IFM40430 - Ceasing to be a QAHC: curing of certain breaches

Activity condition

A breach of the activity condition will almost certainly arise because a QAHC has carried on a trade which is not ancillary to its investment business or which is substantial (IFM40255). Such a breach is overlooked for eligibility purposes as long as it is not deliberate, HMRC has been notified of the breach and the QAHC has secured that the breach ceased as soon as reasonably practicable.

Breaches in this area are perhaps most likely to arise in cases where QAHCs have undertaken activity which they believed was in the nature of investment, but which is subsequently held to be in the nature of a trade (IFM40260).

Where such activity is ongoing at the time the breach is discovered (that is, at the point where the activity is determined to be a trade), an orderly winding down of the activity will be permitted by the ‘as soon as reasonably practicable’ language of the statute. If the activity has already ceased by the time it was found to be a trade, HMRC will normally consider that the ‘as soon as reasonably practicable’ test has been met.

Where a QAHC carries on a trade, that trade will be carried on outside the ringfence and so be fully subject to corporation tax in the usual way (IFM40350). The carrying on of the trade by a QAHC may only be ignored for the purposes of determining the eligibility criteria, not for all tax purposes.

Ownership condition

Breaches of the ownership condition are dealt with differently. The basic principle is that when a breach that is not deliberate is discovered, then, subject to the safeguards referred to below, the QAHC has 90 days from the date it became aware of the breach in which to rectify the position, if it wishes to try, and notifies HMRC of the breach and its intention to rectify. That 90-day period can be extended by agreement with HMRC. If the breach is rectified within the cure period, then it is treated as not having occurred.

There are two safeguards in relation to breaches of the ownership criteria that are additional to the position in relation to the activity condition:

• The first is that the breach must not be very serious – if non-category A investors have ended up with relevant interests exceeding 50 percent, the breach will not be capable of cure or will cease to be capable of cure.
• The second is that the QAHC must have complied with the requirements of FA22/SCH2/PARA12 and taken reasonable steps to monitor compliance with the ownership condition (IFM40250).

In contrast to the two-year grace period provided for in FA22/SCH2/PARA16, there is no requirement that there must be a reasonable prospect of cure for the 90-day period to apply. However, if a QAHC requests an extension of the period, this should not as a rule be granted unless there is a clear pathway to a cure of the breach.

It will be in the nature of most breaches of the ownership condition that remedy is not within the QAHC’s control – some kind of transaction in securities giving rise to relevant interests will be likely to be needed to repair the position, and at least one of the parties to that transaction will not be the QAHC.

Extension requests

Extension requests should be sent to HMRC’s QAHC team - see IFM41210 for contact details.

In considering any request for an extension of the period, HMRC will be mindful of not imposing disproportionate costs on investors in cases where there is a reasonable prospect of cure.

Any extension that is granted will not be excessively long because a QAHC can always request another extension if appropriate. For example, where a QAHC has been able to illustrate a timetable within which HMRC may be satisfied there is a good chance of a cure being achieved, the extension granted should be consistent with that timetable.