Some final amendments were made at report stage, with the substantive ones being to address a number of issues we identified to HMRC and which were summarised in our article of 20 January 2022
The substantive changes at report stage (and the reasons for them) are as follows:
- We pointed out that the rule which, in applying the economic tests in determining whether a fund is close, treats carried interest as a fixed percentage and ignores a GPS did not apply to corporate funds. This has been fixed by moving the provision from paragraph 9(5)(b)(iii) to paragraph 9(5)(a)(iib).
- We pointed out that the rule which, in applying the economic tests in determining whether a fund is close, ignored the right a person has as a creditor in respect of normal commercial loans did not apply to the winding up part of the close company test. This has been fixed by new paragraphs 9(5)(a)(i) and (ii) which has the effect of such rights being disregarded for the close company test.
- We pointed out a number of practical issues in applying the close company test to a fund:
- (i) while the fund could not be close only because of the GP’s/manager’s voting power (per Sch5AAA TCGA modifications to the close company test), this did not extend to other control that the manager/GP could exercise over the fund (for example through a management agreement). This has been fixed by a new paragraph 9(5A).
- (ii) the share capital test did not make sense in a partnership fund which does not have share capital. This has been fixed by the share capital test (paragraph (a) of section 450(3) CTA 2010) being omitted from the close company test for these purposes (see new paragraph 9(5)(a)(iia)).
- Finally, the incorrect cross-reference in paragraph 4(3) to sub-paragraph 4(1)(b)(i) rather than sub-paragraph 4(1)(b)(ii) has been fixed. This means that the Directly and Indirectly rule will not apply in unintended situations.
There remains an issue with the way GDO operates in relation to a master fund where the investors participate via one or more feeder fund. While the offshore fund GDO rules incorporated in the QAHC rules allow a feeder fund with the same manager to be treated as part of the master fund for these purposes, that easement only applies where the feeder fund is an offshore fund, which a partnership feeder fund cannot be. While this has not been fixed at report stage (we pointed it out too late!), we hope it will be addressed through guidance at least in respect of partnership feeders.
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