2015 Autumn Statement and Spending Review Released

November 30, 2015

The statement is tax light, but there is continued focus on carried interest.

On 25 November, the UK Chancellor of the Exchequer George Osborne made a number of tax-related announcements in the 2015 Autumn Statement and Spending Review. Draft legislation that implements many of these announcements is expected to be published on 9 December for inclusion in the Finance Bill 2016. This year’s Autumn Statement is unusually light on detail in both its breadth and depth of coverage on business tax matters.

Tax Treatment of Fund Managers’ Performance-Related Returns

The government is expected to publish draft legislation to implement the conclusions reached by HM Revenue & Customs (HMRC) following its July consultation relating to the circumstances in which performance-linked fees arising to fund managers may continue to benefit from capital gains taxation. The legislation will be included in the Finance Bill 2016 and take effect beginning 6 April 2016. This legislation, combined with the disguised management fee rules and the abolition of the base cost shift for carried interest that were introduced in the UK’s 2015 Summer Budget, is part of a series of measures that the government has taken to crack down on perceived tax avoidance in the private equity and asset management industry. (For further details on this topic, see our LawFlash Tax Measures in the UK 2015 Summer Budget).

In discussions between HMRC and the Alternative Investment Management Association (AIMA) on 11 November, HMRC indicated that a “holding period” approach is likely to be adopted to determine whether performance-related fees will benefit from capital gains tax. Under this methodology, full capital gains tax treatment is likely to be limited to carried interest arising from assets held by a fund for at least four years. Where this holding period is less than three years, income tax treatment will apply, with some sort of gradation for holding periods between three and four years (thus ensuring an appropriate split between income tax and capital gains tax).

This formulistic approach may result in carried interest holders in some funds being treated as earning income in respect of early disposals and/or opportunistic disposals made within a short period of acquisition. However, this tax treatment is likely to be limited to the carried interest holders themselves and will not cover other fund investors, so a fund’s own activities should not be “tainted” by trading treatment purely as a result of these changes (which will be particularly important to pension fund investors). We expect to see more detail on this when draft legislation is released on 9 December.

It is no surprise that a consequence of these changes may be that performance-related fees from hedge funds are unlikely to qualify for capital gains treatment, because HMRC takes the view that such carried interest is more closely aligned with an annual investment management fee.

Proposed Changes to the UK’s Limited Partnerships Rules for Private Funds

On 23 July, the government launched a consultation on proposed changes to the UK limited partnership rules for private equity funds constituted as limited partnerships. The purpose of these proposed changes is to ensure that the UK limited partnership continues to be the vehicle of choice for European private equity, venture capital and other private funds by removing some of the unnecessary legal complexity and administrative burdens currently associated with limited partnerships. The Government also remains committed to exploring the possibility of allowing UK (non-Scottish) funds to elect to have a separate legal personality. No further announcements or updates have been made in this area, although given that the consultation closed on 5 October 2015 a response document or draft legislation is expected to be published in the near future.

PAIFs and Co-Ownership Authorised Contractual Schemes

The government has confirmed that the Finance Bill 2016 will introduce a Stamp Duty Land Tax (SDLT) seeding relief on the transfer of existing property portfolios into a property authorised investment fund (PAIF) or a co-ownership authorised contractual scheme (CoACS). The Finance Bill 2016 will also amend the SDLT treatment of CoACSs so that SDLT is not payable on transactions in units (subject to resolving potential avoidance issues). There will be a defined seeding period of 18 months, a three-year clawback mechanism, and a portfolio test of 100 residential properties with a total value of £100 million or 10 nonresidential properties with a total value of £100 million. These changes will take effect after the date on which the Finance Bill 2016 receives Royal Assent. Whether this is perceived by industry as a useful addition will depend on the antiavoidance provisions and how particular definitions are drawn.

Automatic Exchange of Information

On 14 September, HMRC published guidance notes on the automatic exchange of financial account information under the Organisation for Economic Co-operation and Development’s (OECD's) common reporting standard (CRS), the EU Council Directive 2014/107/EU of 9 December 2014 on Administrative Cooperation (DAC), the Foreign Account Tax Compliance Act (FATCA), and the UK's arrangements with the Crown Dependencies and Overseas Territories (CDOT). The DAC effectively implements the CRS as between EU member states. Under the CRS and DAC, the year ending 31 December 2016 will be the first reporting year, with a reporting deadline of 31 May 2017 and an information exchange deadline of 30 September 2017.

The guidance notes incorporate (to some extent) the existing FATCA and CDOT guidance and also indicate the extent to which this existing guidance has not been incorporated. Although the basic due diligence and reporting processes are the same under the DAC, CRS, CDOT, and FATCA rules, the guidance’s purpose is to assist with any UK-specific areas where the CRS allows for a degree of optionality and to highlight differences in approach between the DAC, CRS, FATCA, and CDOT rules, as well as to bring together some of the main issues. HMRC emphasises that the CRS commentary should be the first point of reference for consultation if financial institutions have any doubts about how any element of the DAC applies to them.

Hybrid Mismatches

Following its December 2014 consultation on the tax treatment of hybrid mismatch arrangements, the government will introduce legislation in the Finance Bill 2016, which will take effect 1 January 2017, to implement the OECD recommendations as part of the base erosion and profit shifting (BEPS) project for addressing hybrid mismatch arrangements. The rules will apply to arrangements that involve payments made under, or in connection with, a hybrid financial instrument or by or through a hybrid entity. A “hybrid entity” for these purposes is defined as an entity recognised as a person (natural or legal) under the tax code of any territory and the income or expenses of which are also treated as belonging to another (or other) person(s) under the tax code of that or another jurisdiction. By this definition, the rules could potentially catch payments made by or through Delaware limited liability companies that are deemed UK resident for tax purposes (such entities being transparent for US tax purposes).

Dividends Taxation Reform

The government has confirmed that it will shortly consult on the taxation of company distributions. It is not yet clear whether these changes will be limited to tax avoidance situations where returns are made in such a way that they qualify (under current law) for capital gains tax treatment or will have  broader application. This confirmation follows a proposal (announced in the July 2015 Budget and subject to consultation) to reform the taxation of dividends by abolishing the tax credit and replacing it with a new tax-free dividend allowance. For further details of the proposed changes to the taxation of dividends, see our LawFlash Tax Measures in the UK 2015 Summer Budget.

Employment-Related Taxes

As part of an ongoing project to simplify the tax rules relating to employee share schemes, a number of technical changes will be introduced to streamline and simplify aspects of the tax rules for tax-advantaged (Enterprise Management Incentives, Company Share Option Plans, Save As You Earn, and Share Incentive Plans) and non-tax-advantaged employee share schemes. These changes will provide more consistency, including clarifying the tax treatment for internationally mobile employees of certain employment-related securities (ERS) and ERS options.

In addition, and as previously announced, the government is concerned about the growth of salary sacrifice arrangements used to reduce or defer income tax and social security charges. The government is considering what further action is necessary and is gathering further evidence to inform its approach.

Peer-to-Peer Lending: Withholding Tax and Bad Debt Relief

The government is expected to publish draft legislation shortly in light of responses to its 15 July consultation on a proposed withholding tax on interest payments in respect of peer-to-peer (P2P) loans with a view to its inclusion in the Finance Bill 2016.

P2P lending platforms, a type of Internet-based intermediary that provides a connection and management service to put lenders in contact with borrowers, enable individuals and businesses to lend to one another on a “many to many” model. The nature of the lending arrangements means that a single interest payment might consist of a mixture of interest from which tax should be deducted and interest that should be paid gross, which makes it difficult for borrowers to work out what their obligations are and how to comply with them. The government seeks to resolve this issue by imposing a withholding tax on the platform itself.

There is also a parallel consultation on a proposed Personal Savings Allowance (taking effect beginning 6 April 2016) that would operate to provide tax relief for individuals of up to £1,000 (or £500 for higher-rate taxpayers) with respect to income tax deducted at source from interest paid by banks and building societies, including in respect of interest received by individuals on their P2P loans.

Abolition of the Permanent Non-domiciled Status

“Permanent non-domicile status” will be abolished starting 6 April 2017. Under the new rules, individuals who have been UK resident for more than 15 out of the last 20 tax years will be deemed to be UK domiciled for all tax purposes, not just for inheritance tax. Also, individuals with a UK domicile of origin will be deemed to be UK domiciled whenever they are resident in the UK. Non-UK domiciled individuals are able in certain cases to be subject to UK tax on non-UK source income and gains only to the extent that the income or gains are remitted to the UK.


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Kate Habershon