The Government has today issued a Summary of Responses to the Consultation Document for the reform of the tax and company law rules for Investment Trust Companies (ITCs), published in July of this year. At the same time, and as part of the release of draft Finance Bill 2011 clauses, draft primary legislation for the new definition of an ITC has been published.
Herbert Smith was one of a number of interested parties who responded to the Consultation Document. Although the original proposals were broadly very positive we, and others including the AIC, identified a number of issues with the Government's original proposals. Judging by the contents of the Summary of Responses, the results of the Consultation appear to be positive. Although it remains to be seen (with the publication of the draft Regulations, expected in Spring 2011) exactly how the new regime will work, the indications are that the main concerns of the industry have been recognised. In particular, the major concerns surrounding the proposed changes to the "close company" test and the restriction of the ability of ITCs to retain income would appear to have been alleviated.
From today's publications the following points, in summary, are clear:
- draft Regulations to establish the new regime (which will contain the new conditions for approval as an ITC, as well as the new "white list" for ITCs and detailed rules on the HMRC approval process) will be published in Spring 2011;
- the new regime is likely to take effect around the end of 2011, or the beginning of 2012;
- there will be no change to the current "close company" test for existing ITCs. The Consultation Document had proposed that the existing 'exception' to the close company rules - where at least 35% of voting shares are held in public hands - would be removed under the new regime. This would have meant that certain existing ITCs would have been classified as close companies under the tax legislation, and therefore would not have been able to be approved as ITCs under the new regime;
- for new ITCs, the change to the close company test will ensure that only those companies under the control of a very small group of individuals will be denied ITC status. It remains to be seen how the draft Regulations will achieve this, but the comment in the Summary of Responses that the Government does not consider that this would affect any of the existing ITCs that expressed concern over this proposal is welcome and promising;
- ITCs will be able under the new regime to retain up to 15% of (total) income. The Consultation Document had suggested that ITCs under the new regime would only be entitled to retain up to 10% of total income;
- the new 'characteristics-based' definition of an ITC in the primary legislation will (in the Government's view) cover all FSA Listing Rules 'Chapter 15' investment companies. This will be confirmed in due course in HMRC guidance. The definition is more widely drafted in the draft legislation published today. It refers to a company with a business consisting of "investing its funds in shares, land or other assets with the aim of spreading risk...". The Consultation Document had proposed a definition which would require an ITC to have the "sole objective" of investing funds with a view to spreading risk;
- the Regulations will address concerns raised to ensure that private equity group holding companies are not excluded from the new regime;
- the Government does not intend to offer a clearance procedure with regard to the "spread of risk" test as a matter of course. It is to be hoped that the Regulations and published HMRC guidance will be sufficiently clear on this issue;
- no additions or amendments to the proposed "white list" for ITCs (which specify transactions which would not give rise to taxable income) are planned;
- the Government has stated that it was not its intention to remove the ability of ITCs to initiate share buy-backs or share redemptions;
- the Government has confirmed that the planned changes to the CA 2006 "investment company" requirements will go ahead.
A copy of the Government's Summary of Responses can be accessed here.
Herbert Smith's original response to the Consultation Document can be accessed here.