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1 22 October 2012 James Driver HM Revenue & Customs Specialist Personal Tax, Personal Tax Policy 100 Parliament Street London SW1A 2BQ Dear James, Reform of two anti-avoidance provisions: (i) the attribution of gains to members of closely controlled non-resident companies; and (ii) the transfer of assets abroad HMRC consultation IMA represents the UK-based investment management industry. Our Members include independent fund managers, the investment arms of retail banks, life insurers and investment banks, and the managers of occupational pension schemes. They are responsible for the management of over 4 trillion of funds (based in the UK, Europe and elsewhere), including authorised investment funds, institutional funds (e.g. pensions and life funds), private client accounts and a wide range of pooled investment vehicles. In particular, our Members are the appointed investment managers of funds domiciled offshore, including non-uk UCITS. Of the c. 4.2 trillion managed in the UK by IMA members at end 2011, 1.6 trillion (over one-third) was managed in the UK on behalf of overseas clients. In particular, our members managed in the UK 765 billion in overseas-domiciled funds. The importance to the economy of investment through collective investment vehicles has long been recognised in UK taxation legislation. It is a fundamental tenet of investment through funds that investors should not be subject to tax on capital gains at the level of the fund and that any tax applies only on disposal of an investor s interest in the fund itself. This is recognised in the UK tax legislation through the exemption from tax on gains for authorised and unauthorised funds and for investment trusts at Chapter III of Part III of TCGA. Where offshore funds are transparent such that gains in the fund would fall to be treated at taxable in the hands of a UK investor, s.103a applies so that the fund is treated as opaque for UK tax purposes, and no such gain arises, otherwise than at the time of disposal of the interest in the fund. In addition, the UK has extensive legislation on the taxation of offshore funds that prevents UK taxpayers (including UK companies) from avoiding UK tax by diverting profits, income or gains through an offshore fund and ensures UK investors in those 65 Kings wa y Lo nd on W C2B 6TD Tel:+44(0) Fax:+44(0) w w w. i n v e s t m e n t u k. o r g Investment Management Association is a company limited by guarantee registered in England and Wales. Registered number Registered office as above.

2 funds are taxed fairly. This legislation removes the need for offshore funds to be captured by the provisions in s.13 TCGA. A primary aim of the UCITS IV Directive was to enable cost-efficiencies (such as the establishment of master-feeder structures and cross border mergers of funds) and to reduce administrative costs around the Union (in relation to notification procedures). The UK government has gone to great lengths to ensure tax barriers are removed for the implementation of UCITS IV, while ensuring that the UK remains a competitive jurisdiction for investment management. It would be unfortunate if the opportunity were not taken as part of the reform to the anti-avoidance provisions to make it absolutely clear that investment through offshore widely-held collective investment schemes will be excluded from the anti-avoidance legislation designed to target artificial enveloping and diversion of profits abroad. Our concerns relating to funds are focussed on questions 2 and 3 of the consultation. Our response to these questions is in the appendix, along with proposed remedies for offshore funds. Please do not hesitate to contact me on or at jmorleysmith@investmentuk.org should you wish to discuss in more detail. Yours sincerely Jorge Morley-Smith Head of Tax cc. John Buckeridge Policy and Technical Adviser, Collective Investment Schemes HM Revenue & Customs

3 Appendix IMA response to HMRC s consultation on the reform of two anti-avoidance provisions: (i) the attribution of gains to members of closely controlled nonresident companies; and (ii) the transfer of assets abroad Question 2: Are there any particular issues for private equity firms here, or other types of investment vehicle? Newly-launched funds require a minimum size in order to be able to have a sufficiently diversified portfolio and to ensure that the level of administration and dealing costs does not adversely impact performance and deter investors. Therefore, a fund promoter will often seed funds by depositing an initial investment in the fund of sufficient size so as to ensure the fund has critical mass on launch. As a result, a fund in the seeding phase of its lifecycle is likely to be a closely-held company for the purposes of s.13 TCGA. In the context of a UCITS domiciled in, say, Ireland or Luxembourg, it will often be necessary for the management company ( ManCo ) of the fund only to have a board that meets regularly in order to fulfil the commercial and legal obligations of the fund, and to interact with the local regulator. The home country regulator will need to be satisfied that the composition and expertise of the board, the governance structure and the control environment allow the board of the ManCo to carry out in a satisfactory manner the obligations formally placed on it by EU legislation. Thus, the board must have real substance and expertise, and it must demonstrate that it is discharging this obligation (see Article 9 of Directive 2010/43/EU). However, it is common for day-to-day fund management functions to be outsourced to other providers. One of these may be the investment (or portfolio) management function, and back and middle office administration are commonly outsourced, as specialist companies provide economies of scale. Thus, other than in respect of the higher levels of strategic management, all other core functions may be outsourced, typically to independent third party suppliers, but also to service providers within the same group. The proposed exemptions at s.13(5)(ca) and s.13(5)(cb) of the draft regulations would not apply in the context of funds. Assets of funds are not typically used for economic activities outside the UK, nor can they be characterised as being connected with any part of a business establishment outside the UK. Moreover the proposed s.13a(5) seems to preclude investment activity from being regarded as economically significant. The wording in the consultation document at 2.14 is also particularly unhelpful as it appears to restrict the management of property through an independent agent:...that property must be actively managed (and not through an independent agent). A UK manager of an offshore fund would be regarded as an independent agent if it meets the conditions of the Investment Manager Exemption (IME) in s ITA 2007 or s CTA 2010.

4 However, 2.14 also states that an active investment management company will qualify, provided activities take place between unconnected parties, or on the same terms, and in similar circumstances, as would apply between unconnected persons dealing with each other at arm s length. It is not clear what this is referring to, or how an investment management company would qualify. IMA believes that a further exemption should be drafted to ensure that offshore funds that are widely-held or marketed are not caught within the provisions of s.13. A similar exemption was drafted into the new CFC regime at s.317be and s.317bf for funds that meet the genuine diversity of ownership condition in regulation 75 of the Offshore Funds (Tax) Regulations 2009 (SI 2009/3001). The genuine diversity of ownership condition acts to ensure that only funds that are intended to be marketed and widely-held can benefit from favourable tax treatment (such as certainty over whether a fund is trading or investing, or exemption from CFC rules). The conditions are designed to ensure that where a fund is set up only for the benefit of a few known investors, no such tax benefits can arise. It therefore targets similar conditions as the anti-avoidance rules at s.13, but takes into account specific circumstances of funds, such as the fact that funds are typically seeded. IMA therefore urges that offshore funds that meet the genuine diversity of ownership condition are specifically exempted from the reformed s.13 provisions. Question 3: Is the motive test helpful? Are there any suggested modifications or refinements? The proposed motive test is helpful. However, it should be made clear that an investment in an offshore fund that meets the genuine diversity of ownership condition would not be considered to be made for tax avoidance purposes. Reasons why offshore funds should automatically be excluded from the antiavoidance legislation at s.13 TCGA The Offshore Funds (Tax) Regulations 2009 Offshore funds are also subject to a specific and extensive tax regime designed to counter arrangements that enabled a UK taxable investor to accumulate income in an offshore fund free of tax and, when its investment was realised, be subject to capital gains tax on any gain. There is no need for an investment in an offshore fund to be regarded as falling into the anti-avoidance provisions. These rules were substantially re-written in Under the new rules, the definition of an offshore fund (in s.355 TIOPA) is much wider. Broadly, the rules provide that any gains realised by UK investors in an offshore fund will be taxed as income (and therefore taxed at income tax rates) rather than as gains (at capital gains tax rates), unless certain conditions are met. If an offshore fund satisfies the relevant conditions to be registered as a reporting fund, any realised gain made by a UK investor on a reporting fund will be taxed as a capital gain.

5 This extensive and complex legislation for UK investors in offshore funds should negate the need for those investors to additionally be captured by s.13 TCGA. UCITS IV A primary aim of the UCITS IV Directive, which came into effect on 1 July 2011, was to open up more opportunities for Europe's investors and to reduce the administrative costs of cross border notifications. UCITS IV allows cross-border Master-Feeder funds as a pooling technique; it provides a new framework for cross-border mergers of UCITS; and it brings in a Management Company Passport, which will allow UCITS authorised in one Member State to be managed remotely by a Management Company established in another Member State and authorised by that Member State s regulatory body (the ManCo Passport ). The ManCo Passport allows managers to sell UCITS across the EU without having to establish a ManCo in each jurisdiction. The provisions in s.13 TCGA need to recognise this. If non-uk UCITS are caught within the provisions, UK investors are immediately put at a disadvantage. The UK government has gone to great lengths to ensure that the UK remains a global centre for asset management. If funds are captured under s.13 TCGA, this could have a detrimental impact on the range of funds that UK investors have access to and that UK investment managers can promote.