INTM269170 - Non-residents trading in the UK: through UK investment managers, brokers or Lloyd’s agents: customary remuneration test

Facts to be considered

The UK investment manager must receive remuneration at a rate that is not less than customary for the class of business. That means considering whether the arrangements provide the UK investment manager with a level of remuneration which would have been achieved at arm’s length. When determining whether a pricing structure applies the customary rate, all circumstances are 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 i.e. HMRC considers the net effect of any provision made or imposed by means of a transaction or series of transactions. (See INTM269175.)

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, or is agreeing to a lock-in of its investment, would be regarded as transactions made at arm’s length.

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. 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.

Where the investment manager is paid in the form of a security, or an interest of some other kind, in the non-resident or in another entity, the customary remuneration test will only be met if it can be shown that the manager 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 ITEPA03/Pt7. This will be particularly so if the director or employee of the fund manager is given preferential investment terms involving reduced or rebated fees.

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, or
  • in connection with the non-resident, or
  • 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.