instead limited to tax deducted at source.

Question 3

Part III: particular provisions of the Investment Manager Exemption investment transactions

Accepted Answer

24. Application of the Investment Manager Exemption provisions is restricted to investment transactions. These are currently defined in the Investment Manager (Tax) Regulations 2014 as applied and modified by the Investment Manager (Investment Transactions) Regulations 2014. For the purposes of the Investment Manager Exemption investment transactions include shares, stock, commercial paper and warrants, futures (including forward) contracts, options contracts or securities of any description, any foreign currency, carbon emission credits, interest rate swaps, equity swaps, currency swaps, commodity swaps and commodity index swaps, credit default swaps, whether settled physically or by cash, and other contracts for difference, but not contracts relating to land. Transactions in rights under a life insurance policy are also included.

25. Transactions in physical commodities, including warrants on the London Metal Exchange which give the holder title to the metal, are not investment transactions for the purposes of the exemption. However, futures and options contracts in commodities that provide for physical delivery will be treated as investment transactions provided physical delivery does not occur.

26. Transactions in land, including transactions of any nature which result in the acquisition of land, are not within the definition of investment transactions. Further, futures or options contracts relating to land are specifically excluded from the definition. Futures or options contracts involving indices of land can however qualify depending on the characteristics of the particular index used. Although this list is not exhaustive, HMRC would expect that the index is:

publicly accessible
comprised of a significant number of properties so that it is not capable of manipulation, such as by being linked to specific properties
is maintained by persons not connected with the non-resident or its investment manager

27. Placing money at interest, including structuring and negotiating the terms of the placement, is an investment transaction. If commitment, placement or documentation fees are received by the non-resident for placing its own money at interest the fees will be regarded as part of the return on the loan. Participation as a syndicate member by providing funds for a syndicated loan is also regarded as placing money at interest. However, taking a lead in arranging a syndicate to advance a loan, originating a loan in which the non-resident is not a lender, or managing such a loan, are functions outside the definition of an investment transaction for the purposes of the Investment Manager Exemption and any fees or similar remuneration or preferential rate (to whomever paid) for arranging or managing it are chargeable to UK tax if the arrangement or management is carried on in the UK.

28. In determining the extent to which any fees or similar remuneration are chargeable to UK tax, HMRC will have regard to the level of interest and other compensation payable to the non-resident, or its agent, in order to determine whether the relevant amount is an arm’s length amount. For example, where the non-resident receives interest at a rate higher than other syndicate members, the interest differential may be regarded by HMRC as a disguised arrangement or management fee or similar. Provided the non-resident or the UK manager is taxed on the fee in the UK, or the equivalent of the fee, the tests for the Investment Manager Exemption will not have been failed. Similarly, the investment manager may receive fees in connection with the syndication which are matched by a corresponding reduction in the management and/or performance fees payable to him by the non-resident. Provided the syndication fees are taxable in the hands of the manager the Investment Manager Exemption will not be jeopardised.

29. Where a transaction entitles the non-resident to receive an income flow and the income is derived from persons unconnected with the non-resident, its agents, or the holder of a security or other interest in the non-resident, then HMRC will regard such a transaction as an investment transaction.

30. Where an investment manager carries out on behalf of a non-resident:

both ‘investment transactions’ in respect of which the conditions are met
other transactions that are not investment transactions, or in respect of which the conditions are not met

it is only those other transactions that are potentially fully exposed to income tax or corporation tax. The ‘investment transactions’ in respect of which the conditions are met are not tainted by the existence of these other transactions and will remain within the scope of the Investment Manager Exemption.

The qualifying conditions

32. The Investment Manager Exemption applies in relation to investment transactions carried out by the investment manager on behalf of the non-resident if the investment manager meets certain tests. The tests are that:

the UK investment manager is in the business of providing investment management services
the transactions are carried out in the ordinary course of that business
the investment manager acts in relation to the transactions in an independent capacity
the requirements of the 20% test are met
the investment manager receives remuneration for provision of the services at not less than the rate that is customary for such business

33. All of these qualifying tests must be met and failure to meet any one of them (other than the 20% test – see below) results in removal of the exemption. If the 20% test is the only test failed, the exemption from tax is restricted.

33A. HMRC acknowledge that investment managers operate within regulatory regimes, or may voluntarily adopt equivalent measures, which may place requirements upon them, and their principals and employees, including as to the receipt and retention of remuneration in the form of interests in collective investment schemes to which they provide investment management services. Such requirements will be considered as part of the facts and circumstances to be taken into account in determining whether the qualifying tests are met, and in particular whether actions taken by the investment manager to comply with the requirements are reasonable, where this is relevant.

34. The remainder of Part III provides guidance on three of these tests:

A. the independent capacity test
B. the 20% test
C. the customary rate test

A. The independent capacity test

35. The manager must act for the non-resident in an independent capacity. This means ascertaining whether, having regard to its legal, financial and commercial characteristics, the relationship between the manager and the non-resident is a relationship between persons carrying on independent businesses that deal with each other on arm’s length terms.

36. The relationship will be considered to be independent if the non-resident has the following characteristics:

a) the non-resident is a widely held collective fund or, if not,

b) the non-resident is not a widely held collective fund but is either being actively marketed with the intention that it become one or is being wound up or dissolved.

37. A fund will be regarded as widely held if either no majority interest in the fund is ultimately held by five or fewer persons and persons connected with them, or no interest of more than 20% is held by a single person and persons connected with that person. A fund may need to establish a track record before new investors are obtained and will therefore have 18 months from the commencement of trading in the UK to meet the widely held test. Where investment management services are provided to a collective investment scheme constituted as a partnership, participants in the scheme will not be regarded as connected persons for this purpose if their only connection is membership of the partnership. This means that if the investment manager is a partner in the fund it will not be treated as connected with the other partners in the fund for the purpose only of the Independent Capacity Test, although there may still otherwise be connection under S993 ITA 2007 between the participants, for example as partners in another capacity.

38. Actively marketed means there must be evidence of ongoing genuine attempts to obtain third party investment into the fund in order to meet the widely held test and that the terms on which interests in the fund are offered are not prohibitive or discriminatory for that class of business.

39. If the fund has one of the above two characteristics the independent capacity test will be met without the need to refer to any other factors.

40. In other cases the independent capacity test will be met:

a) where the provision of services to the non-resident and persons connected with the non-resident is not a substantial part of the investment management business. Where that part does not exceed 70% of the investment manager’s business, either by reference to fees or to some other measure (where that would be more appropriate), it will not be regarded as substantial. Further, if in the first 18 months from the start of a new investment management business the services provided to the non-resident exceed 70% of the business, they will not be treated as a substantial part of the business provided that they are consistently below 70% in subsequent periods.

b) where the provision of services to the non-resident represents more than 70% of the investment manager’s business 18 months after the start of a new investment management business but that was for reasons outside the manager’s control and the manager had taken all reasonable steps to bring it below 70%. The investment manager will be expected to provide all relevant information to support a contention that the services are a substantial part of the manager’s business for reasons beyond the manager’s control and to demonstrate what steps have been taken to rectify that position.

41. If none of the above tests are satisfied HMRC will have regard to the overall circumstances of the relationship between the non-resident and the investment manager in determining whether they are carrying on independent businesses that deal with each other on arm’s length terms. It is not possible to describe every scenario in which the relationship may still meet this test but the guidance in this Statement of Practice should provide certainty to the vast majority of non-residents trading in the UK through an investment manager and HMRC will also continue to provide advice for any other circumstances.

42. Some funds adopt a master/feeder structure. Where the investment manager manages an opaque master fund, such as a company, which has feeder funds then the independence test will be applied as if the master fund were transparent by looking at the beneficial ownership of each feeder fund (and applying the provisions of this Section A to the aggregate interests in the feeder funds) to determine whether the master fund is independent.

43. Similarly, if the investment manager acts for one or more sub-funds of an umbrella fund it is the beneficial ownership of the latter (applying the provisions of this section A to the interests in the umbrella fund) that will determine whether the independence test is met.

44. It should be noted that a subsidiary may be considered independent of its parent company for the purposes of the test, notwithstanding the parent’s ownership of the share capital.

B. The 20% test

45. In essence the requirement is that the investment manager and persons connected with it, including connected charities, must not have a beneficial entitlement to more than 20% of the non-resident’s chargeable profit arising from transactions carried out through the investment manager. The definition of connected persons is that in S993 ITA 2007.

46. Management fees paid to the investment manager and persons connected with it are not included in the chargeable profit provided they would be allowable in computing the profit of the non-resident were it chargeable to UK tax. This applies equally to incentive fees, performance fees or incentive allocations which are calculated by reference to any increase in the net asset value or profits of the relevant non-resident. This treatment of incentive allocations is explained further below.

47. Where the 20% threshold is exceeded, the part of the income of the non-resident to which the investment manager and connected persons are beneficially entitled is excluded from the limitation of charge. The limitation of charge will apply to the part to which they are not beneficially entitled provided the other tests in the investment manager provisions are met.

48. The 20% test is treated as satisfied throughout any period, not exceeding five years, for which it is met in respect of the total taxable income of the period arising from transactions carried out through the investment manager. It is also treated as satisfied if the manager intended to meet that test but failed to do so, wholly or partly, for reasons outside the manager’s control, having taken any reasonable steps to fulfil that intention. This means that the manager must fulfil the intention to keep its beneficial entitlement within 20% of the total taxable income for the period insofar as it is reasonable to do so, but is not required to get within that figure at any cost, for instance where there are good commercial reasons for not achieving.

49. This is an example of how the test may be met throughout a period of five years:

Years	1	2	3	4	5
Taxable income of non-resident	£100	£200	£200	£250	£250
Entitlement of manager to above	£32	£58	£40	£35	£5
Expressed as percentage for each year	32%	29%	20%	14%	2%
Average percentage over qualifying period	32%	30%	26%	22%	17%

It may be assumed that the test is satisfied for year one because:

(a) in this example it was the manager’s intention to have a beneficial entitlement to an average of 20% or less in aggregate over a five year period; and

(b) that intention was fulfilled. Had the 20% beneficial entitlement been achieved before the five years were up, then that shorter period would have been the qualifying period. A second qualifying period of up to five years could include years 2, 3, 4, 5 and 6 and so on.

50. As with any other tests for the exemption, unless specified otherwise, the UK tax rules regard companies, including LLCs, as opaque and the CTA 2010 rules apply. Partnerships (including LLPs to which s 863 ITTOIA/1273 CTA 2009 apply) are transparent for income and corporation tax purposes: CTA 2010 rules will apply to partners within the charge to CT and ITA 2007 to partners within the charge to IT. In addition, the rule for non-resident companies at S1149 CTA 2010 treats partnership collective investment schemes in which they invest as assumed companies for the purposes of the 20% test.

51. Non-UK resident investors in a fund which is structured as a partnership will be partners and participants in the fund. Where a non-resident is connected to the investment manager the 20% test would be automatically broken since all the non-resident participants would be connected to the investment manager under S993(4) ITA 2007, by virtue of their being partners in the same partnership. The investment manager and connected persons would then be entitled to all the income of that non-resident.

Accordingly, where the investment management services are provided to a collective investment scheme (as defined in the Financial Services and Markets Act 2000) the 20% test is applied by looking at the scheme as a whole rather than at the individual participators. It is not then relevant that the investment manager may be connected to the non-resident as partner (S835Q ITA 2007 and S1149 CTA 2010) or that the non-resident participants themselves carry on a financial trade as the availability of the exemption is instead tested solely by reference to the nature of the activities of the notional company represented by the scheme.

52. In certain circumstances the investment manager may be connected with the participants because both are partners in one or more partnerships which have an interest in the fund in question. Where the 20% test is failed as a consequence of aggregating the manager’s income with that of certain partners who are not connected persons otherwise than as a result of S993(4) ITA 2007, ie by being partners in a partnership, the failure will be regarded as a failure under S835N ITA 2007 and S1147 CTA 2010 to fulfil an intention to satisfy the test. But in certain situations that failure will be considered as:

a) attributable to matters outside the control of the manager and persons connected with it; and

b) as not being the result of a failure to take reasonable steps to mitigate the effect of those matters in relation to the fulfilment of that intention. In those situations the 20% test will be met. The legislation will be applied in this way where:

the connected persons are partners other than solely in a fund under consideration
partnership is the only reason that the manager is connected with them

53. Where overseas pension funds are set up under trust the trustees do not have beneficial ownership of the pension fund income although they may be the legal owners. The 20% test will not therefore apply where the trustee is connected to the UK investment manager. In practice it would be unusual for an overseas pension fund to be carrying on a financial trade.

54. Where the establishment of a connected person’s relationship depends on the question of whether a person falls to be regarded as having control of a company’s affairs within the terms of S450 CTA 2010, it is not considered that a person’s ability (whether de facto or de jure) to appoint the majority of the Board of directors will itself constitute control of the company’s affairs – unless, that is, the Board exercises powers which would normally be exercised by the shareholders at a general meeting.

55. Some non-residents remunerate investment managers with profit or incentive allocations and in consultations HMRC, investment managers and advisors reached a consensus that these are performance fees in substance. As such, these are income in nature and where they are recognised by the UK manager as fee income the allocations may be treated as fees payable by the non-resident when computing the chargeable profit. Furthermore, where HMRC is satisfied that some of the allocations are due to an overseas service provider as remuneration for those services at the arm’s length rate those allocations will have the same treatment in computing relevant excluded income.

56. Deferred fees, or securities or interests provided as reward, may in turn generate some form of return. The legislation draws no distinction between the forms in which the profits of the fund are attributed to deferred fees or other investments as the test is based on beneficial entitlement to the chargeable profits of the non-resident and if the manager’s beneficial entitlement to those profits, including the return on the securities, interests or deferred fees, exceeds 20% the test will not have been met.

57. Options to acquire any securities or interests in the non-resident, within the meanings at S420 ITEPA 2003, need only be considered in the context of the 20% test when the options are exercised.

58. Some investments in a non-resident may be linked to structured products issued to customers which provide a return based on the performance of the non-resident, an example of which would be a bank investing in a non-resident fund and selling a product to a customer on which the return is linked to the performance of the fund. In such circumstances the beneficial entitlement to the income of the non-resident remains with the investor in the non-resident, in this example the bank, and not the holder of the structured product, such as the customer.

Interaction of the 20% test and the independence test.

59. The independence test and the 20% test apply quite separately. For example, a UK investment manager acts for an overseas trading fund constituted as a company. If the investment manager is not acting in an independent capacity in relation to the fund company then the whole of the income of the fund is liable to assessment. If the independence test is satisfied, then the 20% test must be separately addressed. If the investment manager’s interest in the fund company is 25% then that share of the fund’s trading income is liable to assessment.

C. The customary rate test

60. The UK investment manager must receive remuneration at a rate that is not less than customary for the services. The legislation does not define what is ‘customary’ nor does it specify from whom remuneration must be received although, as already explained, HMRC will not regard a UK investment manager as acting in an independent capacity on behalf of the non-resident unless the relationship between them is that of persons carrying on independent businesses and dealing with each other at arm’s length.

61. HMRC will be guided by the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations when determining whether a pricing structure applies the customary rate and will look at whether the net effect of any provision made or imposed by means of a transaction or series of transactions provides the UK investment manager with a level of remuneration which would have been achieved at arm’s length. All circumstances will be taken into consideration, including whether that remuneration has been reduced below the arm’s length rate in any way either before or after payment to the UK investment manager.

62. HMRC recognises that remuneration structures through which the non-resident pays fees in a particular class of investment management take numerous forms, with variations including, for example, investment terms intended to attract certain investors or to ‘lock in’ an investment. The arm’s length definition of customary rate for the independent investment manager means that such arrangements between unconnected parties would not jeopardise this test. Transactions made at arm’s length may include directly or indirectly reduced or rebated fees for unconnected investors in the non-resident. Similarly, rebated, reduced or zero fee arrangements which are made between the manager and the unconnected non-resident for genuine commercial reasons, such as where the manager is receiving a separate fee in respect of the assets in which the non resident is investing, would be regarded as transactions made at arm’s length.

63. In determining whether remuneration has been reduced below the arm’s length rate in any way HMRC will consider both the remuneration received by the UK investment manager and any amounts payable to any person:

for services provided to the non-resident
in connection with the non-resident
that relate to the performance of the non-resident

These amounts, which may be payable by either the non-resident or the UK investment manager, will be treated as reducing the remuneration received in the UK below the customary rate unless they can be shown to be at an arm’s length rate.

64. HMRC consider that in order to meet the customary rate test fees payable to a UK investment manager should be recognised for UK tax purposes when earned. A cash payment may be deferred or reinvested in the fund but this should not affect the recognition of the fee income. As a result, the UK manager would pay tax on the fee for the period when earned and no difficulty with the customary rate test is envisaged in these circumstances. If cash settlement of management fees is deferred the manager may have effectively made a loan to, or investment in, the non-resident, as a result of which the return on that loan or investment would be attributable to the manager and may need to be taken into account for the 20% test.

65. Where a UK investment manager, a partner, LLP member, director or employee of that manager, or a person connected with any of these, acquires a security or an interest of some other kind, in the non-resident or in another entity, for services provided by the manager:

to the non-resident
in connection with the non-resident

the customary rate test will only be met if it can be shown that the manager, partner or LLP member brings the security or other interest into charge to UK tax at its market value or, in the case of a director or employee, that the security or other interest is taxed as employment income in accordance with Part 7 ITEPA 2003. The definition of ‘security’ here will be that found in s420 ITEPA 2003. An interest is intended to apply to an interest in a security or securities and any other interest not within the s420 ITEPA definition.

66. Where an option is brought into UK tax charge at full market value at the time it is exercised HMRC will not regard this remuneration as less than the arm’s length rate for the purposes of the customary rate test.

67. Preferential investment terms involving reduced or rebated fees for directors or staff of the investment manager may be a benefit provided by reason of employment and thus may give rise to an employee income tax charge under ITEPA 2003. Similarly, where the investment manager is a partnership, preferential fee terms may be offered to partners who acquire interests in the non-resident, in which case the ensuing personal tax consequences will apply. HMRC will not ordinarily regard these terms as reducing the investment manager’s fees for services below the arm’s length amount unless significant UK tax avoidance or evasion is suspected, in which case all the facts and circumstances will be considered to determine whether the rate of remuneration is below the arm’s length amount.

68. The vast majority of non-residents easily meet the customary rate test. However, HMRC has occasionally encountered structures in which offshore arrangements have been used to evade or avoid UK tax. Commonly, such structures involve arrangements whereby fees charged to the non-resident are diverted to an offshore vehicle at a non-arm’s length rate. Such arrangements represent an abuse of the exemption, place compliant UK managers at a competitive disadvantage and may result in a non-resident failing to meet the terms of the exemption unless remedial action is taken.

69. HMRC has published guidance in its International Manual on what documentation and evidence is required to demonstrate an ‘arm’s length’ reward. At the time of publication of this Statement that guidance appears at INTM483030 and it is advisable to check that the most up to date advice is being followed.

70. The legislation considers the obligations and liabilities of the non-resident and whether the non-resident is exempt from UK tax on its UK trading profits. A non-resident may be a taxable person and in considering whether that is the case, and whether the UK agent has been rewarded with an arm’s length rate, it may be appropriate in some circumstances for HMRC to ask for information such as statutory financial statements of the non-resident and its agents and a full and factual functional analysis of all services provided to the non-resident.

71. In circumstances where such information is requested to ascertain whether the remuneration has been at the customary rate HMRC would normally ask the UK investment manager, but in some circumstances may ask the non-resident, to provide such information as may reasonably be considered necessary. The information powers available to HMRC would include those relevant to the tax liabilities of the non-resident but where reasonable co-operation is provided by the UK investment manager and/or, where appropriate, the non-resident it is intended that a reasonable opportunity will be given to supply the information voluntarily before the use of information powers is considered.

72. Where appropriate documentation, including a factual functional analysis and an acceptable transfer pricing methodology, is in place to support a tax return, the investment manager will have an opportunity to agree an adjustment to the return to meet the customary rate test or for any other reason, or to have adjustments determined through litigation where such an agreement has not been reached, without the non-resident having thereby failed the customary rate test.

73. However, where the investment manager does not have the appropriate documentation and methodology in place at the time of making a return and the remuneration for that period is less than the arm’s length rate, it is possible that the customary rate test has not been met. HMRC would expect the non-resident and the investment manager to ensure that adequate measures are taken to prevent the fund or its investors being exposed to UK tax and will give reasonable notice of possible action, and the reasons for it, to both the non-resident and its agents if it discovers any circumstances in which the non-resident may not have met the Investment Manager Exemption tests.

74. Each case will be considered on its own facts and it is possible that appropriate corrective action through adjustment to the customary rate will still enable the test to be met. It is not possible to describe every scenario but this general approach is intended to provide certainty on what the legislation requires and to reassure non-residents that a disproportionate outcome will not arise from a corrected failure to meet the test.

‘Investment manager’ is used throughout to denote an agent providing investment or asset management services, or services of a similar nature, in the UK to a non-resident. In practice that person may be termed ‘manager’, ‘adviser’, or similar. ↩
In this context, transactions falling within the meaning of investment transaction in the Investment Manager (Tax) Regulations 2014 as applied and modified by the Investment Manager (Investment Transactions) Regulations 2014. ↩
Directive 2011/61/EU. ↩

Statement of Practice 1 (2001): treatment of Investment Managers and their overseas clients

Part I: background

Part II: relevance of trading

Part III: particular provisions of the Investment Manager Exemption investment transactions

The qualifying conditions

A. The independent capacity test

B. The 20% test

Interaction of the 20% test and the independence test.

C. The customary rate test

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Part I: background

Part II: relevance of trading

Part III: particular provisions of the Investment Manager Exemption investment transactions

The qualifying conditions

A. The independent capacity test

B. The 20% test

Interaction of the 20% test and the independence test.

C. The customary rate test

Is this page useful?

Help us improve GOV.UK

Help us improve GOV.UK