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Carried interest: HMRC dismisses GLP's claims

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The Good Law Project (GLP) recently challenged HMRC’s approach to the taxation of carried interest, contending that the regime has no basis in law and that the normal income tax rules should apply in most cases (rather than carried interest being treated as capital for tax purposes, in accordance with a 1987 agreement with industry). GLP reported that HMRC ‘has now conceded the key argument ... accepting that the money managers receive from buyout funds – known in the trade as their “carried interest” – would be taxable as trading income in the hands of UK tax resident individuals.’

However, in response, an HMRC spokesperson said: 'This is nonsense and an irresponsible misrepresentation of our position. We have always said that whether a fund is trading or investing depends on the facts of each case and we don’t take a blanket approach to the taxation of private equity funds. This is the right way to determine the tax which is owed under the law and, if we have reason to question a declaration of carried interest to us, we will query it to ensure the right tax is paid.'

HMRC said that GLP had selectively quoted their letter (and missed out the crucial ‘in circumstances where…’ part in para 33(b)), which makes it sound like HMRC are conceding their position when in fact they're simply stating what they’ve stated all along – namely, that in circumstances where carried interest is generated from an underlying fund which is carrying on a trade, that carried interest would be taxable as trading income.

The department added:

  • 'We assess the risk of non-compliance in relation to carried interest. There are a number of opportunities where non-compliance would be identified throughout our risk based checks and we have a range of sources on which we base these checks.
  • 'Where we have reason to believe the right tax is not being paid, we take appropriate action. Based on our compliance activity, we are confident there is a high level of compliance with the tax rules for carried interest.
  • 'HMRC guidance helps support taxpayers in meeting their compliance obligations. However, in complex transactions taxpayers may wish to seek professional advice on the application of the law to their specific fact pattern.'
Issue: 1636
Categories: News
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