In the summer of 2022, the UK government consulted on extending the scope of the UK Investment Manager Exemption (the “UK IME”) to include direct transactions in cryptoassets. Our previous OnPoint on the consultation, including background on the UK IME, is available here.
HMRC has now introduced regulations1 to include certain cryptoassets as “investment transactions” within the scope of the UK IME with effect from the 2022-2023 tax year (for non-corporate entities) and accounting periods current as at 19 December 2022 onwards (for corporate entities). Accordingly, provided the other conditions of the UK IME are satisfied, UK-based investment managers can now trade in certain cryptoassets directly (rather than limiting their investment strategy to futures and options contracts in cryptoassets, or trading in cryptoassets outside the UK, as was previously the case prior to the new regulations) without the risk of the non-UK fund vehicle becoming subject to UK tax in respect of such transactions.
The extension of the investment transactions list applies only to the UK IME. Although the investment transactions list is used in other UK tax legislation (such as in the context of transactions undertaken by authorised investment funds, exempt unauthorised unit trusts and investment trust companies), the UK government has determined that there is insufficient demand to warrant expansion to those other contexts at present, but will keep this under review. This is primarily because prudential regulation prevents authorised investment funds from holding cryptoassets, and institutional investor interest is largely in equity or debt interests issued by companies operating as cryptoasset market platforms or custodians, rather than directly in cryptoassets.
The definition of cryptoassets in the UK IME
The regulations define “cryptoasset” by reference to the definition used by the Organisation for Economic Cooperation and Development (“OECD”) for the purposes of the Crypto-Asset Reporting Framework (published on 10 October 2022)2 which extended the OECD Common Reporting Standard to the crypto space:
“a digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions”.
This definition is designed to be broad enough to accommodate future innovations and technological developments operating in a functionally similar manner to existing cryptoassets, and it covers the most regularly traded cryptoassets including exchange tokens (specifically Bitcoin and Ethereum), utility tokens, security tokens, stablecoins, smart contracts and non-fungible tokens (“NFTs”). Contrary to the initial consultation proposals, “closed-loop cryptoassets” have not been excluded from the definition of cryptoassets for the purposes of the UK IME (loosely, cryptoassets which are designed to be used within a particular closed system and not being tradable with merchants outside that system, such as Robux used in the Roblox game).
Notwithstanding the broad approach to what constitutes a cryptoasset, the UK IME has been expressly limited to “designated cryptoassets” by HMRC in order to protect the UK’s tax base and prevent the use of cryptoassets to circumvent the existing limitations in the investment transactions list. For example, transactions in land or commodities involving the physical delivery of such property cannot be achieved indirectly through the use of cryptoasset transactions. In broad terms, a cryptoasset is not a “designated cryptoasset” and is therefore outside the protection offered by the UK IME if the cryptoasset represents rights in, or in respect of:
(i) transactions which would not fall within the existing investment transactions list; or
(ii) tangible or intangible property (other than another designated cryptoasset) which would not fall within the existing investment transactions list; or
(iii) the provision of services (if those rights are exercised in the period whilst the cryptoassets is held by the offshore fund).
In addition, designated cryptoassets created or issued by the non-UK resident fund, investment manager, or parties connected to them are excluded from the investment transactions list.
Conclusions
UK investment managers can take comfort in the extension of the UK IME to a range of direct cryptoasset transactions, obviating the prior need to undertake crypto trades outside the UK or limit strategies to futures and options contracts in cryptoassets. We understand that HMRC expects to publish guidance in the near future to assist with the interpretation of the new regulations.
Footnotes:
1) The Investment Manager (Investment Transactions) (Cryptoassets) Regulations 2022
2) https://www.oecd.org/tax/exchange-of-tax-information/crypto-asset-reporting-framework-and-amendments-to-the-common-reporting-standard.htm
