One of the arguments used to justify the need for mixed partnerships was the need that some firms argue that they have to warehouse profits which cannot be paid to partners in cash as a result of regulatory requirements. In particular under the Alternative Investment Fund Managers Directive, AIFM firms are obliged to withhold elements of remuneration payable to certain staff (including partners or members of an LLP) and to make the right to receive this conditional or subject to clawback. Where these rules apply to employees (or to disguised employees, as discussed above), there is no particular problem as tax is payable only when the remuneration is paid out, but where the rules apply to members of an LLP, the tax treatment is tat all of the profit of an LLP gets to be taxed in the tax year applicable to the year in which the profits are made irrespective of whether such profits are paid out.
During the consultation these firms argued that the crack down on mixed member arrangements would unfairly hit AIFM firms – HMRC would be taking away the only means available to mitigate the position under which members would be taxed without receiving the cash with which to pay the tax and may find that the expected profit share on which tax had been paid would never materialise.
HMRC has accepted this argument and for AIFMD firms will allow the profit which is required to be deferred to be allocated not to the relevant individual but instead to the firm itself, which will pay tax on them at the higher rate. When the individual is able to access those profits, he or she will be taxed but will receive a tax credit in respect of the tax paid by the firm and any overpayment of tax may be repaid.
The new arrangements apply to "AIFMD firms" which covers both those managing an alternative investment fund and those to whom a management function is delegated (recognising that the AIFMD requirements can extend tot hose staff also). An election to apply the regime can be made within 6 months of the first period of account for which the election is to have effect, so there is an ability to look at whether such an election is needed with hindsight.
This is a welcome innovation for the firms affected but it is questionable whether this goes far enough. AIFMs are not the only firms caught by the need to defer profit shares. Similar (although less prescriptive) restrictions can apply under the FCAs Remuneration Code and something very similar to the AIFMD rules is pending for UCITS managers.
So what does this mean for you?
If you are an AIFM firm you will anyway be needing to come to grips with how the AIFMD affects your remuneration arrangements. This new concession should be helpful in providing some flexibility on how tax is paid that will help you comply with the rules.
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