HMRC, the UK tax authority, has this week published their eagerly awaited guidance (available here) on the UK's new qualifying asset holding company ("QAHC") regime. The guidance provides welcome detail on HMRC's view on certain key issues relating to the regime's eligibility criteria, but remains silent on certain other important points which we had hoped would be addressed.
The QAHC regime is one part of a wider review of the UK's funds regime. It is intended to enhance the UK's competitiveness as a location for asset management and investment funds, in order to better compete with other established asset-holding jurisdictions (such as Luxembourg and Ireland). In summary, the QAHC regime provides a range of tax benefits which aim to tax investors in QAHCs broadly as if they had invested in the underlying assets directly. Further detail on the key features of the QAHC regime can be found in our previous client alert (available here).
What does the guidance say?
Some of the most interesting points covered by the guidance regarding the eligibility criteria are summarised below.
Monitoring the ownership condition
A QAHC must take "reasonable steps" to monitor, on an ongoing basis, whether it continues to meet the ownership condition necessary to be eligible for the regime. Somewhat unsurprisingly, the guidance states that what steps are reasonable "should be a function of the overall level of risk, and the facts and circumstances" relevant to each individual QAHC.
The guidance does, however, go on to provide some useful insights as to what HMRC may consider reasonable in particular cases:
- A QAHC directly wholly owned by a fund which meets the genuine diversity of ownership ("GDO") condition would not need to carry out ongoing scrutiny of the qualifying status of its fund owner. This is because the question of whether a fund meets the GDO condition is a once-and-for-all determination. As such, the QAHC would only fail to meet the ownership condition in the future should another person acquire relevant interests in the QAHC's securities (at which time it would, clearly, need to determine that investor's status).
- For funds which do not meet the GDO condition, the level of scrutiny required will depend on the fund's composition. For example, for funds which comprise so many investors that their chance of becoming "close" is negligible, the scrutiny required could be minimal. On the other hand, where a fund is relying on either non-close status or 70% control by Category A investors and is near to breaching the relevant thresholds, a higher level of review will be required. In such cases the guidance suggests that the QAHC should seek confirmation of its investors' Category A status prior to undertaking any significant transactions (e.g. the sale of an investment which would be exempt under the QAHC regime, or a buyback of shares).
- Where QAHCs are owned (in whole or part) by intermediate companies, the guidance indicates that the QAHC should check their ownership structure regularly, which it suggests could be done annually as part of the QAHC's audit process.
More generally, the guidance also sets out certain measures which HMRC considers would be indicative of the QAHC taking "reasonable steps", absent any facts or circumstances suggesting a greater level of scrutiny is appropriate:
- Provisions in the QAHC's articles of association (or equivalent constitutional documents for non-UK incorporated QAHCs) obliging shareholders to notify the QAHC should their Category A status change.
- Obtaining, as part of the process for registering a transfer or issue of securities, written confirmation from incoming investors of their Category A status.
- Maintenance by the QAHC of a record of the total relevant interests held in it by non-Category A investors.
- A verification process in relation to the registration of any transfer or issue of securities giving rise to relevant interests, enabling the QAHC to request and be provided with information from investors to enable the QAHC to assess its satisfaction of the ownership requirement.
Activity condition – ancillary activities
The activities of a QAHC must be the carrying on of an investment business (see below as to the meaning of investment versus trading); any other activities of the QAHC must be (a) ancillary to that investment business and (b) not carried on to any substantial extent. The QAHC legislation does not provide any further detail as to what will be considered "ancillary" or "substantial", and so it is left to the guidance to shed light on how HMRC intends to interpret this provision.
As to whether an activity is "ancillary", the guidance helpfully indicates that the provision of intra-group management services to investee companies (as commonly done by holding companies in private equity structures) could be an example of acceptable ancillary activity.
On the second point, the guidance states that an activity will not, as a general rule, be considered to be carried on to a substantial extent if "the quantum of possible profit from the trading activities [is] sufficiently limited that no potential investor in the company [would] be expected to have regard to it in deciding whether or not to invest". Further, in assessing whether an activity is substantial, the fact that an entity paying the trading income to the QAHC may be a subsidiary, such that the consolidated impact of the activity is nil, would be ignored.
Overall, this is a fairly strict test (stricter than was widely anticipated), and is likely to provide only marginal scope for a QAHC to carry on non-investment activities. In particular, both the two-limb test itself (ancillary and not substantial) and HMRC's interpretation of substantial in this context, is much narrower than the 20% test adopted by HMRC for similar tests concerning the substantial shareholdings exemption and business asset disposal relief that some commentators had predicted would also be applied in this context. That said, it should be borne in mind that the guidance only sets out HMRC's interpretation of the legislation and is not itself the law–but, while it will take a brave manager to deliberately challenge HMRC's view in the courts by carrying out more extensive trading activities, we anticipate that the extent of trading activities in a typical private equity fund structure should not cause an issue in any event.
To view the full article click here
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
