HM Revenue & Customs yesterday announced details of a revised Statement of Practice covering the tax treatment of UK-based investment managers and their overseas clients.
The new Statement of Practice will be released shortly in draft for consultation, but was discussed yesterday at a seminar for hedge fund managers, hosted by Deloitte in London.
Under UK tax rules, a non-UK resident fund, with a UK-based investment manager, could be subject to UK tax on its profits unless it meets certain conditions. These are known as the investment manager exemption (IME) rules. The draft revised Statement of Practice sets out HMRC's guidance as to how these rules will be interpreted in practice.
To qualify for the IME and so escape a potential UK tax exposure, an offshore fund and its UK investment manager must meet a series of conditions. For example: only certain transactions are permitted; the investment manager must be independent of the overseas fund; there are strict limits on the investment manager's interest in the fund; and, the remuneration received by the investment manager must be customary.
The tax authorities emphasise that the consultation process is intended to assist the investment management industry by ensuring that the guidance reflects developments in the sector. They point out that the significant growth in both the size and complexity of transactions over the past few years means that the original Statement of Practice (SP1/01) fails, in some cases, to provide the certainty that the industry desires.
HMRC stated that the revised draft is an initial response to the concerns expressed by the industry. Moreover, as yesterday's seminar demonstrated, it is keen to consult with as many interested parties as possible before a final version of the Statement of Practice is issued.
Andrew Martyn, one of the two senior HMRC representatives responsible for this initiative, acknowledged both the importance of the UK investment management industry to the economy as a whole, and the importance of retaining a tax regime which continues to foster the growth and innovation seen in this industry over the past few years.
However, Martyn commented that it was also important for the tax regime to be equitable between different taxpayers.
Speaking at the seminar, Debbie Anthony, Head of Deloitte's hedge fund practice, drew attention to the major changes from the existing Statement of Practice.
There has been considerable uncertainty as to whether loan origination activity fell within the IME and some clarification on this point has been provided with regard to loan syndication activity; participation as a syndicate member is within the IME but where the manager takes a lead in arranging the syndicate, this function falls outside the IME.
The independence rules have been amended to reflect changes in legislation. IN addition, an attempt has been made to define the term 'customary remuneration'.
Just as important however, commented Anthony, is what has not been addressed. She said: 'Many in the industry would like to see a widening of the scope of the definition of investment transaction to include physical commodities, for example, as the requirement to deal in exchange trade products leads to market distortions. Uncertainty as to whether carbon emission credits fall within the IME has also not been resolved, which means the business is moving outside the UK. While these changes may require a legislative solution rather than revised guidance. it is hoped that these, and other issues, will also be properly debated and resolved as part of the overall consultation process'.
The draft of the revised SP1/01 will be published for wider consultation in the near future.