Part 2 – Tax Considerations
For any Alternative Investment Fund Manager (AIFM), the main factors that define the success of their business will be the amount of capital they are able to raise and the performance of the funds that they manage.
Part 2 – Tax Considerations
For any Alternative Investment Fund Manager (AIFM), the main factors that define the success of their business will be the amount of capital they are able to raise and the performance of the funds that they manage.
Administrative matters are quite rightly a secondary concern, but it is still important these are dealt with competently as failure to do so may result in the AIFM incurring fines and penalties, breaching its regulatory requirements with the Financial Conduct Authority (FCA) or paying too much tax.
In this short series of articles Blick Rothenberg Partner Peter Scott summarises the various filing requirements of a new UK-based AIFM and other issues it may face.
We hope these insights help you to manage your business in a proficient manner allowing you to free up as much time as possible for you to concentrate on improving the performance of the funds you manage.
Value Added Tax
Unless it markets to UK retail investors, as a provider of financial services the AIFM will be able to recover the VAT it suffers on most of its expenses (VAT cannot be recovered on client entertaining).
The AIFM would also normally have to charge VAT at 20% on the management and performance fees it charges the fund. However, this does not have to be charged if the fund is based outside the UK.
In order to recover VAT on the expenses it suffers, the AIFM must first register for VAT. This is done by filling in a VAT application form which typically takes a couple of months for HM Revenue & Customs (HMRC) to process.
Once the AIFM is registered for VAT it can start to reclaim the VAT that it has suffered. It can also reclaim the VAT that it suffered on expenses in the six months prior to becoming registered and the VAT it has suffered on assets it owns at the time of registration, providing they were purchased in the last three years.
As a VAT-registered entity, the AIFM is required to submit a VAT return each quarter within one month and seven days of the quarter end. This includes details of the sales and purchases the AIFM has made in the quarter and the total VAT the AIFM is reclaiming.
HMRC will then make a payment of VAT based on the return.
Partnership tax
If the AIFM is an LLP it will be required to submit a partnership tax return for each tax year. This is normally filed online and must be filed by the 31 January which follows the end of the tax year.
The partnership tax return is based on the financial statements for the accounting period which ends in the tax year. Therefore, if the AIFM has an accounting reference date of 31 December then the partnership tax return for the year ending 5 April 2022 will be based on the financial statements for the period ending 31 December 2021. From April 2024 this arrangement is changing meaning that the partnership tax return will be based on the profit made in the year ending 5 April (or 31 March if easier) regardless of when the partnership’s accounting reference date is.
The partnership tax return reports the taxable profits made by the LLP in the relevant accounting period and how these have been allocated to each partner. The LLP does not pay tax on these profits – it is up to the individual partners to report these profits in their personal tax returns and pay the relevant amount of Income Tax on the profits.
Some partners in the LLP may be deemed employees for tax purposes. This would result in the LLP being charged employment taxes on any amounts paid to those members in addition to the taxes already paid by those members on their partnership profit shares. Partners who play a significant role in running the LLP will not be in danger of being deemed employees, but this may be a risk in respect of some junior partners.
Corporate tax
If the AIFM is a company it will be required to submit a Corporation Tax return for each accounting period based on the financial statements for that accounting period. This is done online, usually by the company’s accountants, and must be filed within 12 months of the end of the period.
The Corporation Tax return reports the taxable profits of the company and calculates the Corporation Tax payable on those profits. The Corporation Tax is payable nine months and a day following the end of the accounting period and interest is charged on any tax which is paid late.
If the AIFM has profits in excess of £1.5m then it has to pay Corporation Tax in four quarterly instalments rather than in one lump sum. The first quarterly instalment is due on the 14th of the seventh month of the accounting period with subsequent instalments due at three-month intervals.
Personal tax
If the AIFM is an LLP, then each partner will also need to register with HMRC to be taxed personally on their share of the partnership’s profit. This is done by submitting an SA401 form by post within four weeks of the AIFM being incorporated or the partner joining the partnership.
Each partner will need to pay Class 2 and Class 4 National Insurance. Class 2 National Insurance is currently £3.05 per week and Class 4 National Insurance is calculated based on the profits of the AIFM.
Once the partnership has allocated profits to each partner that partner will need to include those profits on his/her personal tax return and pay tax on them. The personal tax return must be filed on 31 January each year for the tax year that preceded it (so the tax return for the year ended 5 April 2022 must be filed by 31 January 2023). The tax return is filed online.
The Income Tax due on each partner’s profits is also payable by 31 January. At the same time the partner will need to pay a payment on account for the next tax year, calculated as half of the tax payment due for the preceding year. A further payment on account of the same amount is due six months later (on 31 July).
How Blick Rothenberg can help
We hope that you have found this article helpful in giving you an understanding of some of the general issues and requirements you will face in setting up an AIFM.
While this series of articles focuses on general issues applicable to most UK AIFMs there may be some issues specific to your circumstances which also need to be considered. If you would like to discuss any of the content of this article further, please contact Peter Scott directly via [email protected].
For all our latest Financial Services news and insights, visit our Financial Services hub here.
