Consultation outcome

Expanding the Investment Transactions List for the Investment Management Exemption and other fund tax regimes – summary of responses

Updated 9 December 2022

1. Introduction

1.1. This document summarises the responses to the consultation ‘Expanding the Investment Transactions List for the Investment Management Exemption and other fund tax regimes’.

1.2. The consultation was open between 23 May 2022 and 18 July 2022.

1.3. The consultation was launched after the government announced its intention on 4 April 2022 to expand the Investment Management Exemption (IME) to include cryptoassets. This measure was announced as part of a wider package of cryptoasset measures, which aim to give effect to the government’s desire to maintain and enhance the UK’s position as a global leader in both investment management and cryptoasset activity and business.

1.4. HMRC met with a range of stakeholders during the consultation period and received a total of 14 responses.

1.5. A full list of respondents is available in Annex A. HMRC wishes to thank all respondents for their contributions which have been considered carefully.

2. Responses

2.1. This chapter summarises the responses to the consultation questions and provides any government response after each question.

2.2. Respondents unanimously welcomed the consultation and were supportive of the measure, as well as the government’s wider ambition to maintain the UK’s position as one of the leading financial centres globally.

2.3. At present, the IME only covers transactions in assets that are included within the Investment Transactions List (ITL), and the consultation specifically sought views on:

• the types of cryptoassets which should be included within the IME
• whether there is a case for extending this change to tax regimes for funds which also use the ITL

2.4. Some respondents limited their consultation responses to addressing questions 1 to 3, because their interest was confined to the definition of cryptoassets for tax purposes.

Defining cryptoassets

2.5. The consultation sought to identify the characteristics of cryptoassets that can be used as investment products, in order to enable the government to define cryptoassets for the purposes of the IME. HMRC set parameters that the definition should:

• only include assets which utilise cryptography and distributed ledger technology
• be clear and user friendly
• be ‘future-proof’ by being capable of encompassing newly emerging crypto technologies

2.6. HMRC specifically sought views on a proposal to adopt a cryptoasset definition for the IME which is similar to that proposed in the Crypto-Asset Reporting Framework (CARF) published by the Organisation for Economic Co-operation and Development (OECD) in March 2022.

Question 1: What types of cryptoassets are investment managers seeking to include as part of their product offer?

2.7. Most respondents addressed question 1 and noted that the type of cryptoassets which investment managers would seek to include within their product offer changes on a regular basis. The popularity of a type of cryptoasset will vary depending on factors such as the jurisdiction in which the institutional investor is based, the level of risk, the liquidity of the assets, and the availability of assets on the market. Responses generally noted that different cryptoasset funds will have different strategies, with some focused on a wide range of digital assets, and others investing in a single type of asset.

2.8. Most respondents mentioned exchange tokens, specifically Bitcoin and Ethereum. Other types of cryptoassets which were mentioned included:

• ‘Altcoins’ such as Litecoin, XRP, Bitcoin Cash and Binance Coin
• utility tokens (without physical delivery)
• security tokens
• stablecoins
• non-fungible tokens (NFTs)
• cryptoasset derivatives and futures contracts

2.9. A few respondents suggested that the range of investment options within the cryptoasset sector was likely to increase in the future as the market develops.

2.10. HMRC has used the above list of cryptoassets to test the suitability of the definitions discussed in question 2.

Question 2: Are there any particular definitions, in regulatory or other contexts, that investment managers find useful in defining cryptoassets? Please provide details.

2.11. This question along with question 3 received the highest volume of responses. Respondents emphasised that it was desirable to have a single consistent and universal definition which is used across the UK tax system.

2.12. Respondents generally agreed with the proposed approach to adopt a broad definition of cryptoassets which can accommodate future evolutions in cryptoasset markets, on the basis that cryptoasset technologies are developing too rapidly for HMRC to attempt to provide and maintain a specific list of cryptoasset tokens which are within scope.

2.13. Most respondents also agreed that such a definition would require refinement with exclusions, depending upon its use in particular circumstances.

HMRC’s proposed definition

2.14. HMRC proposed using the CARF definition as a starting point:

‘The term ‘Cryptoasset’ refers to a digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions.’

2.15. Respondents almost unanimously agreed that this definition was the most suitable definition for UK tax purposes and made the following points:

• it is suitably wide-ranging to encompass the financial products and investments which are of interest to the investment sector
• the adoption of the OECD’s proposed definition is advantageous because it is likely to be used by other tax authorities as an internationally recognised standard, which is helpful when the funds which rely upon the IME will be domiciled outside of the UK in another jurisdiction
• the reference to ‘similar technology’ to distributed ledger technology, may help to future proof the definition as cryptoasset technology evolves and ensure that the definition is technologically neutral

2.16. A few respondents were concerned that (at the time of the consultation) the CARF definition had not yet been finalised and could be changed to become narrower in future. One respondent suggested that it was preferable for the UK not to rely on a cross reference to the OECD CARF definition in the UK taxes acts, to avoid future amendments made to the CARF automatically impacting upon the UK definition.

The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (MLRs)

2.17. The most popular alternative definition suggested by respondents was the UK’s definition of cryptoassets within the MLRs. The regulations implement standards set by the Financial Action Task Force, and the anti-money laundering and counter-terrorist financing supervision of cryptoasset businesses under the MLRs is carried out by the Financial Conduct Authority (FCA).

2.18. The definition is contained in Regulation 14A(3) of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017:

‘a cryptographically secured digital representation of value or contractual rights that uses a form of distributed ledger technology and can be transferred, stored or traded electronically.’

2.19. Respondents proposing this definition highlighted that investment managers will already be familiar with the MLRs definition and its interpretation, and it would be convenient for the regulatory and tax definitions to be the same.

2.20. However, as with definitions of cryptoassets generally, it would need to be modified for UK tax purposes.

Other definitions

2.21. Other alternatives which were suggested by respondents included:

• HM Treasury and the FCA have recently held a consultation on the definition of ‘qualifying assets’ for the purposes of the Financial Promotions Order. At the time of writing, the proposed definition does not reference distributed ledger technology, and some respondents opined that this made the definition too wide for tax purposes

• the European Union’s Markets in Crypto Assets (MiCA) definition. Respondents generally considered and rejected its adoption on the grounds that it is narrower than the OECD’s proposed definition for CARF. However, one respondent suggested that MiCA’s definition is more practical in cases where investment managers do not directly hold cryptoassets on behalf of their clients, and instead deal with cryptoassets held on trust by a nominee or custodian

2.22. A few respondents suggested that it would be sensible for HMRC, HM Treasury and the FCA to collaborate to ensure that there is consistency between the definition of cryptoassets for tax and regulatory purposes.

2.23. Other respondents acknowledged that that there may be occasions where different definitions are required for different purposes but advised that any differences between tax and regulatory definitions should be clearly explained in order to minimise potential confusion.

2.24. It was highlighted that HMRC’s Cryptoasset manuals currently adopt a cryptoasset definition which is similar to the MiCA definition, and respondents requested that if HMRC adopted the OECD’s proposed definition for UK tax purposes then the definition used in guidance should be amended accordingly so that there is only one definition.

2.25. A few respondents advised that HMRC should regularly review and update its definition of cryptoassets to ensure that it remained relevant.

The government’s view

2.26. The consultation feedback has confirmed the government’s view that a suitable approach to defining cryptoassets is to adopt a broad definition which aligns with current and anticipated definitions in the UK tax framework and wider regulation. Such a definition should have the breadth and depth that the industry requires to accommodate the cryptoassets identified in question 1 and enable innovation in this area by offering flexibility to include future products yet to be developed.

2.27. However, exclusions will be required to protect the UK’s tax base and to reflect the particular context in which the definition is being used.

2.28. The government has considered the alternative definitions put forward and agree with the consensus view that the definition proposed by the OECD for CARF encompasses a wide breadth of cryptoassets but ensures that only cryptoassets which rely on distributed ledger technology or similar technologies will be included. The CARF definition was published by the OECD on 10 October 2022.

2.29. The government therefore intends to use a definition which is based on the current OECD CARF definition.

Question 3: Are there any existing UK activities involving cryptoassets which would need to be excluded from the ITL in order to prevent a reduction in tax receipts?

2.30. HMRC had suggested the exclusion of cryptoasssets which replicate financial products and investments specifically excluded from the ITL currently. This would include:

• transactions in land, including transactions of any nature which result in the acquisition of land
• cryptoassets that provide for the transfer of tangible assets or intangible assets not already included in the ITL
• closed-loop cryptoassets which are only intended for use within a closed network

2.31. There was some disagreement between respondents on the extent of the exclusions which would be required to protect the UK’s tax base. Some respondents held views such as:

• all forms of investment activity that are speculative in nature and are intended to result in capital appreciation should be included

• HMRC should be cautious about narrowing its definition too tightly because this may damage its ability to deal with new forms of cryptoassets in the future and may create additional complexity which takes away tax certainty

• whatever exclusions HMRC adopted, further refinement of exclusions would be required as the demand for products and investments within the market changes

Transactions in Land

2.32. Respondents generally noted that they understood that HMRC wished to preserve taxing rights in respect of profits arising from land.

2.33. However, some responses questioned how such an exclusion would apply to NFTs. A tokenised title to a real property would be straightforward to define and exclude. But some NFTs do not involve the transfer of land, but instead reference land in a way that does not give the holder an interest in land itself. Respondents also mentioned the exchange of digital land (virtual real estate which is not physical land) in the metaverse. Metaverse platforms sell parcels of digital land by associating each parcel with an NFT and recording transactions on blockchain networks. Respondents requested that care be taken to be precise in the scope of the exclusion in transactions in land.

2.34. Other respondents stated that under the current ITL, derivative contracts which reference a broad-based index of land fall within the scope of ‘relevant contracts’ and so are permitted. Those respondents stated that cryptoassets which offer comparable economic exposure to land index-related derivatives should therefore not be excluded from the IME.

Transactions that provide for the transfer of tangible assets or intangible assets not already included in the ITL

2.35. Again, respondents generally noted that they understood that HMRC wished to preserve its taxing rights but raised concerns around how this exclusion would apply to cryptoassets such as NFTs. Responses stated that while an NFT can be associated with a particular digital or physical asset, the NFT is not usually the actual asset itself. Depending on the terms of the contract between the holder, as purchaser, and the auction business through which the NFT was acquired, there may or may not be property rights granted to the holder.

2.36. Respondents advised that there are other types of cryptoassets which in some way relate to or reference ‘real world’ assets without necessarily resulting in the counterparties transferring those referenced assets. Again, respondents mentioned that derivative contracts for commodities can fall within the definition of ‘relevant contracts’ for the purposes of the existing ITL, provided they do not actually result in delivery of the physical asset, notwithstanding that they may be capable of being physically settled.

2.37. Respondents requested that HMRC be clear whether such assets are within the scope of the exclusion.

Closed-loop cryptoassets

2.38. Respondents who mentioned closed-loop cryptoassets did not consider that all closed-loop networks should be excluded without regard to the attributes of the asset and the operation of the network, particularly if the other IME conditions to demonstrate that the investment manager is acting as an independent agent on behalf of a fund have been met.

2.39. Some respondents questioned how HMRC would define ‘closed-loop networks’, and whether all tokens available via closed-loop networks would come within the scope of the exclusion or only those which are used for the purposes of purchasing goods or services from the issuer or participants on the network in question.

2.40. Respondents also raised concerns that the exclusion could result in assets which are similar being treated differently depending on whether they exist on an open or closed blockchain.

2.41. A small number of respondents questioned whether this exclusion could inadvertently exclude cryptoassets invested into through networks which have been or will in the future be set up with limitations on participants, in order to give greater certainty regarding transactions and counterparties. For example:

• some networks require participants to meet anti-money laundering checks
• some financial institutions are setting up decentralised finance or DeFi liquidity pools that only professional investors can access
• some financial institutions are developing digital tokens to send payments which operate on a closed network due to concerns surrounding commercial stablecoins

The government’s view

2.42. The government recognises a balance must be struck between providing a definition which is sufficiently broad to allow for innovation and protecting the UK’s tax base, without creating rules that are too complex to be workable.

2.43. As respondents have pointed out, the ITL framework allows derivatives to be included where they provide for the transfer of property provided delivery of the property does not occur. The government recognises the benefits of this flexibility in the ITL and transactions in cryptoassets which provide rights in relation to other property will also be included in the IME as long as the transaction does not result in the delivery of the property.

2.44. The IME will also include transactions in cryptoassets that represent rights in relation to assets, provided transactions in those assets would currently fall within the ITL.

2.45. Similarly, transactions in cryptoassets which provide for the supply of services will be included, unless they result in an actual supply of services in, or connected with, the period in which the cryptoasset is held by the non-resident.

2.46. Transactions in cryptoassets which give rights to other cryptoassets will be included, providing transactions in those other cryptoassets would fall within the IME.

2.47. Following responses on the proposed exclusion of closed-loop cryptoassets, the government no longer considers it necessary to exclude these types of cryptoassets. This will help to minimise barriers to innovation in this area.

2.48. However, in order to protect against the risk of abuse it is necessary to exclude transactions in cryptoassets created or issued by the investment manager, non-UK resident fund or parties connected to them.

Question 4: Please outline the likely types of funds that will start or continue to be managed from the UK as a result of including cryptoassets within the scope of the IME.

2.49. There were few responses to this question. Respondents generally highlighted that the IME plays an important role in the UK’s attractiveness for the investment management industry.

2.50. Respondents concurred that the funds that would benefit from this addition will generally be offshore funds whose investments are at present managed by investment managers in jurisdictions outside the UK. Those funds would be marketed to institutional and other professional investors, unless in any particular jurisdiction marketing to retail investors is permitted.

2.51. Some respondents also stated that there is demand among investment managers who are already based in the UK, who wish to begin accessing the cryptoasset markets in order to broaden their client base.

2.52. One respondent advised that the cryptoasset investment market is currently led by multi-asset open-ended hedge funds which permit redemptions. Another respondent advised that the vehicle of choice in other fund jurisdictions is an exchange-traded fund.

Collective investment arrangements

2.53. The ITL is used for the purposes of the following tax regimes for funds:

• authorised investment funds
• exempt unauthorised unit trusts
• investment trust companies

2.54. The list provides that when such funds carry out particular transactions, those transactions will always be treated as investment transactions for UK tax purposes (and not trading transactions). The list also impacts diversely owned reporting offshore funds in calculating their reportable income.

2.55. The consultation sought to identify whether there is a case for extending this change to the fund tax regimes which also use the ITL.

Question 5: Do any funds within the scope of the rules listed in Chapter 1 Paragraph 11 currently hold cryptoassets? If so, please provide details of the types of fund and cryptoassets held, and whether such funds generally treat these activities as investment or trading activities.

2.56. Reponses indicated that there is currently no demand from any of the types of funds which use the ITL to hold cryptoassets, highlighting in particular that prudential regulation prevents authorised investment funds from holding cryptoassets. Therefore, such funds would not benefit the inclusion of cryptoassets in the ITL.

2.57. A small number of responses advised that investment trust companies and exempt unauthorised unit trust schemes would be able to hold cryptoassets as investments, but respondents stated that there was no demand from such vehicles to hold cryptoassets.

2.58. It was suggested that Authorised Contractual Schemes (ACS) should be provided with access to the ITL. ACSs are regulated by the FCA and are currently unable to deal in cryptoassets. ACSs do not currently benefit from the ITL because they are transparent for income, and so the income arises to the investors.

Question 6: Please outline the types of UK fund products that are currently offered, or may be offered in future, which would benefit from the inclusion of cryptoassets in the ITL.

2.59. As with question 5, there were few responses to this question. Respondents reiterated that there does not seem to be current demand from UK funds which are able to hold cryptoassets to offer new cryptoasset products. One respondent stated that, currently, institutional investor interest is largely in equity or debt interests issued by companies operating as cryptoasset market platforms or custodians, rather than directly in cryptoassets.

Question 7: Please identify any differences in the definition of cryptoassets that would be needed for UK funds compared to that required for the IME.

2.60. In line with responses to question 2, respondents broadly wished to have one clear, universal definition of cryptoassets which is used across the UK tax system, and so no respondents recommended that any further modification of the definition of cryptoassets would be required for the purposes of UK funds.

2.61. However, the majority of respondents who answered this question reiterated that there are currently regulatory barriers which would prevent authorised investment funds from dealing in cryptoassets. Those respondents advised that the inclusion of cryptoassets in the ITL used by UK authorised investment funds would be inconsistent with the regulatory framework within which those funds operate. The respondents therefore recommended that HMRC focused on ensuring that the inclusion of cryptoassets in the IME was workable and return to inclusion for the purposes of UK funds if the regulatory position changes.

2.62. An alternative view expressed by one respondent was that a single ITL list should be maintained for the purpose of the IME and for UK funds. Delineating between two lists could result in disparity of treatment between offshore funds managed by UK managers that rely on the IME and UK funds that rely on ITL to determine the tax status of their activities, despite having identical investment strategies. They advocated for a consistent of UK tax position for all funds irrespective of their location and took the view that amending the ITL should not be considered an endorsement by HMRC of cryptoassets.

The Government’s View

2.63. The government recognises that it is generally preferable to maintain a single ITL list for the purpose of the IME and for funds which use the ITL, to ensure consistency of tax treatment and keep the UK tax system simple and user friendly. In general, where the government provides clarity on the tax treatment of a particular type of investment transaction, then this should not be seen as an endorsement or comment on the suitability of any form of investment.

2.64. However, responses to this consultation did not demonstrate any current demand to deal in cryptoassets from the funds which rely upon the ITL.

2.65. The government therefore does not consider that there is a case at this time for extending this change to the fund tax regimes which also use the ITL. This will be kept under review.

Other

Question 8: Do respondents have any comments on the assessment of impacts in these proposals in the Exchequer Impact Assessment?

2.66. There were few responses to this question. Those who did provide responses agreed with HMRC’s assessment that the proposal should have negligible impact on the tax receipts arising in the UK.

2.67. Respondents stated that in the absence of certainty on the tax treatment for UK investment managers who carry out transactions in cryptoassets on behalf of non-residents, then:

• UK investment managers will limit their cryptoasset strategies, and
• Cryptoasset investment management business will be carried out in other jurisdictions where the tax position is clear.

2.68. Respondents expected that providing clarity on the tax treatment for UK investment managers who carry out transactions in cryptoassets on behalf of non-residents would lead UK investment managers to expand their cryptoasset strategies, and the UK to become more attractive as a base for new investment management businesses. This in turn may sustain and create jobs and generate new fee income contributing to the taxable business profits of the investment managers.

2.69. A few responses requested that any change to the Investment Management Exemption be implemented for the 2022/2023 tax year, in order to provide tax certainty from the date of the Economic Secretary’s statement on 4 April 2022.

The government’s view

2.70. The government recognises that certainty of tax outcomes is important for investors and investment managers. HMRC intends for changes to the IME to come into force by the end of the 2022 calendar year with effect in relation to transactions entered into during the 2022 to 2023 tax year for non-corporate entities, and accounting periods current on 31 December 2022 for corporate entities.

3. Next steps

3.1. Since the consultation closed on 18 July 2022, HMRC has considered the evidence submitted in response to the consultation and has used the ideas and feedback to inform the design and scope of the policy.

3.2. The government has decided to limit this change to the IME, until such a time as there is a case for extending the change to the fund tax regimes which also use the ITL. This matter will be kept under review.

3.3. HMRC has shared the design of draft regulations for the Investment Manager (Investment Transactions) (Cryptoassets) Regulations 2022 with consultation respondents for further comment. The feedback received has been used to make refinements to wording.

3.4. HMRC intends to introduce the regulations by the end of the 2022 calendar year to have effect in relation to transactions entered into during the 2022 to 2023 tax year for non-corporate entities, and accounting periods current on 31 December 2022 for corporate entities. HMRC expects to publish guidance in the near future to assist with interpretation of the regulations. Questions regarding the new regulations can be emailed to HMRC.

Annex: List of respondents

• Alternative Investment Management Association (AIMA)

• Andersen LLP

• Chartered Institute of Taxation (CIOT)

• Coalition for a Digital Economy (Coadec)

• CryptoUK

• Cummings Pepperdine LLP

• Investment Association (IA)

• Financial Conduct Authority (FCA)

• Macfarlanes LLP

• Marshall Wace LLP

• Managed Funds Association (MFA)

• Sidley Austin LLP

• Simmons & Simmons LLP

• Society of Trust and Estate Practitioners (STEP)