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HMRC internal manual

International Manual

HM Revenue & Customs
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Non-residents trading in the UK: through UK investment managers, brokers or Lloyd’s agents: Customary remuneration test: avoidance

Arrangements not at arm’s length

Sometimes arrangements are made whereby fees charged to the non-resident are diverted to an offshore vehicle at a non-arm’s length rate (see INTM269170). Such arrangements represent an abuse of the exemption, and may result in a non-resident failing to meet the terms of the exemption unless remedial action is taken.

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.

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.