As part of wider efforts to make Britain a global hub for cryptoassets technology and investment, on 4 April 2022 the government publicly committed to consult on extending the scope of the UK Investment Manager Exemption (the “UK IME”) to include direct cryptoassets as part of the investment transaction list in order to promote the UK investment management industry in this area. On 23 May 2022, the government published this consultation document with a call for engagement from relevant stakeholders: Expanding the Investment Transactions List for the Investment Management Exemption and other fund tax regimes.
The IME and Cryptoassets: Current Position
By way of background, a non-UK fund vehicle can become subject to UK tax if it is “trading” (rather than “investing”) in the UK through a permanent establishment or agent. For these purposes, a UK-based investment manager with discretionary investment management authority is often seen as an agent of the non-UK fund. The UK IME was introduced in statute to protect the UK funds management industry and was designed to ensure that a non-UK fund vehicle with a trading strategy will not be subject to UK tax simply because investment transactions are conducting on its behalf by a genuine UK resident investment manager (and the legislation sets out a number of tests that need to be satisfied in order to demonstrate that the UK investment manager is an agent of independent status).
The issue for the UK fund management industry at the moment is that it may not be currently possible for a UK investment manager to provide discretionary investment management services to an offshore fund vehicle which is undertaking a trading strategy in relation to direct cryptoassets because the application of the UK IME is restricted to “investment transactions” as set out in regulation (often termed the “white list”), and cryptoassets do not expressly appear on this list. Accordingly, similar to how UK managers operate in relation to physical commodity funds, UK managers have often been forced to limit their fund investment strategy to futures and options contracts in cryptoassets (which do expressly appear on the list, provided physical delivery of the underlying does not occur) or otherwise structure the arrangements so that discretionary investment management occurs outside the UK.
The Proposal for the UK IME
The government proposes to extend the UK IME investment transaction list to certain types of cryptoassets, acknowledging that “cryptoassets” is an umbrella term that continues to evolve which encompasses different types of crypto technologies, including, but not limited to, exchange tokens, utility tokens, security tokens, stablecoins, smart contracts and non-fungible tokens.
HMRC’s is planning to identify the characteristics of cryptoassets that can be used as investment products, and will aim to limit the white list to these types of cryptoassets only. It is proposed that HMRC will only include assets which utilise cryptography and distributed ledger technology to validate and secure transactions (or similar technology), and will not allow the inclusion of cryptoassets to be used in a manner to circumvent categories of assets currently excluded from the investment transaction list such as transactions in land or cryptoassets that provide for the transfer of tangible assets or intangible assets not already included in the investment transaction list. In addition, the definition of cryptoassets will also exclude ‘closed-loop cryptoassets’. These are cryptoassets which are only intended for use within a closed permissioned network, for example for the purposes of purchasing goods or services. They can only be transferred by or to the issuer or participating merchant and can only be redeemed for fiat currency by a participating merchant. It is also hoped that the scope of the new assets included within cryptoassets for these purposes will contain a degree of “future proofing” to anticipate likely developments in this fast moving area.
Collective Investment Arrangements
It is also noted that the UK IME investment transaction list is also used in other contexts in UK tax legislation to identify transactions which would generally be considered to form part of an investment business and would not generally be viewed as trading activities, including for the purposes of a range of funds such as diversely owned authorised investment funds, exempt unauthorised unit trusts, diversely owned reporting offshore funds and approved investment trusts. HMRC is consulting on whether to extend cryptoassets into the investment transaction list for the purposes of the UK IME only, or whether there is a case for extending the change to the other fund tax regimes which also use the investment transaction list.
Expected Timeline and Next Steps
Please note that the consultation closes on 18 July 2022, with a view to HMRC publishing a summary of responses (together with a draft of any legislation or HMRC order) in the autumn (September - November 2022).
Interested parties are encouraged to take this opportunity to provide their views on the types of cryptoassets which would be suitable to be included or excluded from the UK IME investment transaction list, and whether this cryptoassets category should be limited to the UK IME or to all instances in UK tax legislation where the investment transactions list is used.
