SALF705 - Self Assessment for Non-Residents: Agents Who are Not Treated as UK Representatives

Introduction

7.34	Certain categories of agents are specifically exempted from the income tax rules in FA95/S126 or corporation tax rules in FA2003/S150 which impose obligations and liabilities on the UK representatives of non-residents.

Exempt agents: casual agents, Lloyd's' members' agents, brokers and investment managers

FA95/S127 (1) and (13)

7.35

Where they meet the necessary exemption criteria the following are not treated as UK representatives of non-residents and therefore are not subject to the obligations and liabilities imposed by FA95/S126 or FA2003/S150.

Lloyds syndicates members' agents and managing agents (as defined at FA94/Part4/Chapter 5)Underwriting profits will continue to be taxable in full through Self Assessment by non-resident members in the same way as for resident members.
Brokers
Investment managers.

Brokers

FA95/S127(2) & FA2003/Sch26/Para 2

7.36

There are four conditions which must all be met before the specific exemption for brokers can apply. These are as follows.

The broker must be carrying on the normal business of a broker in a market where brokers normally act.
The transaction must be carried out by the broker in the ordinary course of the broker's business.
The broker's fee must be at least the customary fee for that class of business.
The non-resident must not, during the same chargeable period, carry out any trading transactions through the broker other than those which are excluded by this rule.

The purpose of these conditions is to exempt only those brokers who are acting in the ordinary course of their business on arm's length terms.

Investment managers

FA95/S127 (3) & FA2003/Sch26/Para 3

7.37	The four conditions applying to brokers are mirrored in the conditions which must be met before the exemption for investment managers can apply. These are as follows. The investment manager must be carrying on the business of providing investment management services. The transaction must be carried out by the investment manager in the ordinary course of the investment management business. The investment manager's fee must be at least the customary fee for that class of business. The non-resident must not, during the same chargeable period, carry out any trading transactions through the investment manager, other than those which are excluded by this rule.
7.38	In addition, the following three further conditions must also be met. The transactions must be investment transactions, (paras 7.42-7.54). The investment manager must act on behalf of the non- resident in an independent capacity, (paras 7.45-7.48). The investment manager must not be entitled to more than 20% of the profit from the transactions on behalf of the non-resident: (paras 7.49-7.52).
7.39	The effect of these conditions is to exempt only those investment managers who are acting in the ordinary course of their business on arm's length terms and are independent of the non-resident.

Investment managers: the investment transaction condition

FA95/S127 (12) & FA2003/Sch26/Para 3 & SI2003/2172-3

7.40

The investment manager exemption is intended to cover the discretionary management of financial investments. It therefore applies only where the investment manager carries out investment transactions on behalf of the non-resident.

7.41

‘Investment transaction’ is defined identically for income tax at FA95/S127 (12) for corporation tax at FA2003/Sch26/para 3 and includes transactions in

shares
stock
securities
futures contracts (excluding those relating to land)
options contracts (excluding those relating to land)
foreign currency
money placed at interest.

This definition was extended by Statutory Instruments with effect from 12 September 2003 to include financial swap transactions such as credit derivatives.

7.42

Most financial instruments, including futures and options contracts in physical commodities, are covered by this definition. Spot transactions in physical commodities (including precious metals such as gold bullion) are outside the definition.

Investment managers: the ‘independent agent’ condition

FA95/S127(3) & FA2003/Sch26/Para 3

7.443	The exemption applies only where the investment manager is the ‘independent agent’ of the non-resident. This is defined in the same way as in para 7.22 above. It requires the relationship between the investment manager and the non-resident to have the legal, financial and commercial characteristics of one between persons carrying on independent businesses that deal with each other at arm's length. Where the conditions in FA95/S127 (3) or FA2003/Sch26/Para 3 are met, it is considered that the independence requirement is satisfied. Relevant factors, detailed in the Statement of Practice 01/2001 include: Where the provision of services to the non-resident and persons connected with the non-resident is not a ‘substantial part’ (see para 7.46) of the investment management business. From the start of a new investment management business provided the above condition was satisfied within 18 months. Where the manager intended to satisfy either of the above conditions and failed to do so for reasons outside his or her control, having taken any reasonable steps to fulfil the intention. Where investment management services are provided to a collective fund, the interests in which are quoted on a recognised stock exchange or otherwise freely marketed, for instance, as units in a unit trust. Where investment management services are provided to a 'widely held' (see para 7.47) collective fund.
7.44	The provision of services to the non-resident and persons connected with the non-resident is not a ‘substantial part’ of the investment management business where it does not exceed 70% of that business, either by reference to fees or to some other measure where that would be more appropriate. Moreover, where investment management services are provided to a collective investment scheme constituted as a partnership, participants in the scheme are not regarded as connected persons for this purpose solely by reason of membership of the partnership.
7.45	A fund is ‘widely held’ if either no majority interest in the fund is held by five or fewer persons and persons connected with them, or if no interest of more than 20% is held by a person and persons connected with him.
7.46	The above list is not exhaustive. Cases which fall outside these categories are considered on their own facts. Moreover, a subsidiary is not to be considered not independent of its parent company in this regard solely because of the parent's ownership of the share capital.

Investment managers: the ‘20%’ condition

FA95/S127(3)(d) and (4)-(7) & FA2003/Sch26/Para 4

7.47	This condition is satisfied where the investment manager, together with any persons connected with the investment manager (as defined at ICTA88/S839), are not entitled to more than 20% of the taxable profits of the non-resident from transactions carried out through the investment manager. Where the 20% limit is exceeded, the exemption will apply to the rest of the taxable profits (i.e. the part to which the investment manager and connected persons are not entitled) provided the other conditions for the exemption are satisfied.
7.48	The 20% rule is satisfied where: throughout a period not exceeding five years for which the investment manager and persons connected with the investment manager intended their beneficial interest in the total taxable income for the period from transactions carried out through the investment manager not to exceed 20% provided any failure to meet the 20% limit was for reasons wholly or partly outside their control and, nevertheless, the intention was fulfilled insofar as it was reasonable to do so.
7.49	Performance related fees do not normally affect the operation of the 20% rule, as the rule looks at the beneficial interest in the taxable profits of the non-resident from trading through the investment manager. Professional fees, including performance related fees, are normally allowable as a deduction in arriving at those profits, and are thus netted off before applying the 20% rule.
7.50	The provisions in FA95/S127 (7A) to (7D) & FA2003/Sch26/Para 5 ensure that where investment management services are provided to a collective investment scheme which is transparent for tax purposes, the 20% rule is applied by looking at the scheme as a whole. It is treated as satisfied by each participant in the scheme, where the scheme, if it were taxed as a separate entity would not be regarded as carrying on a financial trade in the UK, whatever the level of beneficial entitlement, and would be regarded as carrying on a trade, provided the 20% rule is satisfied in respect of the beneficial entitlement of the investment manager and connected persons to the taxable income of the scheme.

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