Spring Budget 2023: QAHC

The current position

For a company to be a QAHC, it must meet the "ownership condition" by being at least 70% owned by good investors ("category A investors").  Included in the list of "category A investors" are "qualifying funds". 

An entity is a fund if it is a "collective investment scheme" (CIS) or an "alternative investment fund" (AIF) for UK regulatory purposes. A fund is "qualifying" if it meets the "diversity of ownership condition", which it can do in one of three ways which, broadly, are:

• the fund is a CIS and meets the "genuine diversity of ownership condition" (the GDO);
  
  
• the fund is not closely held; or
  
  
• the fund is 70% controlled by category A investors.

The problem for corporate funds

As HMRC consider that the GDO is a one-off test (the others require on-going monitoring) it is, arguably, the most advantageous condition to meet.  However, this is not open to most funds that are companies as, under the current rules, they are not CIS (unless they are open-ended investment companies).  

The problem for aggregator funds

The GDO requires a fund to be widely marketed.  As an aggregator fund is a fund through which different associated funds hold their interests in the same underlying asset. The associated funds may have been widely marketed, but the aggregator may not have been.

The problem for parallel funds

A parallel fund is essentially, a series of fund vehicles that are associated and which invest together in the same underlying assets. However, the current QAHC rules require fund structures to be considered on an entity by entity basis when assessing whether the ownership conditions is met. 

Therefore, if there is both a main fund vehicle and a parallel fund vehicle, investing jointly in a potential QAHC, each must be considered separately.  If the parallel vehicle is used by only a few investors, it may not satisfy any of the diverse ownership tests by itself and so may not be a "qualifying fund". 

One of the requirements for a company to be a QAHC is, broadly, that its investment strategy does not include the acquisition of listed equities.  This "investment strategy" condition therefore reduces flexibility for funds that want to be able to acquire small holdings of listed shares.

• Corporate funds are to be able to use the GDO to meet the ownership condition. Today's announcement indicates that this change will be deemed to have always had effect (so back to the introduction of the regime in April last year).

• The GDO will be able to be satisfied by reference to multi-vehicle arrangements. Essentially, this allows the test to be considered in the context of the entities making up the "fund" as a whole (rather than on an entity-by-entity basis) and so is helpful in relation to parallel and aggregator vehicles.   This change will have effect from the date of Royal Assent to the Finance Bill 2023. For more detail please click here.

• A QAHC will be able to elect for listed securities it holds to be treated as unlisted for the purposes of the investment strategy condition. However, this comes at a cost. If the election is made, the corporation tax exemption that usually applies to distributions received by a company is switched off.  This change will have effect from the date of Royal Assent to the Finance Bill 2023.

The government will be pushing ahead with its proposal announced on L Day to tighten up the current anti-avoidance rules targeting those looking to side step the restrictions on ownership of QAHCs by fragmenting their ownership interests. That change will have effect back to L Day (20 July 2022). In addition, several further amendments have been announced today.  These include:

• an amendment to the eligibility criteria for QAHC status. Companies within the UK's special corporation tax regime for securitisation companies will not be able to be QAHCs with effect from today (15 March 2023);
  
  
• the introduction (from the date of Royal Assent to the Finance Bill 2023) of special rules for alternative finance arrangements, the intention behind which is to help Sharia-compliant structures access the regime; and
  
  
• several tidy-ups of the technical provisions.

The use of parallel funds and aggregator funds is very common, and we have already encountered situations where the fund structures in which they sit are, in reality, diversely owned but are finding it difficult to access the QAHC regime due to the current overly-restrictive legislation.  The reforms to this aspect of the regime are therefore welcome, as is the fact that the relevant proposals have been simplified since L Day. 

Similarly, the asset management industry will very much welcome the fact that corporate funds can benefit from the GDO.  It is hard to see why corporate funds should be in a worse position than other types of fund, and this reform rectifies that anomaly. Although it appears to have retrospective effect, we understand that this will only be relevant to corporate funds that have made an ineffective notification (by relying on the GDO), and will not allow corporate funds to submit notifications to join the regime with retrospective effect.

Today's proposals in relation to the investment strategy condition may not satisfy funds that want the flexibility to hold small amounts of listed equities. This is because they may consider that the benefit of the QAHC being able to hold such securities is outweighed by the cost, i.e. liability to corporation tax on the dividends, especially with the main rate set to increase to 25% from April.   

We will know more about the proposals next week, when the Spring Finance Bill 2023 is due to be published.

For more information on QAHCs please see our detailed briefing.