The Authorised Investment Funds (Tax) (Amendment) Regulations 2009

EXPLANATORY NOTE

(This note is not part of the Regulations)

These Regulations amend the Authorised Investment Funds (Tax) Regulations (S.I. 2006/964) (“the principal Regulations”).

Regulation 1 of these Regulations deals with citation and commencement, and regulation 2 provides for the principal Regulations to be amended. Regulations 3, 4 and 5 make consequential amendments to regulations 2, 6 and 8 of the principal Regulations respectively.

Regulation 3 inserts a reference to Parts 1A, 2B and 4B in regulation 2 of the principal Regulations.

Regulation 4 inserts a definition of “instrument constituting the fund” and “genuine diversity of ownership condition” into regulation 6 of the principal Regulations.

Regulation 5 inserts a definition of “connected person” into regulation 8 of the principal Regulations.

Regulation 6 inserts Part 1A into the principal Regulations comprising regulations 9A and 9B. Part 1A defines the genuine diversity of ownership (“the GDO”) condition, which details the conditions that must be fulfilled in order for the GDO condition referred to in Parts 2A, 2B, 4A and 4B of the principal Regulations to be satisfied. Part 1A also contains the clearance procedure that can be followed by an authorised investment fund to ascertain whether it meets the GDO condition.

Regulation 7 modifies the meaning of “interest distribution” in regulation 13 of the principal Regulations to make provision relating to Tax Elected Funds.

Regulation 8 amends regulation 14B of the principal Regulations to reflect that as a consequence of these regulations the GDO condition applies to the principal Regulations where specified. Previously, although Parts 2A and 4A contained references to a GDO condition, each Part had its own specific GDO condition.

Regulation 9 omits regulations 14C and 14D of the principal Regulations, which previously contained the GDO condition and the clearance procedure for Part 2A of the principal Regulations.

Regulation 10 inserts a new Part 2B into the principal Regulations comprising regulations 14E to 14N. New regulation 14E details the tax treatment of an authorised investment fund which carries out an investment transaction and which meets the GDO condition in the particular period under consideration. An investment transaction is defined in new regulation 14F as a transaction in stocks or shares, a transaction in a relevant contract, a transaction which results in a diversely owned authorised investment fund becoming a party to a loan relationship or a related transaction, a transaction in units in a collective investment scheme, a transaction in securities, a transaction in buying or selling currency and a transaction in a carbon emissions trading product. New regulations 14G to 14N make further provisions in relation to these transactions.

Regulation 11 amends regulation 17 of the principal Regulations to make consequential amendments to provisions in respect of distribution accounts in relation to Property AIFs and Tax Elected Funds.

Regulation 12 amends regulation 48(4) of the principal Regulations to reflect that the GDO condition is contained in regulation 9A.

Regulation 13 amends regulation 51(1)(b) of the principal Regulations to reflect that the GDO condition is contained in regulation 9A.

Regulation 14 inserts new regulations 52B to 52E into the principal Regulations. New regulation 52B sets out the tax treatment of shares and units held by a financial trader in a diversely owned authorised investment fund which meets the requirements of regulation 14E in a relevant period. The regulation contains definitions of the terms used in the regulation and in new regulation 52C. New regulation 52C sets out the amounts that financial traders are to bring into account in respect of the shares or units held in the diversely owned authorised investment fund and covers a number of different scenarios. New regulation 52D excludes certain shares and units from regulation 52C. New regulation 52E defines “financial trader” and contains consequential definitions.

Regulation 15 amends regulation 69D of the principal Regulations to reflect that the GDO condition is contained in regulation 9A.

Regulation 16 omits regulation 69DA of the principal Regulations. As a consequence of the introduction of a general GDO into the principal Regulations this regulation is no longer required.

Regulation 17 omits regulation 69J of the principal Regulations which contained the GDO condition which has to be satisfied in order for Part 4A to apply to an open-ended investment company. As a consequence of the introduction of a general GDO condition into the principal Regulations this regulation is no longer required.

Regulation 18 amends regulation 69O of the principal Regulations to reflect that the GDO condition is contained in regulation 9A.

Regulation 19 amends regulation 69P of the principal Regulations to reflect that the procedure for clearance in respect of the GDO condition is contained in regulation 9B.

Regulation 20 amends regulation 69Q of the principal Regulations to reflect that the GDO condition is contained in regulation 9A.

Regulation 21 omits regulation 69U of the principal Regulations. This regulation contained the clearance procedure for the GDO condition in relation to Part 4A of the principal Regulations. As a consequence of the introduction of the GDO condition this regulation is no longer required.

Regulation 22 amends regulation 69Z8 of the principal Regulations to reflect that the GDO condition, which is a condition that has to be satisfied in order for Part 4A to apply to an open-ended investment company is now contained in regulation 9A of the principal Regulations.

Regulation 23 substitutes regulation 69Z34 (certificates of deduction of tax) of the principal Regulations to provide for information relating to the deduction of tax to be provided in a written statement or electronically.

Regulation 24 inserts the new Part 4B dealing with a certain type of authorised investment fund (“Tax Elected Funds”) into the principal Regulations. Part 4B comprises regulations 69Z42 to 69Z71 of the principal Regulations and is divided into seven Chapters.

Chapter 1 of Part 4B contains preliminary provisions. Regulation 69Z42 is of an introductory nature; regulation 69Z43 sets out the structure of Part 4B; and regulation 69Z44 defines two key concepts.

Chapter 2 of Part 4B is concerned with entry into the Tax Elected Funds regime. Regulation 69Z45 specifies the conditions which an authorised investment fund must meet in order for Part 4B to apply to it in respect of an accounting period. The conditions are the property condition (dealt with in regulation 69Z46); the loan creditor condition (dealt with in regulation 69Z47); and the scheme documentation condition (dealt with in regulation 69Z48). Regulations 69Z49 to 69Z53 deal with procedural matters arising in connection with an application for Part 4B to apply. Regulations 69Z54 and 69Z55 are concerned with the consequences of entry into the Tax Elected Funds regime.

Chapter 3 of Part 4B is concerned with the tax treatment of Tax Elected Funds. Regulation 69Z56 provides for the components of income of a Tax Elected Fund. Regulation 69Z57 provides for the treatment of property investment income. Regulation 69Z58 provides for the treatment of distributions.

Chapter 4 of Part 4B is concerned with distributions made by Tax Elected Funds. Regulation 69Z59 provides for the total amount shown in the distribution accounts of a Tax Elected Fund to be attributed in two different ways; and regulations 69Z60 and 69Z61 are concerned with the tax implications of the different attributions.

Chapter 5 of Part 4B is concerned with the treatment of participants in Tax Elected Funds. Regulation 69Z62 makes provision relating to participants chargeable to corporation tax. Regulation 69Z63 is concerned with the obligation to deduct tax from a distribution to participants. Regulation 69Z64 makes a consequential modification to the Corporation Tax Act 2009.

Chapter 6 of Part 4B is concerned with compliance. Regulations 69Z65 to 69Z68 deal with the consequences where conditions for membership of the Tax Elected Funds regime are breached. Regulation 69Z69 provides for information to be provided to an officer of Revenue and Customs.

Chapter 7 of Part 4B is concerned with leaving the Tax Elected Funds regime. Regulations 69Z70 to 69Z73 provide for Part 4B to cease to apply to a fund in various different circumstances.

Regulations 25 to 29 make consequential amendments to the principal Regulations. Regulation 25 amends regulation 70 (application of section 234A of ICTA) to make provision for the information to be provided to a participant in a Tax Elected Fund. Regulations 26 to 29 make consequential amendments to provide for the treatment of TEF distributions (non-dividend).

Regulation 30 amends regulation 95 of the principal Regulations, which regulation, as a consequence of the rewriting of Finance Act 1996, modifies the Corporation Tax Act 2009.

Regulation 31 amends regulation 96 of the principal Regulations to modify the provisions of the Income Tax (Trading and Other Income) Act 2005 in relation to Property AIFs and Tax Elected Funds.

Regulation 32 makes amendments to the Schedule to the principal Regulations to provide for abbreviations and defined expressions used in Part 4B.

Regulation 33 makes amendments to the Real Estate Investment Trusts (Assessment and Recovery of Tax) Regulations 2006 (S.I. 2006/2867) to provide that distributions by a Real Estate Investment Trust are not made gross.

A full Impact Assessment has not produced in relation to the insertion of Part 1A (the genuine diversity of ownership condition) as no impact on the private or voluntary sectors is foreseen. A full and final Impact Assessment has not been produced in relation to the insertion of Part 2B (diversely owned AIFs) as a negligible impact on the private or voluntary section is foreseen. A full Impact Assessment has been produced in relation to the insertion of Part 4B (Tax Elected Funds) and is available on the HMRC website under http://www.hmrc.gov.uk/ria/index.htm#full.