As the world enters yet another year with no clear end to the pandemic in sight, economic recovery will remain at the forefront of government policy around the world. The UK is no different and increased borrowing will eventually have to be met by taxpayers through greater taxation.
The key areas of UK taxation that are likely to impact the asset management industry in 2022 are discussed below. Many of these themes have been ongoing for years whilst some are new legislation.
Salaried member rules – these rules aim to ensure that only ‘true’ partners in a partnership are afforded the beneficial tax treatment. Where this is not the case, the legislation seeks to tax the individuals as employees, thus subjecting them to employer’s NIC and deduction at source. There is growing concern across the asset management industry that HMRC are interpreting the salaried member legislation far more strictly than previously anticipated. HMRC has taken action against a number of asset managers which has resulted in protracted enquiries with very little resolution. This theme is expected to continue in 2022 leading to greater uncertainty amongst managers due to the highly subjective nature of the legislation. It is important for members in an LLP to have robust documentation in place to evidence their true position.
Mixed membership rules – these rules affect partnership structures that have partners or members that are not individuals (e.g. limited company or trustees) and thus a ‘mixed membership’ and look to ensure that a corporate member does not receive an excess profit allocation. HMRC is expected to continue to use these rules to challenge managers with mixed member LLPs on their position, particularly as the only case to date is that of an asset manager. There has been a longstanding concern in relation to how the legislation interacts with genuinely commercial structures and the risk of double taxation.
Transfer pricing – these globally agreed rules underpin the profits and taxes paid by every multinational business and HMRC are likely to continue its focus on them in the new year to ensure asset managers fairly apportion profits based on the value contributed by different jurisdictions. Implications of increased remote working during the pandemic may require additional consideration based on the jurisdiction of physical presence. Increased transparency and information sharing by tax authorities in relation to cross border transactions and the adoption of the OECD’s recommendations from the Base Erosions and Profit Shifting (BEPS) project has also resulted in greater focus in this area. Furthermore, attention on the asset management industry’s ESG credentials is likely to add even more pressure on asset managers to have robust transfer pricing policies in place.
Basis period changes – aligned to the revised start date for MTD for income tax, changes will be made to simplify the rules under which trading profits made by self-employed individuals and partnerships are allocated to tax years. The changes affect LLPs that do not draw up annual accounts to 31 March or 5 April. Although the transition to the new rules will take place in the 2023/24 tax year and the new rules will come into force from 6 April 2024, asset managers with LLPs in their structure that do not draw up accounts to 31 March or 5 April should start thinking about the implications of changing their accounting period vs retaining their existing one.
National Insurance Contributions (NICs) – the new year brings in a temporary 1.25% increase to both the main and additional rates of NICs for 2022/23, reverting back to 2021/22 levels from April 2023 and being replaced by a new 1.25% Health and Social Care Levy. With the increase in NIC adding a 2.5% charge for employment relationships, asset managers will again be looking at the comparison between LLP and Ltd structures, factoring in both the NIC changes and the previously announced increases in corporation tax. Whilst the net impact of effective tax rates is in favour of an LLP structure for profit extraction (with no employer’s NIC on remuneration) consideration will need to be given to what extent this benefit is offset by the salaried and mixed member rules.
Economic crime (AML) levy – the levy will first be charged on entities that are regulated during the financial year from 1 April 2022 to 31 March 2023, and the amount payable will be determined by reference to their size based on their UK revenue from periods of account ending in that year. First payments will be made in the financial year from 1 April 2023 to 31 March 2024. The levy will be paid as a fixed fee (ranging from £5k to £250k) based on the size band with entities with below £10.2m of UK revenue being exempt. Asset managers will need to understand their administrative and payment requirements in 2022 as they prepare for compliance.
Corporate Criminal Offence (CCO) – with HMRC actively enforcing this legislation since its inception, having opened several cases and reaching out to managers through their designated customer compliance managers, it is clear that focus in this area will continue. The rules impose unlimited fines on companies or partnerships enabling tax evasion (both in the UK and overseas) by any of their representatives, i.e. employees, agents, related enterprises etc. and failing to take preventative measures. Asset managers are expected to ensure they have preventative policies and procedures in place to protect themselves from falling foul of the legislation.
Disguised Investment Management Fees (DIMF) – it is likely that in their efforts to raising taxes quickly, HMRC focus their attention on targeted anti-avoidance legislation such as DIMF. The DIMF legislation aims to ensure that fees are correctly charged to UK income tax where investment management services have been undertaken in the UK. The legislation applies to both management and performance fees and imposes an income tax charge on the deemed UK trading income of individuals, where untaxed fees are considered to ‘arise’ to the investment managers, irrespective of whether they physically receive the fees. As the number of enquiries in this area continue to increase, managers should be mindful of any open tax risks that could be subject to scrutiny.
Environmental, Social and Governance (ESG) – in its race towards net zero, the government will continue to encourage businesses to rethink their sustainability strategies, bolstered by tax incentives and greater focus on tax transparency. Certain common tax incentives in this area including the use of electric vehicles, the cycle to work scheme that are likely to gain impetus along with increased focus by asset managers on governance issues around their tax strategy and managing tax risk.
Uncertain Tax Treatment – this measure applies to the corporation tax, VAT and income tax returns (via Self-Assessment or PAYE) of large businesses that are due to be filed on or after 1 April 2022 and requires large businesses to notify HMRC where they have adopted an uncertain tax treatment that HMRC is not already aware of through its ongoing customer compliance relationship. Businesses will be required to notify HMRC only if the tax advantage exceeds a £5m threshold. A number of managers have expressed concern over the level of subjectivity proposed by the legislation and an increased level of uncertainty is expected while the rules remain untested.
Mandatory Disclosure Rules (MDR) – in 2021, the government announced that it would implement the OECD’s model MDR for Common Reporting Standard avoidance arrangements and opaque offshore structures. The model rules require taxpayers and intermediaries to disclose information on these types of arrangements and structures to HMRC. The government envisages that the MDR regulations will come into force in Summer 2022 and replace the DAC 6 rules. With the consultation closing in February, asset managers will only be left with a short time frame to understand their reporting obligations under the rules in advance of its implementation.
Pillar II – as part of this consultation released in the new year, the government is seeking views on the implementation of Pillar II in the UK, which will help ensure large multinational enterprises (with consolidated group revenue of at least €750m) operating within the UK pay a global minimum level of tax (15%) with limited exclusions applying to investment funds. This is in line with HMRC’s ongoing initiative to significantly limit / end international tax avoidance and ensure that big businesses pay their fair share of tax. Asset managers will need to consider their reporting and payment obligations under the rules that are expected to come in from 2023.
Qualifying Asset Holding Companies (QAHCs) – this measure forms part of a wider review of the UK funds regime to enhance the UK’s competitiveness as a location for asset management and for investment funds. Following two consultations, the government introduced a new framework for the taxation of QAHCs and certain payments that QAHCs may make. Taxation in the new regime is based on existing tax rules and comes into effect from 1 April 2022. This would be of particular interest to funds that already use SPVs / asset holding companies to hold investments.