London 20th July 2007- The Alternative Investment Management Association (AIMA), the leading global hedge fund and alternative investment industry association, welcomed the release today of the HMRC Revised Statement of Practice on the Investment Manager Exemption (IME).

The IME is vital to the UK hedge fund industry as it enables offshore funds to trade in the UK, in certain investments, through a UK-based investment manager and without the risk of UK taxation – allowing UK investment managers to be globally competitive.

A key concern for managers has been that they meet IME conditions as the hedge fund industry continues to develop new types of investment transactions and arrangements.

The Revised Statement of Practice (SP) is the result of a cooperative effort between HMRC and the industry over more than twelve months and reflects HMRC’s stated commitment to improving the IME, by providing greater flexibility and clarity for managers and by expanding the scope of exempt activities. The revised SP also takes account of legislative changes affecting corporate non-residents made in the Finance Act 2003.

Commenting on the new provisions, Mary Richardson, Director of AIMA’s Regulatory Department, said:

“AIMA considers the revisions as helpful for the continuing competitiveness of UK-based hedge fund management. HMRC has maintained close dialogue with the industry and has addressed many of its concerns”.

Key points in the Revised Statement of Practice include:

* New investment transactions now included in the scope of the IME include

– carbon emission credits;
– placing money at interest, including structuring and negotiating
the terms and to the extent that it involves participating in rather
than taking a lead in arranging or originating a loan. Taking a
lead in arranging a syndicate, originating but not participating in a
loan, or managing a loan are not investment transactions and fees
etc. for such services are taxable

– transactions in physical commodities and land remain excluded
but futures and options in commodities are included provided no
physical delivery occurs and futures and options involving certain
indices of land are included.
– A minor or inadvertent non-qualifying transaction (determined as such
by HMRC by looking at all the circumstances) will not cause the IME to
be failed provided the profit is charged to UK tax.
– The ‘independent capacity’ test is now a hierarchical test and a fund
will be considered independent if it is either ‘widely held’ or ‘actively
marketed’; if neither test is met, other factors are considered.
– Master-feeder structures are clarified as to treatment:
– deferred fees are taxable when earned, rather than when paid
– profit allocations are included as fees (thus recognising the
commercial reasons for these arrangements in the case of US
funds).
– The ‘customary rate’ test:
– confirmation that an ‘arm’s length’ rate will be determined on
the basis of net rather than gross fees earned;
– acknowledgement of genuine commercial reasons for rebated,
reduced or zero fee arrangements;
– the importance of appropriate documentation to support the
chosen transfer pricing methodology.

The revised SP has immediate effect. However, for those who must make
changes to become compliant, the original SP may be applied until 31st
December 2009.

For further information, please contact:
Eoin Brophy
Partner
Hume Brophy Communications
Tel: +44 (0)20 7499 8736
Mob: +353 86 851 5477
E: eoin.brophy@humebrophy.com

The Alternative Investment Management Association Ltd
Meadows House, 20-22 Queen Street, London W1J 5PR
Tel: +44 (0)20 7659 9920 Fax: +44 (0)20 7659 9921
E-mail: info@aima.org www.aima.org