Part 13Tax avoidance

F1CHAPTER 5EDisguised investment management fees

809EZCMeaning of “carried interest” in section 809EZB

(1)

For the purposes of section 809EZB “carried interest” means a sum which arises to the individual under the arrangements by way of profit-related return.

This is subject to subsections (3) to (8) (sums where no significant risk of not arising); and see also section 809EZD (sums treated as carried interest).

(2)

A sum which arises to the individual under the arrangements does so by way of “profit-related return” if under the arrangements—

(a)

the sum is to, or may, arise only if—

(i)

there are profits for a period on the investments, or on particular investments, made for the purposes of the scheme, or

(ii)

there are profits arising from a disposal of the investments, or of particular investments, made for those purposes,

(b)

the amount of the sum which is to, or may, arise is variable, to a substantial extent, by reference to those profits, and

(c)

returns to external investors are also determined by reference to those profits;

but where any part of the sum does not meet these conditions, that part is not to be regarded as arising by way of “profit-related return”.

(3)

Where—

(a)

one or more sums (“actual sums”) arise to the individual under the arrangements by way of profit-related return in a tax year, and

(b)

there was no significant risk that a sum of at least a certain amount (“the minimum amount”) would not arise to the individual,

so much of the actual sum, or of the aggregate of the actual sums, as is equal to the minimum amount is not “carried interest”.

(See subsections (7) and (8) as to how the minimum amount is to be apportioned between the actual sums where more than one actual sum arises in the tax year.)

(4)

For the purposes of subsection (3)(b) assess the risk both—

(a)

in relation to each actual sum (and the investments to which it relates) individually, taking into account also any other sums that might have arisen to the individual under the arrangements instead of that sum, and

(b)

in relation to the actual sum or sums and any other sums that might have arisen to the individual under the arrangements by way of profit-related return in the tax year (and the investments to which all those sums relate) taken as a whole;

(so that, in a particular case, some of the minimum amount may arise by assessing the risk in accordance with paragraph (a) and some by assessing it in accordance with paragraph (b)).

(5)

For the purposes of subsection (3)(b) assess the risk as at the latest of—

(a)

the time when the individual becomes party to the arrangements,

(b)

the time when the individual begins to perform investment management services directly or indirectly in respect of the scheme under the arrangements, and

(c)

the time when a material change is made to the arrangements so far as relating to the sums which are to, or may, arise to the individual.

(6)

For the purposes of subsection (3)(b) ignore any risk that a sum is prevented from arising to the individual (by reason of insolvency or otherwise).

(7)

Where more than one actual sum arises in the tax year, the minimum amount is to be apportioned between the actual sums as follows for the purposes of subsection (3)—

(a)

so much of the minimum amount as is attributable to a particular actual sum is to be apportioned to that actual sum, and

(b)

so much of the minimum amount as is not attributable to any particular actual sum is to be apportioned between the actual sums on a just and reasonable basis.

(8)

For the purpose of subsection (7) any part of the minimum amount is attributable to a particular actual sum to the extent that there was no significant risk that that part would not arise to the individual in relation to that actual sum, assessing the risk in accordance with subsection (4)(a).