There are two policy objectives underlying the tax treatment of UK
resident investment managers and their overseas clients. These objectives
That overseas investors should not be charged to UK
tax in relation to most investment transactions conducted on their
behalf through an independent UK investment manager but
Any fees earned by a UK resident investment manager
for services performed for the non-resident should be fully chargeable
to UK tax.
The UK tax system seeks to achieve these objectives through the
Investment Manager Exemption (IME), which applies where certain conditions
are met. The exemption enables non-residents (funds and individuals) to
appoint UK investment managers without the risk of exposing themselves to UK
taxation. Consequently, the IME is one of the key components of the UK’s
attraction for the investment management industry, including the offshore
hedge fund industry.
In July 2007 HMRC revised its guidance on implementation of the IME
(Statement of Practice 1/01), to reflect developments in the investment
management industry. However, there were some issues where the industry
wanted to see changes which went beyond the scope of the revised guidance
and require legislative amendment.
Following dialogue with the industry HMRC propose legislative changes in
Finance Bill 2008 to deal with the following two issues:
Alignment of the IME definition of ‘investment
transactions’ with the FSA definition of ‘regulated activities’ (subject
to additions or specific exclusions), the advantages of which should
include tax simplification through alignment of regulation and
accommodation of innovative financial instruments as they come to the
market. In practice this means that UK managers of offshore funds should
have the legal certainty they seek when they engage in a wider range of
transactions. HMRC is continuing to consult with the industry on the
precise scope of the new rules.
Removal of an unpopular ‘cliff edge’ where the whole
of an offshore fund’s UK profits might be brought into UK tax if certain
transactions cause one of the qualifying conditions for the IME to be
failed. The intention is to provide a more proportionate tax effect for
non-qualifying transactions or arrangements.
This announcement is welcome and follows a period on ongoing
consultation with the investment management industry.