Investment manager

The UK Investment Manager Exemption and Crypto-Assets – Consultation Paper

As part of wider efforts to make Britain a global hub for crypto-asset technology and investment, on 4 April 2022 the government publicly committed to consultations on extending the scope of the UK investment manager exemption (theBritish EMI“) include direct crypto-assets as part of the investment transaction list to promote the UK investment management industry in this area. On May 23, 2022, the government released this consultation document with a call for engagement from affected stakeholders: Expand the list of investment transactions for the investment management exemption and other fund tax regimes.

EMI and crypto-assets: current situation

For information, a non-UK fund vehicle may become subject to UK tax if it ‘deals’ (rather than ‘invests’) in the UK through a permanent establishment or ‘an agent. For these purposes, a UK-based investment manager with discretionary investment management authority is often considered a non-UK fund agent. The UK EMI was introduced into law to protect the UK fund 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 carried out on its behalf by a bona fide resident investment manager (and the legislation sets out a number of criteria which must be met in order to demonstrate that the UK investment manager is a status agent independent).

The problem for the UK fund management industry at present is that it may not currently be possible for a UK investment manager to provide discretionary investment management services to a offshore fund which undertakes a trading strategy in relation to direct crypto-assets, as the application of the UK EMI is limited to “investment transactions” as defined in the regulations (often referred to as the “list blanche”), and crypto-assets do not expressly appear on this list. As a result, similar to how UK managers operate when it comes to physical commodity funds, UK managers have often been forced to limit their fund investment strategy to crypto-asset futures and options. (which are expressly listed, provided that 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 British EMI

The government proposes to extend the list of UK EMI investment transactions to certain types crypto-assets, recognizing that “crypto-assets” is an umbrella term that continues to evolve and encompasses different types of cryptographic technologies, including but not limited to exchange tokens, utility tokens, security, stablecoins, smart contracts and non-fungible tokens.

HMRC plans to identify the characteristics of crypto-assets that can be used as investment products and will aim to limit the whitelist to these types of crypto-assets only. It is proposed that HMRC will only include assets that use cryptography and distributed ledger technology to validate and secure transactions (or similar technology), and will not allow the inclusion of crypto-assets to be used in a way to circumvent asset classes currently excluded from the list of investment transactions such as land or crypto-asset transactions that involve the transfer of tangible or intangible assets that are not already included in the list of investment transactions . Additionally, the definition of crypto-assets will also exclude “closed loop crypto-assets”. These are crypto-assets intended only for use within a closed authorized network, for example for the purpose of purchasing goods or services. They can only be transferred by or to the issuer or participating merchant and can only be exchanged for fiat currency by a participating merchant. It is also hoped that the scope of new assets included in cryptoassets for these purposes will contain some degree of “future proof” to anticipate likely developments in this rapidly evolving field.

Collective investment agreements

It should also be noted that the UK EMI investment transaction list is also used in other contexts of UK tax law to identify transactions which would generally be considered part of an investment business and would generally not be considered commercial activities, including for the purposes of a range of funds such as licensed broad-holding investment funds, exempt unauthorized mutual funds, reporting offshore broad-holding funds and approved investment trusts. HMRC is consulting on whether to extend crypto-assets to the list of investment transactions for UK EMI purposes only, or whether to extend the change to other tax regimes of funds that use also the list of investment transactions.

Expected timeline and next steps

Please note that the consultation closes on 18 July 2022, with a view to publication by HMRC of a summary of the responses (along with draft legislation or HMRC order) in the autumn (September – November 2022 ).
Interested parties are encouraged to take this opportunity to provide their views on which types of crypto-assets should be included or excluded from the list of UK IME investment transactions, and whether this category of crypto-assets should be limited to the UK EMI or all instances. in UK tax law where the investment transaction list is used.