HM Revenue and Customs (HMRC) is consulting on a proposal to expand the existing Investment Manager Exception (IME Exception) to include crypto-assets.

The IME exemption defines the types of investment transactions that UK collective investment agreement managers may undertake on behalf of non-UK resident investors. Such transactions are not subject to UK taxation. It includes a list of types of assets subject to inclusion in this exception.

According to the UK Treasury, most international funds are located outside the UK, and the funds and their investors are subject to the tax rules of their countries of residence. Typically, a non-resident fund managed by an independent investment manager in the UK does not have a taxable turnover in the UK. But there is uncertainty in this matter, which acts as a deterrent for UK fund managers. One such factor is the presence of cryptocurrencies as assets in their portfolios.

IME guarantees to investment managers and investors that there will be no corporate tax on foreign corporate investors or personal income tax on the completion of qualification tests. In addition, it allows non-resident funds to appoint UK investment managers without the risk of paying UK tax on a fund registered abroad.

The consultation will consider how to define crypto-assets and what categories of crypto-assets should be included in this exception. HMRC is considering adopting a definition of crypto-assets similar to that proposed in the OECD Crypto Asset Report published in March 2022: “a digital representation of value based on a cryptographically secure distributed ledger or similar technology to validate and secure transactions.” However, HMRC wants to make this definition more precise to exclude transactions in land and crypto-assets that involve the transfer of tangible or intangible assets not yet included in the exclusion list.

The consultation will also explore whether the expanded list should apply to other fund tax regimes subject to the exception, such as authorised mutual funds, tax-exempt non-authorised mutual funds, reporting offshore funds, and approved investment funds.

According to the government, this innovation aims to provide tax certainty to investment managers seeking to include types of cryptoassets in portfolios and to encourage new crypto-asset investment management companies to operate in the UK.

The deadline for responses that can be left during consultations is July 18, 2022. The STEP Digital Assets Special Interest Group plans to respond, and any member who wishes to participate in formulating a response, or has an opinion on the matter, can contact the STEP Policy Development Group.

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