The Authorised Investment Funds (Tax) Regulations 2006

Explanatory Note

(This note is not part of the Regulations)

In the Finance (No. 2) Act 2005 (c. 22) (“the 2005 Act”), Chapter 3 of Part 2 makes provision relating to authorised investment funds. Existing statutory provisions dealing with authorised investment funds cease to have effect on such day as the Treasury may appoint by order (see sections 17(1) and 19(1) of the 2005 Act). Arrangements are being made for the enactments specified in section 17(1) of the 2005 Act to be repealed.

Sections 17(3) and 18 of the 2005 Act then confer powers to make provisions about the treatment of authorised investment funds for taxation purposes. These Regulations exercise those powers. In doing so, these Regulations contain material dealing with the same matters as those dealt with in the enactments specified in section 17(1) of the 2005 Act, and in various statutory instruments; but these Regulations make some changes in dealing with those matters. These Regulations also contain new provisions.

Part 1 of these Regulations contains preliminary provisions and provides for interpretation. As regards the preliminary provisions, regulation 1 provides for citation, commencement and effect; and regulation 2 sets out the structure of these Regulations, indicating the nature of each of the eight parts into which these Regulations are divided. Regulations 3 to 8 then deal with matters of interpretation. Regulation 3 defines “authorised investment funds” as “open-ended investment companies” and as “authorised unit trust schemes”. The definition of an open-ended investment company is dealt with in regulation 4 and definitions relating to authorised unit trust schemes are set out in regulation 5. Regulations 6 to 8 contain further definitions. The final regulation in this Part is regulation 9, which introduces the Schedule to these Regulations.

Part 2 of these Regulations deals with the tax treatment of authorised investment funds; and this Part contains the special detailed rules that apply to this subject. Capital profits, gains or losses arising to an authorised investment fund must not be brought into account for the purposes of Chapter 2 of Part 4 of the Finance Act 1996 (c. 8) (loan relationships) (see regulation 10), or for the purposes of Schedule 26 to the Finance Act 2002 (c. 23) (derivative contracts) (see regulation 11). Regulation 12 contains further provisions supplementing these basic rules. Further provision is then made for the purposes of an authorised investment fund's loan relationships. Regulation 13 is concerned with the treatment of interest distributions, and regulation 14 prevents the carrying-back of deficits on loan relationships to earlier periods.

Part 3 of these Regulations deals with distributions made by authorised investment funds. Regulation 15 is concerned with interpretation, and regulation 16 specifies the funds excluded from the ambit of this Part. Regulation 17 deals with the contents of distribution accounts: amounts shown as available for distribution must be shown as available for distribution as yearly interest or as dividends. Regulations 18 to 21 are concerned with interest distributions. Regulation 18 sets out the general rule that applies. But before an interest distribution may be made, an amount must satisfy the qualifying investments test. The test is set out in regulation 19 and further explained in regulations 20 and 21. Regulation 22 deals with dividend distributions; and regulation 23, which applies both to interest distributions and to dividend distributions, contains provisions which apply if the amounts available for distribution are de minimis only.

Part 4 of these Regulations deals with the treatment of participants in authorised investment funds; and this Part is divided into four Chapters.

Chapter 1 of Part 4 contains preliminary provisions. Regulation 24 sets out the structure of this Part, indicating the nature of each of the four Chapters, and regulation 25 specifies funds excluded from the ambit of this Part.

Chapter 2 of Part 4 deals with participants chargeable to income tax. Regulation 26 provides for the general obligation to deduct a sum representing tax when any yearly interest is paid (“the deduction obligation”) to be relaxed in a number of cases. The cases in question include those where the reputable intermediary condition is met, the residence condition is met or the non-liability condition is met. Regulations 27 to 29 then deal in detail with the reputable intermediary condition; regulations 30 to 33 with the residence condition; and regulations 34 to 46 with the non-liability condition.

Chapter 3 of Part 4 deals with participants chargeable to corporation tax. Regulation 47 provides that the deduction obligation does not apply to interest distributions. So far as dividend distributions are concerned, regulation 48 provides for the unfranked part of the dividend distribution to be treated as an annual payment and not as a dividend distribution or an interest distribution. Regulation 49 specifies how the unfranked part of the dividend distribution is to be calculated, and regulations 50 to 52 contain supplemental provisions.

Chapter 4 of Part 4, which does not derive in any way from earlier legislation, imposes a charge to tax on substantial QIS holdings in qualified investor schemes. The first group of provisions in this Chapter is of a general nature. Regulation 53 provides for the charge to tax under this Chapter, and specifies those participants who are excepted from that charge. Regulation 54 explains what is meant by the expression “substantial QIS holding”. Regulation 55 is concerned with the amount charged to tax under this Chapter: that amount is calculated by reference to the difference in value of the substantial QIS holding between two measuring dates. Regulation 56 specifies the dates that are measuring dates, and regulations 57 and 58 contain additional provisions relating (respectively) to the charges to income tax and corporation tax. Regulation 59 contains further provisions. The next group of provisions in this Chapter is concerned with the first measuring date. The general rule that a participant must value his holding on the first measuring date is set out in regulation 60; but that general rule is modified in the cases dealt with in regulations 61 to 63. Regulation 64 contains the definition of the first measuring date, and regulation 65 specifies a calculation that must then be made. The final group of regulations in this Chapter is concerned with disposals of holdings. Separate provision is made for reorganisations (regulation 66), for the disposal of part of a holding (regulation 67), for the disposal of the whole of a holding (regulation 68) and for no gain/no loss disposals (regulation 69).

Part 5 of these Regulations deals with compliance. Regulation 70 provides for section 234A of the Income and Corporation Taxes Act 1988 (c. 1) (information relating to distributions) to apply in a modified form. Regulation 71 provides that an authorised investment fund making interest distributions without deduction of tax must report this information to the Commissioners for Revenue and Customs. The Commissioners may require information to be given about interest distributions made without deduction of tax (regulation 72) and may inspect records (regulation 73), but the information so obtained by the Commissioners may only be used in limited contexts (see regulation 74). The Commissioners may also inspect residence declarations given under Chapter 2 of Part 4 of these Regulations (regulation 75).

Part 6 of these Regulations contains further provisions relating to authorised investment funds; and this Part is divided into two Chapters.

Chapter 1 of Part 6 is of a general nature. Regulation 76 deals with the case where an open-ended investment company issues shares of different denominations. Regulation 77 provides that there must not be discrimination in respect of different classes of shares.

Chapter 2 of Part 6 is concerned with the amalgamation of an authorised unit trust with, and the conversion of an authorised unit trust into, an open-ended investment company. The circumstances in which this Chapter applies are set out in regulation 78; and regulations 79 to 85 are concerned with the tax consequences of the scheme undertaken.

Part 7 of these Regulations contains consequential amendments and modifications of enactments; and this Part is divided into three Chapters.

Chapter 1 of Part 7 contains amendments of references to enactments repealed by section 17(1) of the 2005 Act (regulations 86 to 92).

Chapter 2 of Part 7 contains modifications of the Tax Acts (regulations 93 to 96).

Chapter 3 of Part 7 contains modifications of the Taxation of Chargeable Gains Act 1992 (c. 12) (regulations 97 to 110).

Part 8 of these of these Regulations contains final provisions. Regulation 111 provides for the revocation of statutory instruments whose subject matter is now contained in these Regulations.

The Schedule to these Regulations is in two Parts. Part 1 gives the meaning of the abbreviated references to Acts used in these Regulations; and Part 2 consists of an Index of expressions defined or otherwise explained in these Regulations.

A full regulatory impact assessment of the effect that this instrument will have on the costs of business is available on the website of Her Majesty's Revenue and Customs at www.hmrc.gov.uk/ria/ria-aif.pdf.