Consultation outcome

Expanding the Investment Transactions List for the Investment Management Exemption and other fund tax regimes

Updated 9 December 2022

Summary

Subject of this consultation

The Investment Manager Exemption (IME) uses qualifying tests to provide certainty that non-UK resident investors can appoint UK-based investment managers to conduct certain investment transactions on their behalf, without bringing them into the scope of UK taxation. The Investment Transactions List (ITL) establishes the types of transactions that may qualify for the IME. The ITL is kept under review to reflect continued evolution of the investment management industry. The ITL may also be used by certain fund tax regimes.

Scope of this consultation

The government announced on 4 April 2022 its intention to expand the ITL used for the purposes of the IME to include cryptoassets. HMRC is asking for views on the scope of the extension.

Who should read this

HMRC would like to hear in particular from tax practitioners, investment managers, representative bodies, administrators and other interested parties.

Duration

Monday 23 May 2022 to Monday 18 July 2022

Lead official

The lead officials are Ahmed Dar and Eleanor Costello of HM Revenue and Customs (HMRC).

How to respond or enquire about this consultation

Responses to this consultation can be sent to investmentmanagerexemption@hmrc.gov.uk or by post to: 

Investment Manager Exemption Team
HMRC 
B8.22 Stratford Regional Centre 
Central Mail Unit
Newcastle
NE88 

Enquiries about this consultation should be directed to Ahmed Dar on 03000 599926.

Additional ways to be involved

HMRC will consider holding meetings with interested parties to discuss the proposals in this consultation. The timing, format and venue of meetings will be informed by expressions of interest received.

After the consultation

A summary of responses together with a draft of any legislation or HMRC order will be published in autumn 2022.

Getting to this stage

This consultation follows an announcement on 4 April 2022. This is the first stage in the formal consultation process.

Previous engagement

HMRC has held informal discussions with interested stakeholders to identify the key issues that need to be addressed, and the proposals for change.

1. Introduction

The UK government’s cryptoasset strategy

The government’s FinTech Sector Strategy was introduced by the Chancellor of the Exchequer in March 2018. It sets out the government’s ambition to work with the UK’s financial services sector to maintain the UK’s position as one of the leading financial centres globally, and to ensure that the UK is the world’s most innovative economy.

On 4 April 2022 the Economic Secretary to the Treasury announced the next steps for the government’s FinTech Sector Strategy at the Innovate Finance Global Summit. The government seeks to establish clear UK tax and regulatory treatment of cryptoassets to place the UK at the forefront of safe, sustainable and rapid innovation in cryptoasset and blockchain technologies.

One of those measures will be to expand the IME to include types of cryptoassets. This will provide certainty of tax treatment to UK investment managers and their non-UK resident investors who are seeking to include cryptoassets within their portfolios, and we anticipate that this will also encourage new cryptoasset investment management businesses to base themselves in the UK.

In this consultation, we use the term ‘investment manager’ to refer to businesses or individuals who provide investment management services to investors in collective investment arrangements. We use the term ‘fund’ to refer to such arrangements.

The purpose of this consultation is to understand:

• the types of cryptoassets which should be included within the IME
• whether there is a case for extending this change to other tax regimes which also use the Investment Transactions List (ITL)

Background to the Investment Management Exemption

The UK is a world leading fund management location and UK based investment managers are subject to tax on the investment management fees that they receive. The majority of the world’s funds are not located in the UK, and the funds and their investors are subject to the tax rules of their countries of residence. A non-resident fund that is managed by an UK based investment manager who is determined to be an agent of independent status, would not usually be expected to have a taxable presence in the UK but there can be uncertainty on this point.

The IME provides an assurance to investment managers and investors that, where qualifying tests are met, there will be no charge to corporation tax for overseas corporate investors, or to income tax for individuals. This provides non-resident funds with the ability to appoint UK based investment managers without creating a risk of UK taxation for the foreign domiciled fund. The IME is an important factor in the UK fund management industry’s attraction for non-resident funds, and the certainty that it provides reduces the cost to HMRC of operating the UK’s tax rules on complex fund management structures.

For corporation tax, UK based investment managers transacting on behalf of foreign domiciled funds which are trading, may create a taxable presence in the UK unless the investment manager is considered to be acting on behalf of the fund as an agent of independent status. The IME provides greater clarity on the circumstances in which a UK investment manager will be classified as an independent agent, thereby not creating a UK taxable presence for foreign funds.

For income tax, the IME raises the threshold for chargeability so that the same criteria apply to limit taxability in the UK even when there is no tax treaty or no protection in the form of a permanent establishment article.

The IME only covers transactions in assets that are included within the ITL. Cryptoasset investments are not specifically included in the list and would not generally fall within any of its current categories.

Collective investment arrangements

The ITL is also used for the purposes of the following UK tax regimes for funds:

• diversely owned authorised investment funds
• exempt unauthorised unit trusts
• diversely owned reporting offshore funds
• approved investment trusts

The general policy underlying the taxation of investors in funds is that they should obtain similar tax outcomes to investors with direct interests in the underlying assets. For private investors, transactions such as buying and selling shares are typically considered to be investment activities. Gains or losses on disposal would therefore treated as capital for tax purposes. By contrast, similar transactions would be taxed as income for financial traders.

The ITL provides that when such funds carry out certain transactions, they will always be treated as ‘investment transactions’. Although transactions in the types of assets on the ITL would generally be considered to form part of an investment business, the ITL provides greater certainty. The returns from those transactions will not be taxable as trade profits, and will instead be treated as either investment income (e.g. dividends) or, on disposal of the assets, capital receipts.

2. Defining cryptoassets

The term ‘cryptoassets’ is an umbrella term which encompasses different types of crypto technologies, including but not limited to exchange tokens, utility tokens, security tokens, stablecoins, smart contracts, and non-fungible tokens. It is an asset class that continues to evolve.

There are a number of definitions for cryptoassets that exist or are being proposed by a variety of organisations and authorities. Such definitions typically differentiate cryptoassets from other intangible assets by reference to cryptography that uses a form of distributed ledger technology.

This consultation is seeking to identify the characteristics of cryptoassets that can be used as investment products. This will enable HMRC to create a definition of cryptoassets for the purposes of the ITL which is fit for purpose. The definition should:

• only include assets which utilise cryptography and distributed ledger technology
• be clear and user friendly
• be ‘future-proof’ by being capable of encompassing newly emerging crypto technologies

HMRC is considering the adoption of a cryptoasset definition for the ITL which is similar to that proposed in the Crypto-Asset Reporting Framework published by the Organisation for Economic Co-operation and Development (OECD) in March 2022. That definition is currently subject to consultation but at the time of writing the proposed definition reads:

‘The term ‘Cryptoasset’ refers to a digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions.’

The OECD’s proposed definition is broad and HMRC would seek to refine such a definition to ensure that the inclusion of cryptoassets cannot be used to circumvent categories of assets currently excluded from the ITL. For example, we would want to exclude:

• transactions in land, including transactions of any nature which result in the acquisition of land
• cryptoassets that provide for the transfer of tangible assets or intangible assets not already included in the ITL

The definition of cryptoassets that qualify for inclusion should also exclude ‘closed-loop cryptoassets’. These are cryptoassets which are only intended for use within a closed permissioned network, for example for the purposes of purchasing goods or services. They can only be transferred by or to the issuer or participating merchant, and can only be redeemed for fiat currency by a participating merchant.

We welcome the views of investment managers, investors and fund managers on the types of cryptoassets which are suitable to be included in or excluded from a new ITL category.

Question 1: What types of cryptoassets are investment managers seeking to include as part of their product offer?

Question 2: Are there any particular definitions, in regulatory or other contexts, that investment managers find useful in defining cryptoassets? Please provide details.

Question 3: Are there any existing UK activities involving cryptoassets which would need to be excluded from the ITL in order to prevent a reduction in tax receipts?

Question 4: Please outline the likely types of fund products that will start or continue to be managed from the UK as a result of including cryptoassets within the scope of the IME.

3. Collective Investment Arrangements

The purpose of the ITL is to identify transactions which would generally be considered to form part of an investment business and would not generally be viewed as trading activities. The ITL currently applies for both the IME and certain UK tax regimes for funds. This means that both UK and overseas funds managed by UK investment managers obtain the same level of certainty about the types of transactions which will not be taxed as a trading activity in the UK.

The following questions explore whether cryptoassets should be included within the ITL only for the purposes of the IME, or whether there is a case for extending the change to the other fund tax regimes which also use the ITL.

Question 5: Do any funds within the scope of the rules listed in Chapter 1 Paragraph 11 currently hold cryptoassets? If so please provide details of the types of fund and cryptoassets held, and whether such funds generally treat these activities as investment or trading activities.

Question 6: Please outline the types of UK fund products that are currently offered, or may be offered in future, which would benefit from the inclusion of cryptoassets in the ITL.

Question 7: Please identify any differences in the definition of cryptoassets that would be needed for UK funds compared to that required for the IME.

4. Assessment of impacts

Summary of Impacts

Year	2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028
Exchequer impact (£m)	–	–	–	–	–	–

The final costing will be subject to scrutiny by the Office for Budget Responsibility, and will be set out at a future fiscal event.

Exchequer Impact Assessment

Impacts	Comment
Economic impact	The economic impacts will be identified following consultation and final design of the proposals.
Impact on individuals, households and families	There are expected to be no impacts for individuals, households and families. Any future impacts will be fully examined and detailed.
Equalities impacts	There is no evidence to suggest that the measure will have any adverse equalities impacts for any particular groups.
Impact on businesses and Civil Society Organisations	This measure is expected to have some positive impact in reducing compliance burdens for managers of funds affected by the proposals. However, any future impacts will be fully examined and detailed.
Impact on HMRC or other public sector delivery organisations	It is not anticipated that implementing this change will incur any significant costs for HMRC.
Other impacts	Small firms impact test: small firms will be positively affected to the extent that they form part of the population of affected investment managers. Other impacts have been considered and none have been identified.

Question 8: Do respondents have any comments on the assessment of impacts of these proposals in the Exchequer Impact Assessment?

4. Summary of consultation questions

Question 1: What types of cryptoassets are investment managers seeking to include as part of their product offer?

Question 2: Are there any particular definitions, in regulatory or other contexts, that investment managers find useful in defining cryptoassets? Please provide details.

Question 3: Are there any existing UK activities involving cryptoassets which would need to be excluded from the ITL in order to prevent a reduction in tax receipts?

Question 4: Please outline the likely types of funds that will start or continue to manage from the UK as a result of including cryptoassets within the scope of the IME.

Question 5: Do any funds within the scope of the rules listed in Chapter 1 Paragraph 11 currently hold cryptoassets? If so please provide details of the types of fund and cryptoassets held, and whether such funds generally treat these activities as investment or trading activities.

Question 6: Please outline the types of UK fund products that are currently offered, or may be offered in future, which would benefit from the inclusion of cryptoassets in the ITL.

Question 7: Please identify any differences in the definition of cryptoassets that would be needed for UK funds compared to that required for the IME.

Question 8: Do respondents have any comments on the assessment of impacts of these proposals in the Exchequer Impact Assessment?

5. The consultation process

This consultation is being conducted in line with the Tax Consultation Framework. There are 5 stages to tax policy development:

Stage 1: Setting out objectives and identifying options

Stage 2: Determining the best option and developing a framework for implementation including detailed policy design

Stage 3: Drafting legislation to effect the proposed change

Stage 4: Implementing and monitoring the change

Stage 5: Reviewing and evaluating the change

This consultation is taking place during stage 1 of the process. The purpose of the consultation is to seek views on the detailed policy design and a framework for implementation of a specific proposal, rather than to seek views on alternative proposals.

How to respond

A summary of the questions in this consultation is included at chapter 4.

Responses should be sent by 11:59pm on Monday 18 July, by email to investmentmanagerexemption@hmrc.gov.uk or by post to:

Investment Management Exemption Team 
HMRC
B8.22 Stratford Regional Centre 
Central Mail Unit 
Newcastle
NE88 

Enquiries about this consultation should be directed to Ahmed Dar on 03000 599926.

Please do not send consultation responses to the Consultation Coordinator.

Paper copies of this document in Welsh may be obtained free of charge from the above address.

When responding please say if you are a business, individual or representative body. In the case of representative bodies please provide information on the number and nature of people you represent.

Confidentiality

HMRC is committed to protecting the privacy and security of your personal information. This privacy notice describes how we collect and use personal information about you in accordance with data protection law, including the UK General Data Protection Regulation (UK GDPR) and the Data Protection Act (DPA) 2018.

Information provided in response to this consultation, including personal information, may be published or disclosed in accordance with the access to information regimes. These are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act 2018, General Data Protection Regulation (GDPR) and the Environmental Information Regulations 2004.

If you want the information that you provide to be treated as confidential, please be aware that, under the FOIA, there is a statutory Code of Practice with which public authorities must comply and which deals with, amongst other things, obligations of confidence. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on HM Revenue and Customs.

Consultation privacy notice

This notice sets out how we will use your personal data, and your rights. It is made under Articles 13 and/or 14 of the GDPR.

Your data

We will process the following personal data:

Name
Email address
Postal address
Phone number
Job title

Purpose

The purpose(s) for which we are processing your personal data is: Expanding the Investment Transactions List for the Investment Manager Exemption and other fund tax regimes.

Legal basis of processing

The legal basis for processing your personal data is that the processing is necessary for the exercise of a function of a government department.

Recipients

Your personal data will be shared by us with HM Treasury.

Retention

Your personal data will be kept by us for 6 years and will then be deleted.

Your rights

• you have the right to request information about how your personal data are processed, and to request a copy of that personal data.

• you have the right to request that any inaccuracies in your personal data are rectified without delay.

• you have the right to request that any incomplete personal data are completed, including by means of a supplementary statement.

• you have the right to request that your personal data are erased if there is no longer a justification for them to be processed.

• you have the right in certain circumstances (for example, where accuracy is contested) to request that the processing of your personal data is restricted.

Complaints

If you consider that your personal data has been misused or mishandled, you may make a complaint to the Information Commissioner, who is an independent regulator. The Information Commissioner can be contacted at:

Information Commissioner's Office
Wycliffe House
Water Lane
Wilmslow
Cheshire
SK9 5AF

0303 123 1113 casework@ico.org.uk

Any complaint to the Information Commissioner is without prejudice to your right to seek redress through the courts.

Contact details

The data controller for your personal data is HMRC. The contact details for the data controller are:

HMRC
100 Parliament Street
Westminster
London
SW1A 2BQ

The contact details for HMRC’s Data Protection Officer are:

The Data Protection Officer
HM Revenue and Customs
7th Floor
10 South Colonnade
Canary Wharf
London
E14 4PU

advice.dpa@hmrc.gsi.gov.uk

Consultation principles

This call for evidence is being run in accordance with the government’s consultation principles.

The consultation principles are available on the Cabinet Office website.

If you have any comments or complaints about the consultation process, please contact the Consultation Coordinator.

Please do not send responses to the consultation to this link.

Annex: Relevant (current) government legislation

The Investment Management Exemption (IME) is contained within the following parts:

• sections 817-828 Income Tax Act 2007
• sections 835C-835S Income Tax Act 2007
• sections 969-972 Corporation Tax Act 2010
• sections 1145-1150 Corporation Tax Act 2010

The IME’s current ITL regulations are contained within the Investment Manager (Investment Transactions) Regulations 2014.

The order references the Investment Transactions (Tax) Regulations 2014 which is also used by the following statutory instruments:

• Authorised Investment Funds (Tax) Regulations 2006

• Offshore Funds (Tax) Regulations 2009

• Investment Trust (Approved Company) (Tax) Regulations 2011

• Unauthorised Unit Trusts (Tax) Regulations 2013