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As expected, the Government have announced that legislation will be
included in the Finance Bill 2008 to bring into effect changes to the IME.
Although the Pre-Budget report announced that the definition of investment
transaction for these purposes would be aligned with the activities
regulated by the FSA, it has now been confirmed by HMRC that such an
alignment will not be pursued given the complexity required to tailor the
FSA's list of activities to those relevant to the investment management
industry. Instead, a single list of qualifying transactions for the purposes
of the IME will be maintained. This list will replace the various lists in
both primary and secondary legislation. In addition, a streamlined statutory
process for adding transactions to the list has been announced so that
appropriate updates can be made more quickly and more easily.
These measures will have effect on or after the date that Finance Bill 2008
receives Royal Assent, although a provision is included to ensure that the
existing definition of an investment transaction continues to have effect
until replaced by an order after that date.
The Government has also announced changes in the IME to remove what has
become known as the 'cliff edge' provisions. Under the proposed changes,
where the investment manager undertakes a transaction which falls outside
the definition of investment transaction, and thereby fails the IME, only
that transaction will fall within the scope of UK tax, rather than
potentially the whole fund as is currently the case. The change not just
mitigates the risk of UK tax on the inadvertent undertaking of
non-qualifying transactions, but also introduces the scope for non-residents
to enter into taxable transactions through the same investment manager
without subjecting the qualifying transactions to UK tax.
Our view
Both of these measures had been announced to some extent in the
Pre-Budget report of October 2007. We welcome the announcement to
abandon the proposal to align investment transaction with the FSA
definition, as this would not have had much practical benefit. Whilst our
preference would have been to identify specific transactions to be
excluded from the definition of ‘investment transaction’, we hope that
the new proposals will improve the flexibility of the IME and enable the
rules to adapt to changes in the investment world.
We believe that the proposal to eliminate the ‘cliff-edge’ scenario will
significantly reduce the tax risk for hedge fund managers by enabling
them to undertake activities which would previously have resulted in a
breach in the IME, provided these activities are taxed in the UK. We
believe that this is a logical and sensible solution to an otherwise
disproportionate risk. |
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