With Brexit dominating the summer news agenda, this briefing is a summary of tax developments that have arisen over the last couple of months relevant to the asset management industry. Please get in touch if you would like further information (our contact details are at the end of this briefing).
Potential for UK withholding tax in respect of fee rebate arrangements
On 9 August 2019 the Upper Tribunal delivered its decision in the case of The Commissioners for HM Revenue & Customs v Hargreaves Lansdown Asset Management Limited. The tribunal held that the "loyalty bonuses" paid to investors by Hargreaves Lansdown Asset Management Limited (HL) were taxable income of investors in relation to which HL was potentially required to withhold tax. The bonuses were structured as "fee rebates"/"trail commissions", in that they were ultimately funded by the fund managers from their annual management charges.
What should you be doing?
The decision will be relevant for many in the asset management sector, with relevant investors facing
additional tax costs and relevant payers (likely to be fund managers or other entities in the fund structure) being obliged to operate withholding arrangements (including, ascertaining whether an exemption from withholding tax applies to each investor). To the extent fund managers have fee specific rebate arrangements we would recommend that these are reviewed and, if necessary, restructured.
Mandatory disclosure rules (DAC 6) – draft regulations and HMRC views published
In 2018, the EU introduced new mandatory disclosure rules (commonly referred to as "DAC 6") for cross border arrangements which satisfy certain "hallmarks". Although the first disclosures are not required until next summer, the rules will apply retrospectively to any arrangements put in place on or after 25 June 2018. The scope of the reportable arrangements under the Directive is very wide and not limited to aggressive tax planning. As the rules will apply to current transactions, practitioners and industry have been clamouring for some time for detail from HMRC as to how they will be implemented.
In July, the Government published, for consultation, draft implementing regulations as well as a consultation document which sets out some information as to how HMRC envisages applying the regime. These materials indicate that the final rules will be closely aligned to the EU Directive but that HMRC is looking to take a reasonable approach in certain cases where the Directive provides scope for unduly wide-ranging obligations. For example, it is helpful that the draft regulations indicate that some (albeit, not all) of the hallmarks will only apply if a main benefit of the arrangements is the obtaining of a tax advantage contrary to the policy intent of the legislation on which the arrangement relies. In addition, it seems that an arrangement will not be cross-border unless other jurisdictions are of some "material relevance" to the arrangement and that HMRC is looking to avoid parties to an arrangement have multiple reporting obligations.
Those hoping that HMRC would take a relaxed approach to implementing DAC 6 (perhaps with an eye on Brexit or because of the UK's existing disclosure of tax avoidance scheme rules) will be disappointed but, it seems that the industry's worst fears will not be realised. Hopefully, the consultation process will provide further clarity.
What should you be doing?
Given the width of arrangements that are potentially within the scope of DAC 6 and international nature of most asset management structures, those within the sector should be reviewing all arrangements they have implemented since 25 June 2018 to ascertain whether they are reportable as well as establishing processes and policies for ensuring on-going compliance with DAC 6 in practice, e.g. putting in place administrative systems for identifying and reporting relevant arrangements.
Off payroll working draft rules published
In July, the Government published draft legislation implementing the expected imposition of new payroll tax obligations on businesses which engage consultants through personal vehicles.
The draft legislation does not alter the fundamental principles of the proposals. As expected, the client will be responsible for deciding whether or not the new rules apply by looking at whether the consultant would be considered to be one of its employees if you ignored the existence of the personal vehicle. If the consultant would be regarded as an employee, the person paying the personal vehicle's fee will generally be required to account for income tax and national insurance contributions (NICs), including employer NICs and the apprenticeship levy. Such payer will be the client, broadly, unless there is at least one intermediary between it and the personal vehicle. However, the rules will not apply to clients that are "small".
The draft legislation provides some helpful detail and clarity, albeit there are still some problematic issues that will hopefully be ironed out through the consultation process.
A particular point to note for non-UK clients is that, under the draft legislation, they will potentially become required to operate UK payroll taxes (including paying employers NICs), even if they have no connection with the UK other than the engagement of the consultants through a personal vehicle. Further, it is not yet clear whether UK clients with offshore consultants need to comply with some of the procedural aspects of the new rules even though the arrangements are outside the scope of UK tax.
What should you be doing?
With less than seven months until the new regime applies, businesses who engage consultants should be
identifying those engagements that will or might continue to be in place in April 2020, considering whether they should be altered in light of the new rules and ensuring that by April 2020 they will have systems in place to comply with the new regime.
Bill implementing ATAD II submitted to Luxembourg Parliament
The EU's Anti-Tax Avoidance Directive (ATAD I) was amended in May 2017. This amendment (ATAD II) extends the scope of the directive so that it applies to more hybrid structures. On 8 August, the Luxembourg government filed a bill containing implementing legislation for ATAD II. Most of the provisions should apply from 1 January 2020, however, those relating to reverse hybrids should not apply until 1 January 2022.
The new rules will extend the Luxembourg anti-hybrid regime that came into force in January in a number of ways. These include, increasing its territorial scope to transactions with parties outside of the EU and adding further structures to those where hybridity will be counteracted.
An example of the last point is the extension of the regime to reverse hybrids. Broadly, these are arrangements involving an entity treated as transparent in Luxembourg but as opaque in the jurisdiction(s) of non-resident associated investors holding, directly or indirectly, at least 50% of its voting rights, capital interests or rights to profit. The effect of the regime would be to make these entities potentially subject to Luxembourg tax. Helpfully, although this would potentially catch common fund vehicles (e.g. the Luxembourg "SCSp” limited partnership) there is an exemption for certain collective investment vehicles.
The Bill increases the situations in which enterprises will be considered to be associated with each other. This is important as the hybrids regime often only applies to arrangements between associated enterprises. Under the Bill, where a person acts together with another person in respect of the voting rights or capital ownership of an entity, the first person is treated as holding the voting rights and capital interests of the entity held by that other person. However, the new rules introduce a 10% threshold for funds, so that an investor holding (directly or indirectly) less than 10% of the interests in a fund and entitled to less than 10% of its profits should not be considered to be acting together with other investors unless there is evidence to the contrary.
What should you be doing?
To the extent that you have Luxembourg entities within your fund structure, we would strongly recommend that you review the implications of ATAD II and whether any restructuring may be required.
Other news - draft clauses for Finance Bill 2020 published and revised DIMF guidance expected
In July, the Government published various draft pieces of legislation to be included in the Finance Bill 2020. Several of these are potentially relevant to holding or portfolio companies e.g. the draft rules for the digital services tax to be introduced from April 2020 and the introduction from that date of a capital loss restriction for corporation tax.
Also, it is expected that HMRC will later this year publish updated guidance on the disguised investment
management fee regime, including in relation to the income-based carried interest rules.
