Budget Notes

BN28 INVESTMENT MANAGER EXEMPTION

Who is likely to be affected?

1. UK-resident investment managers and non-residents trading in the UK through those investment managers.

General description of the measure

2. Legislation will be introduced in Finance Bill 2008 to make changes to the legislation underpinning the Investment Manager Exemption (IME) to:

•    simplify the approach to defining transactions that are within the scope of the IME; and

•    remove one of the conditions that must be met in order for a transaction to come within the IME.

3. Following these changes, there will be a single list of transactions qualifying for the IME and the process for updating the list will be simpler. There will also be a more proportionate outcome where not all of the transactions carried out in the UK by an investment manager on behalf of a non-resident meet the qualifying conditions.

Operative date

4. The first change listed in paragraph 2 above will have effect on or after the date that Finance Bill 2008 receives Royal Assent, but with a saving provision to ensure that the existing definition of an "investment transaction" has effect until replaced by an order to be made after that date. The second change will have effect for the tax year 2008-09 and subsequent tax years and accounting periods ending on or after the date that Finance Bill 2008 receives Royal Assent.

Current law and proposed revisions

5. The IME enables non-residents (companies, individuals and funds) to appoint UK-based investment managers to carry out transactions on their behalf without the risk of exposure to UK tax, provided certain conditions are met.

6. The legislation underpinning the IME is at section 127 of, and Schedule 23 to, the Finance Act (FA) 1995, section 152 of, and Schedule 26 to, FA 2003 and sections 818 to 828 Income Tax Act 2007. This primary legislation is supplemented by secondary legislation in four sets of Regulations: Statutory Instruments 2003/2172, 2003/2173, 2007/963 and 2007/964.

Simplifying the approach to defining transactions

7. The IME only has effect for transactions meeting the statutory definition of an "investment transaction". The types of transaction coming within that definition are currently listed in different parts of the primary and secondary legislation, and there is a statutory power to add to those lists by making new Regulations.

8. This measure replaces that approach with by allowing HM Revenue & Customs (HMRC) to make an order designating transactions as "investment transactions" for the purposes of the IME. After the change, there will be a single list of transactions coming within that definition and there will be no need to refer to the current range of different statutory provisions, which will be repealed.

9. The list of eligible transactions will be available on the HMRC website, so that all interested parties can see which transactions are covered.

Achieving proportionality

10. At present, where an investment manager carries out, on behalf of a non-resident, a transaction that does not qualify for the IME, one of the qualifying conditions can operate in a way that means that no other transactions carried out by that investment manager for that non-resident are capable of qualifying for the IME, even where those other transactions would themselves meet the qualifying conditions. This can result in the non-resident being exposed to UK tax on all of the transactions carried out through the investment manager.

11. This measure will remove that condition and produce a more proportionate outcome. All transactions that meet the qualifying conditions will qualify for the IME and if there are any non-qualifying transactions it will only be those transactions that will be exposed to UK tax.

Further advice

12. If you have any questions about this change, please contact Lee Harley on 020 7147 2597 (email: lee.harley@hmrc.gsi.gov.uk), Mike Hogan on 020 7147 2655 (email: mike.hogan@hmrc.gsi.gov.uk), or Andrew Martyn on 020 7147 3342 (email: andrew.martyn@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk