IFM40250 - Eligibility criteria: compliance with ownership condition

FA22/SCH2/PARA12

PARA 12 provides that a QAHC must take reasonable steps to monitor whether the ownership condition is met in relation to it.

This is an ongoing obligation, applicable at all times while the company is a QAHC. Failure to comply with this obligation will render any breaches of the ownership condition ineligible for cure periods (see IFM40420).

The question of what steps are reasonable should be a function of the overall level of risk, and the facts and circumstances of each case. For example, where a QAHC is directly wholly owned by a fund which meets the genuine diversity of ownership (GDO) condition, there is no risk of that fund’s status changing from category A. This is because if the GDO condition is met when the fund is set up, that is a once and for all determination, not an ongoing requirement. A future failure to meet the ownership condition could therefore only arise in the event of a transaction causing another party to hold relevant interests. Ongoing scrutiny of the status of the fund would therefore be unnecessary.

Where a fund is required to produce a statement and make it available to HMRC under PARA 9(3), there is no set template for this statement. It will be sufficient for the statement to be prepared as contemporaneous evidence that the GDO condition has been met and retained, should evidence be requested by HMRC at a future date. The statement does not need to be provided to HMRC unless it is requested.

However, a non-GDO compliant fund would need to be non-close in order to retain category A status. This is an ongoing obligation, not a once and for all test applied at the outset like the GDO condition. In such a case, a degree of ongoing scrutiny of the fund would be necessary, although the appropriate level of that scrutiny would be a function of the fund’s composition.

For example, if the fund was a retail fund with hundreds of investors each holding a small share of the total, its chances of ever becoming close would be negligible, and scrutiny could be correspondingly minimal. If, on the other hand, the fund was held to a material extent by a small number of investment managers, such that it was not far from being close at the outset, careful scrutiny would be appropriate.

Where a QAHC is owned in whole or part by an intermediate company, that intermediate company must be wholly owned or almost wholly owned by category A investors in order to retain its own category A status. The ownership structure of the intermediate company should be checked with the intermediate company regularly by the QAHC, perhaps annually as part of the audit process if there are no circumstances to suggest a change had occurred.

Where the risk is low, an annual confirmation from the category A investor(s) that it remains category A as part of the QAHC’s audit process would be sufficient. This might be appropriate, for example, in the case of a diversely owned non-close fund which nonetheless did not meet the GDO condition.

Where the risk is higher, it would be appropriate to do more. For example, where a fund is relying on non-close status but is very near to being close, confirmation of category A status should be sought prior to the QAHC undertaking any significant transactions, such as the sale of an investment which would be taxable absent the QAHC’s gains exemption, or a buyback of shares.

In the absence of any facts or circumstances suggesting a greater degree of scrutiny would be appropriate, the following would generally be indicative of the QAHC taking reasonable steps:

  • Provisions within the Articles of Association (or equivalent overseas constitutional document) of a QAHC obliging its shareholders to notify the QAHC should their status as category A investors change.
  • Part of the process for registering a transfer or issue of securities giving rise to relevant interests by a QAHC to a person should include the obtaining of written confirmation from the incoming investor of their status as a category A investor or otherwise, except where they are self-evidently not a category A investor.
  • Maintenance by the QAHC of a record of the total relevant interests in it held by non-category A investors, which should be kept updated to reflect any changes.
  • A verification process in relation to the registration of any transfer or issue of securities giving rise to relevant interests, which should ensure that the company is able to request and be provided with information from the transferee or subscriber to enable it to determine if the transfer or issue does lead to the 30 percent threshold being exceeded.