UK Government Expands Assets within the Scope of the UK’s IME to Include Cryptoassets | Cadwalader, Wickersham & Taft LLP

As part of the Edinburgh Reforms announced by the UK Government (link back to “UK FS Reforms”), the UK Government has also confirmed that the “Investment Transactions List” (“ITL”) would be expanded to include cryptoassets. This follows the UK Government’s consultation on this issue, which was held earlier this year and which we previously covered in BrassTax here.

The consultation specifically sought views on the types of cryptoassets that should be included within the ITL, which is of particular important to the UK’s investment manager exemption (“IME”), and whether there is a case for extending this change to tax regimes for funds which also use the ITL.

Defining Cryptoassets

At the consultation stage, the UK Government proposed using the Crypto-Asset Reporting Framework (“CARF”) definition. The UK Government has concluded that the CARF definition should form the basis of the definition for the ITL. Such definition provides that:

“the term “cryptoasset” refers to a digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions.”

This definition was regarded as the most suitable definition for UK tax purposes on the basis that it was suitably wide-ranging to encompass the products and investments that are of interest to the investment sector, will likely be used by other tax authorities and somewhat future-proofs the definition by referring to “similar technology.”

However, during the consultation process, the UK Government considered responses that identified limitations in this approach, including that alternative definitions are already used in existing UK or European Union regulatory legislation or are being consulted on for the purposes of UK regulatory legislation. It has been noted that the HMRC Cryptoasset manual currently adopts a definition of cryptoassets that is similar to the European Union’s Markets in Crypto Assets (“MiCA”) definition. As such, it is expected that the definition used in the HMRC Cryptoasset manuals should be aligned to the ITL definition.

In addition, the UK Government also considered the nature of any exclusions from the proposed definition, given the current limitations on the scope of the ITL such as excluding assets that include transactions in land, the transfer of assets not already included in the ITL and closed-loop cryptoassets. The UK Government has stated that, among other things, cryptoassets that provide rights in relation to other property will be included so long as the transaction does not result in the delivery of the property, as will transactions in cryptoassets that represent rights in relation to assets (provided that transactions in those assets would currently fall within the ITL). This approach reflects the current scope of assets with ITL. However, the UK Government has confirmed that cryptoassets created or issued by the investment manager, non-resident fund or parties connected to them will be excluded from the ITL.

Collective Investment Arrangements

In addition to applying to the UK IME, the ILT also applies to certain UK tax regimes for funds. Specifically, the ITL is used to identify transactions that would generally be considered to form part of an investment business and would not generally be viewed as trading activities. As such, UK investment managers of both UK and overseas funds obtain the same level of certainty about the types of transaction that will not be taxed as a trading activity in the UK.

Whilst the consultation sought responses to whether the changes to the ITL should be extended to the fund tax regimes that also use the ITL, HMRC commented that, based on the responses to the consultation questions, there appears to be little demand to deal in cryptoassets from the funds which rely upon the ITL. Accordingly, the UK Government does not consider that there is sufficient demand to warrant extending this change to the fund tax regimes.

Conclusion

HMRC has noted that the regulations implementing the changes to the ITL are intended to be introduced by the end of the 2022 calendar year in order to have effect in relation to transactions entered into during the 2022-23 tax year for non-corporate entities and accounting period current on 31 December 2022 for corporates.

The expansion of the ITL, in so far as it is used for the purposes of the UK IME, will have meaningful benefits to UK investment managers. The changes also demonstrate the commitment of the UK Government to ensuring that the UK is a leader in both investment management and cryptoasset businesses.