IFM40420 - Ceasing to be a QAHC: breaches of eligibility criteria

Where a company ceases to meet any of the eligibility conditions set out in FA22/SCH2/PARA2(1), it may cease to qualify and exit the QAHC regime in consequence. The timing of departure, and the potential to cure any breach, depends on which condition is breached.

The intention behind the rules on breaches is to ensure that regime benefits are not available when they should not be, but also to ensure that the tax consequences of breaches are proportionate to the nature of those breaches.

Where QAHCs form part of fund structures, as will commonly be the case, any loss of their status will impact the investor base of the fund in question who are likely to be unaware of the breach.

The rules also recognise, and seek to avoid where possible, the difficulties of going back and restating tax computations of both a QAHC and its investors over potentially many years in the event a breach goes undetected for some time. This is why some inadvertent breaches may be cured, with the result that they are treated for tax purposes as never having happened, and also why those breaches are treated as occurring when they are discovered rather than at the time of the actual breach.

However, where breaches are deliberate, they lead to immediate departure from the regime in the same way as voluntary submission of an exit notification would.

Deliberate breaches are defined in PARA 27(6) and (7). PARA 27(6) sets out the actions which will be treated as deliberate, while PARA 27(7) addresses the identity of the persons who might take those actions.

Breaches will be deliberate where a person knows that a consequence of an action they take will be a breach of a condition, and where it would have been reasonable for the person to avoid doing that thing. An example of a case which would not satisfy the ‘reasonable to avoid’ limb of the deliberate test (and so where the breach would not be treated as deliberate) would be where shares in a QAHC were used as security for a loan from a non-category A lender, and where the borrower is in distress. It may be that the borrower/shareholder is fully aware that defaulting on their loan will lead to the lender taking the QAHC shares and so causing the ownership condition to be breached, but the shareholder would be realistically unable to prevent this. A subsequent enforcement of the security leading to a breach of the ownership condition would not therefore be treated as giving rise to a deliberate breach, even though the QAHC and its distressed shareholder might be fully aware of the impact on the QAHC’s status.

The persons whose behaviour may be deliberate are set out in PARA 27(7). Institutionally, they encompass the QAHC itself and any person with relevant interests in the QAHC (or an enhanced class of the QAHC) exceeding 25 percent. The question of whether an institution has knowledge of any given matter will follow general law, so that a UK company (for example) will broadly be deemed to have the knowledge of its directors.

PARA 27(7) also identifies those individuals whose behaviour may give rise to a deliberate breach. These include directors of companies (where there may be a degree of overlap with the relevant non-natural persons, as the knowledge of directors will generally be imputed to that of the companies on whose board they sit). It also includes other individuals involved in the management of QAHCs or persons with sufficient relevant interest in QAHCs. This includes the investment managers of funds holding interests in QAHCs.

PARA 27(7) is intended only to apply in cases where senior individuals (company directors, or analogous individuals in non-corporate settings) are aware of what is going on. If, for instance, a junior employee of the QAHC agrees to register a transfer of shares in a QAHC, which they know causes the ownership condition to be breached, this should not be treated as a deliberate breach by the QAHC if senior management are unaware of the actions of the employee. However, if there are no institutional checks in place when share transfers are presented for registration, that may mean that the QAHC is not complying with the requirement in PARA 12 (IFM40250) to take reasonable steps to monitor whether the ownership condition is met.

The only conditions where there is potential to cure breaches are the ownership condition and the activity condition.

In all cases of breach, the QAHC is obliged to notify HMRC of the position (see IFM41280+).