After HMRC's technical note on loan relationships I was thinking what would be a good way to make the qualifying investments test (i.e. a fund with > 60% of its investments as loan relationships is taxed as a loan relationship) less onerous?
It seems to me that the wording of CTA 2009 490 (1) "there is a time in the period (i.e the accounting period of the company with the holding in the fund) when that company, scheme or fund fails to meet the qualifying investments test." is disproportionate as a fund that exceeds the 60% limit for one day of an accounting period is to be treated as a loan relationship for the whole of that accounting period.
It might be easier for companies to apply this legislation if there was a grace period during which a fund could fail the qualifying investments test without having to be treated as a loan relationship. So perhaps you to treat a fund as a loan relationship if it fails the qualifying investments test for 30 days in an accounting period. (I think the idea that once a fund has failed its a loan relationship for the whole period else you might have funds that regularly skip between bond and equity.)
This still leaves the problem that the fund still has to be monitored on a day by day basis which can be particularly tricky for some offshore funds where information on the underlying investments may be hard to obtain. Perhaps there could be second rule that says that if a fund passes the qualifying investments test when purchased and on the last day of a company's accounting period then it is to be treated as an "equity" fund for the period. HMRC might worry about funds cheating i.e. ensuring that bond funds pass the qualifying investments test on the last day of an accounting period but I would not see this as a big worry. Firstly it is the company's accounting period and not the funds that you would test on. Secondly is it really going to be worth the hassle and cost of annually selling 41% of a fund's bond assets and reinvesting in equities to obtain equity treatment for a bond fund?
In my world you would run the two tests side by side, that is even if an equity fund did fail the qualifying investments test on the last day of an accounting period then there would still be the <30 day safe harbour.
A final thought of another approach. For UK AIFs we have a counterpart to the qualifying investments legislation in the ability to pay an interest distribution (although here the fund paying the distribution has to have > 60% of its investments in loan relationships for the whole of the dividend period). Perhaps we could piggy back off this and say that a company has to treat any investment that pays an interest distribution as a loan relationship but that any UK fund that doesn't pay interest distributions is an equity fund?
No comments:
Post a Comment