IFM36305 - Disguised fees: Introduction

Disguised Fees

Introduction

ITA07/S809EZA(3)

Where a disguised fee arises to an individual from an investment scheme (IFM36230), or schemes, the disguised investment management fees (DIMF) rules ensure that it is recognised as trading profit and charged to income tax in the hands of the individual. It is therefore necessary to be able to identify if a disguised fee has arisen to an individual.

Has a disguised fee arisen?

For a fee to be a ‘disguised fee’ there are three conditions that must be met:

• Condition 1 (IFM36310): The individual must perform investment management services in respect of an investment scheme (in the past, present or future)
• Condition 2 (IFM36316): There must be a management fee that arises to the individual from an investment scheme
• Condition 3 (IFM36325): The management fee arising must be untaxed or only partly taxed

Conditions prior to 6 April 2016

There have been amendments to the DIMF rules since their introduction in Finance Act 2015. 

Care should be taken for sums arising between 6 April 2015 and 6 April 2016 as the conditions required for a fee to be a ‘disguised fee’ were different during this period.

There were two main differences to the conditions:

• There had to be a partnership involved in the arrangements (Only applied to sums arising from 6 April 2015 to 5 April 2016, not thereafter) (IFM36345)
• The requirements for Condition 2 (IFM36316) were slightly different prior to 22 October 2015 (IFM36351), as from 22 October 2015, there is legislation (ITA07/S809EZDA and ITA07/S809EZDB) which defines when a management fee arises to other persons or connected companies. Prior to 22 October 2015 a management fee had to arise ‘directly’ or ‘indirectly’ to an individual.