HM Treasury Rethinks the UK Tax Treatment of Fee Rebates


In a Written Ministerial Statement made in UK Parliament on 21 May 2013, Treasury Economic Secretary Sajid Javid MP announced the Treasury’s intention to make a crucial and very welcome clarification to the recent HMRC Brief 04/13 on fee rebates. In short, Brief 04/13 stated that fee rebates – defined as payments to fund investors made by persons other than the fund itself – should be paid subject to withholding tax and should be taxable for investors. 

HMRC Brief 04/13 caused significant concern for the investment management industry because of the breadth of the proposed withholding and the lack of certainty regarding the treatment of specific classes of investors. In particular, the Brief left open the treatment of offshore investors who receive such rebates, who unlike UK resident investors would not normally be subject to withholding tax on distributions.

In the Written Ministerial Statement, the Secretary stated that to charge withholding tax on such investors would have a “profoundly negative impact on the international competitiveness of the UK funds industry”, at odds with the Government’s efforts – acknowledged in the Budget 2013 – to maintain the UK’s role as a world-class financial centre.

Following the Written Ministerial Statement, the Government will publish two amending Statutory Instruments, repealing the withholding tax levied on rebates where these are made to investors who are not resident in the UK for tax purposes. It is expected that the amending Statutory Instruments will be laid following a four-week consultation period.

The implications of the Statement are clearly beneficial for UK resident managers of funds with largely non-UK resident investors. Fund managers will not have to withhold tax on fee rebates if the investor is not resident in the UK for tax purposes, regardless of whether the fund itself is a UK or non-UK fund. However, the withholding obligation will remain in respect of UK resident investors, other than those who are entitled to receive payments gross under existing legislation (such as UK corporations, charities and pension funds). In practice, this means that only UK individuals and other limited classes of investors (such as certain trustees and partnerships) should remain within the scope of HMRC Brief 04/13.

The UK funds industry will no doubt welcome HMRC’s clarification, reflecting the Treasury’s and HMRC’s recent approach to bolster its competitiveness.

The Written Ministerial Statement can be viewed here.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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