Schedule 26 - Offshore funds

Finance Bill – in a Public Bill Committee at 5:00 pm on 25th May 2004.

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Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury 5:00 pm, 25th May 2004

I beg to move amendment No. 195, in

schedule 26, page 414, line 30, at end insert—

'(1A) In subsection (3), paragraph (a) replace ''5 per cent'' with ''15 per cent''.'.

The investment conditions to be met by funds seeking distributor status are essentially being removed, but the 5 per cent. limit on investment in other funds has been retained, which poses problems for funds of funds. The amendment would allow an offshore fund to hold a greater interest in a non-qualifying offshore fund and it would allow greater flexibility in the fund-of-funds market; 15 per cent. is a common threshold used in other investment funds. It may be arguable that 15 per cent. is too great, but the 5 per cent. limit still causes significant problems to the development of funds of funds.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury 5:15 pm, 25th May 2004

The amendment would triple the amount that an offshore fund can invest in other offshore funds without losing its status as a distributing fund. As I explained earlier, the clause and the schedule introduce changes to the offshore fund regime. They are the result of consultation with the industry and have generally been welcomed as providing more flexibility for fund managers to tailor their products to the marketplace. They also enable more UK investors to have the same tax rules as if they had invested in an equivalent UK fund. The changes do not alter the investment restriction, which limits to 5 per cent. the amount an offshore fund can invest in other offshore funds without losing its distributor status.

The purpose of the 5 per cent. rule is to stop funds accumulating income in lower-level funds and taking only a small distribution from those funds, which they then distribute to their own unit-holders. The level of 5 per cent. is a form of de minimis to allow relatively small investments in other funds to be disregarded.

A change to 15 per cent., as proposed by the hon. Gentleman, represents a major shift, and it would give funds wider scope to structure their investments to minimise the amount that they are required to distribute. It could radically alter the competitive balance between offshore and UK funds. Moreover, a level of 15 per cent. can hardly be regarded as de minimis, as it is even higher than the 10 per cent. regulatory limit on investing in other funds imposed by the EU directive for collective investment funds.

The new offshore fund rules offer a considerable gain in flexibility to the funds industry, but we must retain the basic integrity of the offshore funds tax system to ensure a level playing field. I therefore urge the hon. Gentleman to withdraw his amendment.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

I am inclined to accept the argument that 15 per cent. is too high. It is not a matter simply of the difference between onshore and offshore funds, because an onshore fund may wish to develop along a founder funds route and the regulatory level is 10 per cent. I hope that the Government will further consider that as a matter of principle, but I accept that the

industry should be pleased with the measures. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 26 agreed to.