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'Rebates' of fund management fees to non-resident investors

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On 25 March 2013 Revenue & Customs Brief 04/13 was published to clarify the tax treatment applying to payments made to certain investors in collective investment schemes or policies of insurance where the payment did not arise directly as a distribution from the investment but was made to the investor by the fund manager or another intermediary party.

Read Revenue and & Customs Brief 04/13

It has become clear that, in cases where such payments are made to investors not resident in the UK, that the correct tax treatment as prescribed by legislation, and explained in the Revenue & Customs Brief, is not in line with general tax policy for other payments from collective investment schemes made to non-resident investors. As a result the following statement was made by Sajid Javid MP, Economic Secretary to the Treasury on 21 May 2013:

'On 25 March HMRC published HM Revenue & Customs Brief 04/13, which clarified the tax position of some regular payments to fund investors made by persons other than the fund itself. The Brief stated that these payments, which are usually characterised by industry as rebates of the Annual Management Charge, are taxable and should be subject to withholding tax and then further taxed as necessary at the investor's marginal rate.

It has been brought to the Government's attention that offshore investors also frequently receive such 'rebates'. Given the legal position, this means that tax should now also be withheld on rebates paid to offshore investors.

However, unlike distributions to domestic investors, offshore investors are not normally subject to withholding tax on either interest or equity distributions. The 'rebates' paid to investors are economically similar to additional distributions from the fund. Collecting withholding tax for offshore investors may therefore create distortions in how different forms of distribution from the fund are treated for tax purposes.

This difference could have a profoundly negative impact on the international competitiveness on the UK funds industry. Imposing a requirement to withhold tax would therefore be at odds with the Government’s Investment Management Strategy, published at Budget 2013. The Government is determined to improve the UK's competitive position as a centre for Investment Management.

The Government has therefore decided to ensure that this unintended consequence of the law as clarified by Revenue Brief 4/13 does not create inconsistencies in the tax system or impact on UK competitiveness.

The Government will imminently publish two short statutory instruments amending the Authorised Investment Funds (Tax) Regulations 2006 and also The Offshore Funds (Tax) Regulations 2009. These will remove the duty to withhold tax from 'rebates' of the Annual Management Charge in most cases where these payments are made to investors who are not UK resident for tax purposes.

Following a four week consultation period, the Government expects to lay the regulations, setting out the detailed rules, subject to the usual parliamentary process.'

Following this statement, HM Revenue & Customs (HMRC) has published draft Statutory Instruments along with a Tax Information and Impact Note (TIIN), which are available from the links below.

The Authorised Investment Funds (Tax) (Amendment) Regulations 2013 (PDF 22K)

The Offshore Funds (Tax) (Amendment No. 3) Regulations 2013 (PDF 22K)

Download the TIIN (PDF 47K)

Please send comments to:

John Buckeridge
Room 3C/06
100 Parliament Street

Or please email HMRC using the link below.

John Buckeridge

The deadline for comments on this is by Tuesday 25 June 2013.

Please note that it is most unlikely that comments received later than this will be able to be taken into account as the Government is committed to putting the regulations into place as soon as possible for the benefit of the UK fund managers and UK funds.

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