HMRC has recently updated its guidance on the distinction between trade and investment in relation to the activity condition of the Qualifying Asset Holding Company (QAHC) scheme. This condition requires that the principal business of QAHC is to engage in investment business and that all other business activities of the company are incidental to that business and not engaged in to a substantial extent.
The first guidelines published offered very little commentary but, after some consultation, they have now been supplemented with some examples in the context of a credit fund.
The first two examples are helpful in emphasizing that holding assets in the medium to long term (when there is no high asset turnover or number of transactions) is likely to be an indicator of the investment activity. HMRC say it is the intention at the time of acquisition that is crucial. This provides some flexibility, even in circumstances where assets are sold ahead of schedule, as long as there is evidence (marketing materials, board minutes, etc.) of the original intent to hold for the medium or long term, the condition can be satisfied. HMRC has refrained from defining the duration of “medium to long term”, but is prepared to say that steady sales in the weeks/months following acquisition may illustrate short-term transactions, whereas holding several years is more likely to be considered a medium to long-term detention.
The third example highlights a situation where AHC divests certain assets from a recently acquired pool of assets. Again, as long as it can be proven that the overall strategy remains unchanged and in the absence of other characteristics of a trade, this should not preclude concluding that the activity is an investment.
The fourth example focuses on loan origination activities and fees earned as part of loan ROI. The treatment here will depend on whether the AHC originates loans and intends to hold them for the medium or long term (indicating investment activity) or whether the fee is a syndication fee which is more likely to be traded – unless this activity can be said to be incidental. HMRC says the amount of syndication fees relative to other returns is likely to provide an indication.
The final example sets out HMRC’s view of distressed debt. Again, the focus is on whether the debt is held for the medium or long term, even if opportunities are taken to sell the debt or if there is debt restructuring. HMRC notes that where the AHC leads the restructuring process with a higher level of activity, it may amount to a swap.
As always, HMRC concludes that this will be a question of fact and the examples provided are illustrative rather than exhaustive. While this update may provide some comfort, it still means that analysis will be required in less straightforward cases to ensure the activity is a qualifying investment activity.
There is no particular provision in FA22/SCH2 that determines whether an activity undertaken by a business amounts to trade or investment, and so it will depend on the particular facts.