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Tim Cornick and Andrew Loan, partners at Macfarlanes LLP, consider the UK’s tax regime for collective investment schemes and suggest that although a lot of work has been done to make the regime more attractive, there is still much to do.
What’s the change in the rules?
Assets held by investors as part of certain tax transparent collective investment schemes are will not be chargeable assets from 8 June 2013. The investor’s interest in the scheme will instead be treated as if it were a chargeable asset. Certainty of treatment is also provided for capital gains purposes for investors in all types of collective investment schemes involved in a reorganisation or reconstruction. (Collective Investment Schemes (Tax Transparent Funds, Exchanges, Mergers and Schemes of Reconstruction) Regulations 2013, SI 2013/1400)
What do the new rules on the tax treatment of the contractual fund vehicle seek to achieve?
Andrew Loan (AL): The new contractual fund vehicle was announced in 2010 as part of the implementation of the fourth UCITS Directive (2009/65/EC), to facilitate the implementation of master-feeder structures based in the UK. Historically, authorised funds in the UK were unit trusts and more recently open-ended companies based, but UK contractual funds akin to the French FCP (fond commun de placement) were not available. The intention is to create a genuinely tax transparent authorised fund regime in the UK.
The UK’s tax regime for collective investment has been undergoing upheaval since 2006—do you think that process is now complete?
AL: A lot of work has been done to make the UK tax regime more attractive, but there is still much to do. There is an alphabet soup of special fund regimes (AUTs and OEICs, PAIFs, FAIFs, TEFs, UUTs, TTFs, reporting and non-reporting offshore funds, FINROFs etc) and the tax rules are not always entirely consistent across the regimes. The tax rules are also subject to change in response to EU and UK regulatory developments.
How successful has the overhaul been?
AL: Generally the UK tax regime has been more competitive, with more options and flexibility, and more certainty. In particular, the reporting offshore fund regime solves many of the difficulties with the old distributing fund regime, and the ‘white list’ of investment transactions allows genuinely diverse authorised funds to be confident they are not exposed to tax on trading income if they buy and sell investments in short order.
That said, many of the special fund regimes have a poor uptake—for example, pension fund pooling vehicles. The PAIF regime seems to be finally gathering interest some five years after it was introduced, with a number of new or converted PAIFs launched in the last year.
In the light of the current debate on tax avoidance and some campaigners labelling the UK as a tax haven, is the focus on enhancing the UK as a place for funds to locate to appropriate/problematic?
AL: The general aim of the tax regimes applying to authorised funds in the UK is that investors should be taxed as if they held the underlying investments directly, to prevent tax being an impediment to investment. This aim is broadly achieved (although indirectly) for many retail investors in pure equity or pure bond funds, but not for mixed funds.
The PAIF, FAIF, and TTF regimes were set up explicitly on a tax transparent basis, but there are still some advantages to establishing funds in other jurisdictions, particularly as EU passporting now allows marketing [of non-UK funds] to UK investors (for UCITS funds at any rate).
The tax regimes that apply to authorised funds in the UK are a long way from the intricate ‘aggressive’ tax avoidance schemes which are catching the headlines at the moment.
Do you think existing non-UK funds (eg hedge funds) could consider setting up in or relocating to the UK as a result of the ‘new’ regime?
Tim Cornick (TC): The creation of the new contractual funds regime removes a barrier to some funds being established in the UK, but we are unlikely to see a tidal wave of new activity. That said, the UK has the advantage of a thriving financial centre with a deep pool of investment management experience. We may see aggregation of existing funds under umbrella/master structures, particularly for the larger managers seeking further economies of scale. Hedge funds tend to want the flexibility of light or no regulation to adopt whatever management strategy they think best.
Will we ever see an authorised, UK-based, hedge fund?
TC: We have seen a number of UK based UCITS III funds using derivatives to create leverage and allow synthetic shorting (so-called ‘NEWCITS’). But a number of them have discovered that the constraints on what a UCITS fund can do limit performance, and the increased compliance obligations mean increased costs. The TTF regime is unlikely to have a significant effect on this, as the combination of the investment whitelist and the tax elected fund regime already creates scope for ‘onshore’ hedge funds in the UK with an acceptable tax treatment.
What are the main advantages and disadvantages of locating authorised funds in the UK?
TC: The UK has a tried and tested regulatory regime, and a good network of double tax treaties. The tax regime is generally well understood and produces a sensible result for UK based investment managers and fund investors. But the taxation of income for most authorised funds established in the UK is still perceived as a significant tax disadvantage by non-UK investors.
In the light of ‘The UK investment management strategy’ published with the Budget 2013, how do you envisage the regime evolving and how could it be further improved?
TC: The funds industry can be fairly confident that the UK tax regime will not move against it. In particular, the abolition of the SDRT charge on surrenders of interests in authorised funds has long been advocated and the withdrawal of the charge from 2014 will be widely welcomed.
Tim Cornick has had substantial involvement in legal matters on behalf of investment funds, investment managers, custodians and trustees. Those areas plus financial services regulatory/compliance matters and related securities work form the bulk of his practice, with a strong emphasis on investment management and collective investment schemes in the UK and offshore.
Andrew Loan advises on a wide variety of general corporate tax and VAT matters, particularly taxation issues in the context of acquisitions and disposals of public and private companies.
This interview was first published as a News Analysis piece in LexisPSL Tax.
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