Clause 36 deals with collective investment schemes. In the 2011 Budget the Chancellor announced his intention to legislate to authorise tax transparent collective investment schemes to be constituted by the contractual arrangements under the UCITS IV directive. According to the impact note:
“The policy objective is to ensure that the UK can compete as a fund domicile for tax transparent funds.”
In other words, the measure is designed to ensure that the UK remains competitive in the asset management market alongside other European jurisdictions such as Luxembourg and Ireland. The move has, not surprisingly, been strongly supported by the Investment Management Association, which represents the asset management industry in the UK. Clause 36 provides powers for the appropriate taxation for capital gains made by UK investors on assets held in such collective investment schemes, and it empowers the Treasury to define in regulations the types of scheme that will be affected.
One concern is that the structure of those schemes will not have been determined at that stage, so the clause will grant a power to define in regulations something that the Government have not yet outlined. I would be grateful for the Minister’s comments on that. The impact note states:
“This measure is expected to have a negligible impact on the Exchequer”,
but if such gains are deemed not to be chargeable under the new legislation, how much revenue will the Treasury forgo by implementing the rules? As I have mentioned, the introduction of the tax transparent fund is designed to attract business to the UK. On whom will the changes have the most impact, and can the Minister provide the Committee with any figures on that matter from the consultations that have been carried out? Has the Treasury considered the potential for abuse of the rules, and can the Minister reassure the Committee about that? What anti-avoidance measures will the rules include?
I understand that clause 215 will be considered in conjunction with clause 36. Clause 215 fulfils a consequent requirement to allow the Treasury to provide, through regulations, an exemption or relief from stamp duty or stamp duty reserve tax for transactions related to collective investment schemes. I have no queries about that.
As the hon. Lady rightly pointed out, clause 36 and clause 215 fit together, and they facilitate the launch of tax transparent funds in the UK. As she pointed out, they are important to the long-term health of the fund management industry in the UK, which is the largest asset management sector in Europe. Other jurisdictions have tax transparent funds, which are attractive to investors, and the UK fund management sector is at a disadvantage as a consequence. The Government have sought to ensure that London remains competitive as a global financial centre. We identified when we came into office that this was one area where we needed to make further progress, so we have worked closely with the fund management sector on that. The hon. Lady is right that there are still issues outstanding about the nature of some of the vehicles that could take advantage of the scheme.
There are two types of authorised tax transparent funds, both of which are contractual funds under the UCITS IV directive. One type is the co-ownership fund, which is a new type of fund structure in the UK but which is already in place and used extensively in other European member states. We are also considering the introduction of an authorised limited partnership fund, which will be based on the already well recognised unauthorised limited partnership vehicle currently used in the UK, with fully transparent income and gains. Given the availability of such funds in other domiciles, there is a commercial demand for a similar vehicle in the UK, and we anticipate that they will be available for use later this year. Once introduced, the tax transparent funds will enable UK fund managers to take advantage of the opportunities created by UCITS IV and establish master funds here in the UK.
The hon. Lady asked about the cost to the Exchequer. The tax transparent funds move the point of taxation from the funds to the investor, so it is not a case of there being no tax, but the point of taxation has been moved.
The hon. Lady also asked about the regulations, and her question reflects the uncertainty of the structure. The Treasury and the FSA have consulted widely on tax transparent funds, and they are considering the responses. The tax regulations will depend on the overall regulatory structure of the tax transparent funds, which is still being finalised in the light of the consultation. The tax regulations that provide the powers will be subject to approval by the House once the regulatory structure has been finalised.
There is a close link between the regulation and taxation of the funds. Under the previous Government, a tax regime was built up to assist the fund management industry, but the regulatory structure did not quite work for the investors, which is why we are trying to develop the regulatory structure in tandem with the FSA at the same time as developing the tax rules. We want not only a taxation structure that works for the funds, but a regulatory structure that works, too.