Volume 1: July 2020

Market Update, Debt Investments and the Availability of Tax Loss Relief, Deferrals of POA, and COVID-19 Updates

Introduction to the A&M Taxand Financial Investors team

A&M Taxand Financial Investors tax practice comprises over 50 tax professionals working in the asset management industry in the U.K. 

The practice - led by Jason Clatworthy and Daniel Parry who, combined, have more than 40 years of tax experience in this area - provide practical, commercially focused tax advice to start-up, mid-market and large investment funds working alongside colleagues from A&M’s Transaction Advisory, Performance Improvement and Valuation/Modelling Groups.

Jason, Daniel and their extensive team have wide experience of supporting investment funds through the entire fund lifecycle with particular expertise in infrastructure and private equity funds, although they also advise real estate, credit and technology funds. 

Our fund structuring tax services are led by Daniel who joined A&M from EY LLP where he established a market leading investment fund structuring team which provided end to end tax advice on the establishment of new funds. 

Our fund investment tax services are led by Jason who joined A&M from Deloitte LLP where he led the European Infrastructure Investors M&A practice and was the Global Tax Leader for the Infrastructure sector alongside being a member of both the firm's Financial Services and Financial Investors Executive Committee.

Our fund reporting tax services are led by Orion Ganase who joined A&M from EY LLP where he was instrumental in growing the fund compliance team to a business earning over £4million in annual revenue.

Our fund executive tax services are led by Donald Campbell who joined A&M from Target Fund Managers where he was Head of Tax. Prior to working at Target Fund Managers, Donald spent 16 years as a partner at Deloitte LLP where he led the firm’s Scottish Private Client Services team and advised on the establishment of investment funds throughout the U.K. along with overseeing the provision of personal tax compliance and advisory services to both U.K. domiciled and non-U.K. domiciled investment fund executives. 

Market Update

After a March and April where funds seemed to be frantically working out what the COVID-19 pandemic was doing to their liquidity and asset valuation, in the last couple of months firms and advisers we are speaking to are returning to some degree of normality.

Fund raise conversations that went quiet for a few months are now starting up, with a probable six months’ delay (or more). Clients are seeing opportunity in a variety of PE sectors and certainly in distressed debt, and it seems there is a large amount of dry powder capital around. The conversations we are having show a concern, however, about not just which sectors will recover better than others, but which exact business models and management teams will perform. Some funds have been wondering whether there is a need for recruiting managers with a particular deep sector expertise for certain assets and whether LPs might look for funds with a narrower investment strategy and narrower/deeper expertise for post-COVID funds.

There are also a lot of conversations around existing assets, particularly at the tail end of a fund, which may have good future potential, but it is uncertain how long it would take to get there. Liquidity through secondary structures or doing fund extensions are being considered. Aside from the legal and commercial factors of these options, people are thinking about how management fees and carry would work to keep a management team incentivised to carry the assets through to a good sale, rather than concentrate on a new fund or look to move job if carry looks a long way away. Carry resets/adjustments have been mentioned for particular assets and tax valuations are very relevant here.

One of the other main topics is how to navigate the complex co-invest and carry rules (old and post FA 2015) to achieve capital losses on underwater instruments and potentially accelerate those losses. This is discussed in more detail in this briefing.

We are planning to discuss these and other topics, with the help of guest speakers, at our first funds breakfast seminar which we are planning for September. It is likely to be a webinar given the current environment, but following from the success of our first Scotland funds webinar we are confident it would be an effective and interesting session.      

Debt Investments and the Availability of Tax Loss Relief

Asset managers may wish to undertake a U.K. tax review of their underlying funds’ debt investments in investee companies to establish whether Capital Gains Tax (“CGT”) loss relief will be available - for individual investors in the funds, individual co-investors from the asset manager and management teams at investee companies - in the event that the investee companies become distressed and the debt investments become irrecoverable.

The availability of CGT loss relief for these individuals should depend on whether the funds’ debt investments are structured as:

1. A simple debt or a debt on security; and
2. If a debt on security, whether the debt investments are qualifying corporate bonds (“QCB”) or non-qualifying corporate bonds (“NQCB”)

If the debt investments are a simple debt, CGT loss relief may be available under the “relief for loans to traders” provisions if the relevant conditions are met (broadly, the debt investments have been used wholly for trading purposes and have become irrecoverable).

If the debt investments are a debt on security and structured as:

• QCB, no CGT loss relief should be available
• NQCB, CGT loss relief should be available    

Any release of the obligation to repay the principal amount of the debt investment may have Corporation Tax implications for the creditor companies which the funds have invested into. We will cover these implications in a future Briefing Note.

Deferrals of POA - Due 31 July 2020

We wanted to take this opportunity to highlight that HMRC have announced that the second POA of Income Tax for tax year 2019/20, due on 31 July 2020, can be deferred, and paid instead, on 31 January 2021.

We understand that this deferral now applies to all self-assessment taxpayers and not just self-employed taxpayers as was first announced.

This process will be automatic, and no application is required, although taxpayers can still make a POA of Income Tax on 31 July 2020 if they wish.

A deferral of the 31 July 2020 POA may mean that taxpayers have a larger payment to make on 31 January 2021 with the following payments potentially due:

• The deferred second 2019/20 POA
• Any 2019/20 balancing payment
• Any 2019/20 CGT liability
• The first 2020/21 POA

COVID-19 Update - CJRS revisions: The good, the bad and the ugly

On Friday 29 May, Rishi Sunak made further announcements on the CJRS support available to employers from 1 July 2020 onwards.

Our colleagues have prepared an informative article to provide further details on the announcements which we have summarised below.

The good

• The scheme has been extended from 1 July 2020 to 31 October 2020;
• Employees can start to return to work from 1 July 2020;
• The scheme will be gradually reduced to help get employees back to work, rather than fully withdrawn; and
• Employees no longer need to be furloughed for a consecutive three week period in order to claim CJRS.

The bad

• Coverage under the CJRS scheme will be limited to those who are furloughed before 30 June;
• The methodology for computing claims is likely to become more complex with the gradual withdrawal; and
• Complex decisions will need to be made by employers and employees to bring about a safe return to work, but in a way that is affordable and sustainable.

The ugly

• New measures were published to extend HM Revenue and Custom’s (“HMRC”) inspection powers to cover CJRS;
• The proposals outline HMRC’s ability to impose penalties and seek recovery action where the CJRS claim was not valid or the company is insolvent; and
• There is a 30 day window in which employers can notify HMRC of errors or omissions, therefore, employers have an opportunity now to adjust or amend their prior CJRS claims.

Please click here for our full article or find further information below.

Covid-19 Updates: Working from home tax reliefs and exemptions

A number of working from home tax reliefs and exemptions may be available to individuals at asset managers who have been working from home during the U.K. lockdown, either because their offices have been closed or they are following advice to self-isolate.

HMRC have published guidance for employers to “Check which expenses are taxable if your employee works from home due to coronavirus (Covid-19)” (Click here to view the guide). From 6 April 2020, employers can pay up to £6 a week (£26 a month) tax-free to employees to cover additional household costs incurred by employees working from home, without requiring supporting evidence of the cost.

Employees may also be able to make a claim for tax relief on the difference between the cost of these additional household expenses and the tax-free payment (if any) received either through submitting:

1. A P87 form (if expenses are up to £2,500); or
2. A self-assessment tax return (if expenses exceed £2,500)

Self-employed individuals should continue to claim for work expenses through their self-assessment tax returns.