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HM Revenue and Customs Brief

Volume 563: debated on Tuesday 21 May 2013

On 25 March HMRC published HM Revenue and 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 are determined to improve the UK’s competitive position as a centre for investment management.

The Government have 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 expect to lay the regulations, setting out the detailed rules, subject to the usual parliamentary process.