A&M Taxand London Asset Managers Briefing Note: Volume 12
1. Major reversal in the Government’s tax plans and possible tax rises
Following the change in Chancellor to Jeremy Hunt on 14 October 2022, a number of the previously announced tax changes from the Mini-Budget have now been, to a large extent, reversed. Key updates include:
- Reinstatement of the corporation tax rise from 19% to 25% in April 2023.
- The basic rate of income tax for individuals will remain at 20%, whilst the additional rate will remain at 45%. The top rate of dividend tax will remain at 39.35%.
- There will no longer be a repeal of the changes to off-payroll working brought in from April 2017 for the public sector and from April 2021 for medium and large organisations.
Further details of the above and other updates can be found in this article.
More changes will be announced in the full autumn statement, scheduled for November 17th, which we will provide a further update on. We understand that Rishi Sunak, our new Prime Minister is preparing for tax rises, particularly income tax and National Insurance Contributions (“NICs”) in the UK in order to compensate for a £50bn fiscal hole left by the last administration. It is yet to be seen whether the drops in NIC rates applicable from 6 November 2022 will continue.
2. Retailisation of private markets
The broadening of access, or “retailisation”, of private market strategies continues to be a key area of focus of asset managers, regulators and policymakers around the world. Providing non-professional investors with access to private asset classes, i.e., private equity, private debt, venture capital, real estate and infrastructure, continues to be encouraged. The rationale behind the pressure to broaden access includes the potential higher yields that could be generated from illiquid assets, particularly when returns from traditional asset classes face economic pressures and low interest rates. In addition, there is an attraction to investing long-term as this could reduce the effects of volatility.
Through the introduction of the UK Long Term Asset Fund (“LTAF”) on 15 November 2021 and reforms to the European Long Term Investment Fund (“ELTIF”), policy makers hope to achieve retailisation of private market strategies. We will provide a further article on the use of these vehicles, including their benefits and challenges, shortly.
3. Update on the potential introduction of an unauthorised contractual scheme fund structure for professional investors
As stated in our last briefing note, the Government is exploring options for the introduction of an unauthorised contractual scheme fund structure for professional investors, known as the Professional Investor Fund. We have provided responses to the consultation. In particular, we have asked for clarity regarding the following:
- Regulatory regime applicable, including authorisation requirements, compared to co-ownership authorised contractual schemes (“CoACSs”)
- How such a structure would differ from other structures already available for investment in real estate assets i.e. property and infrastructure
- How such a structure would specifically benefit other classes of assets / strategies, i.e. private equity, which typically use tax transparent limited partnerships
- Definition of ‘professional investor’
- VAT treatment of fund management fees
- Stamp treatment
- Simplification of capital allowance calculations on plant and machinery
- Interaction with the carried interest rule
- Any particular incentive arrangements?
We will provide a further update once we receive responses.
4. ESG funds and tax
ESG is an approach to investment where investors factor in Environmental, Social and Governance considerations as part of investing. For example, they may consider issues like whether the company manages carbon emissions effectively, whether staff is remunerated appropriately, how well it treats other stakeholders like customers, suppliers and the local community.
We have helped structure many ESG funds recently, including funds specifically focusing on climate change mitigation strategies. We note that investors focused on ESG are increasingly concerned with the tax affairs of the funds they invest in. The expectation of such investors is for funds to perform and maintain sustainable tax practices. Sustainable tax practices include asset managers paying their fair share of tax and good tax and reporting governance.
If you would like to get in touch with us regarding the development of tax and reporting compliant approaches in relation to your current or future fund structures, please feel free to let us know.
5. Pillar 2 applied to investment funds
On 20 December 2021, the OECD published model rules (“GloBE model rules”) to assist in the domestic implementation of the Pillar Two minimum global tax rate of 15%. The Netherlands has published draft legislation to introduce the model rules, becoming the first country in the EU to do so.
Tax neutrality is protected by the GloBE model rules in the following ways:
- The minimum global tax rate of 15% is only applicable to large multinational entity groups (“MNE groups”), which should generally catch trading companies with international presence, but not investment funds, even though their portfolios may be international.
- Certain investment funds fall within Excluded Entities under the rules and therefore exempt from the minimum global tax rate.
Therefore, we generally expect that the GloBE model rules should not adversely impact most investment funds. However, local implementation of the rules should continuously be monitored to determine any effects.
Please get in touch if you would like to speak further.
