Companies Act 2006 (Amendment of Part 23) (Investment Companies) Regulations 2012

Lord Razzall Excerpts

Monday 19th March 2012 Grand Committee

[The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Baroness Wilcox)]

My Lords, investment companies can benefit from a special distributions regime in the Companies Act 2006 if they satisfy conditions. These draft regulations amend those conditions to ensure that they remain in step with tax rules, which have recently been amended.

Investment companies are professionally managed, pooled, risk-spreading investment vehicles. They are publicly listed and invest in a diversified portfolio of shares, securities or other assets with the aim of providing a return to their investors.

These draft regulations amend the Companies Act to ensure that company law and tax rules work in harmony. Part 23 of the Companies Act regulates distributions by a company to its shareholders. It aims to protect the company’s creditors by ensuring that funds are available to meet the company’s debts in the event of it winding up. The most common form of distribution is the payment of a dividend.

The Companies Act allows investment companies to benefit from more relaxed distribution rules compared with other public companies when making distributions out of revenue profits. Investment companies do not have to comply with the net asset test, which permits a public company to make a distribution to its shareholders only if the amount of its net assets is at least equal to its called-up share capital and those reserves not available for distribution. Instead, an investment company must meet a condition that requires the company’s assets to be at least equal to one and a half times the aggregate of its liabilities to its creditors.

This concession for investment companies takes partial advantage of an option in the second company law directive. It recognises that during periods of falling share prices, investment companies might not be able to pay dividends to their investor-shareholders if required to satisfy the net asset test. This would undermine the purpose of these companies.

These draft regulations allow more types of investment companies to qualify for the relaxed distributions regime. It simplifies some of the conditions to ensure that they are compatible with the recent changes to the tax rules. They remove a restriction that prohibits investment companies from paying dividends out of capital profits. Investment companies, like other plcs, will be able to pay dividends out of capital profits and still benefit from the relaxed distribution rules. This change will allow the tax rules to work as intended.

The amended tax rules may require investment companies to distribute a proportion of their capital profits if they are to benefit from the corporation tax exemption. BIS, HMRC and the Treasury issued a joint consultation document on 27 July 2010 and a summary of responses was published on 9 December 2010. The draft regulations were published on the BIS internet site on 4 November 2011. A full impact assessment has been completed, stating that these regulations have a zero net cost to business. While we have been unable to monetise the benefits to business, the investment industry considers these amendments to be beneficial. Companies choose to opt in to the investment companies regime and will do so only if they consider that the benefits exceed the costs.

In summary, these regulations amend the existing rules for investment companies to broaden the definition of “investment company” and remove unnecessary restrictions. They are necessary if the recent changes made to the tax rules for investment companies are to have their full effect. This is a deregulatory measure that has been warmly welcomed by the investment industry, and I therefore commend it to the Committee.

[Lord Razzall]

My Lords, I welcome these regulations. It is clearly not sensible that HMRC should propose amendments which, unless the Companies Act is changed, cannot be implemented. I have just one question, which may be difficult to answer. It is suggested that the objective of HMRC is to try to increase the number of investment trusts that become domiciled in the UK in order to take advantage of these changes in company law and tax law. Page 8 of the impact assessment states that,

“there are 200 registered as ‘investment companies’ under the Companies Act”,

but that there are 320 quoted investment companies, which suggests that there is the potential for an additional 120 companies to register. Is that right? If the objective is to get companies that are quoted on other exchanges to register here, it could be presumed that a limitless number of companies might take advantage of these rules. I assume that the 120 companies referred to here are only UK companies, and it would be difficult to estimate the potential if that is HMRC’s objective.

[Lord Young of Norwood Green]

I enter this debate with some trepidation because it is certainly not my favourite subject. I listened carefully to the Minister throughout her complex analysis of the benefits, but I am not sure that I fully comprehended it, so I apologise if I have to call for a bit of reiteration. I have two questions to put. The first is on risk-spreading investment vehicles. Given the problems that we have had with risk and financial collapses, is the Minister satisfied that the requisite safeguards are in place in these companies? Secondly, can the Minister explain in a little more detail precisely what benefits, following the changes to the corporation tax regime, will arise from realigning company law in this way?

[Baroness Wilcox]

My Lords, I agree that it is a complicated subject—it is complicated to read. Consistency in regulation is essential if we are to provide a framework for companies to operate within and thrive. These regulations remove conflicting regulatory requirements between the Companies Act and corporation tax rules.

In answer to the question asked by the noble Lord, Lord Razzall, 320 investment companies are UK-domiciled. He is correct that we do not know how many companies are registered abroad. I am afraid that is the answer that I can give at the moment, but if the noble Lord wishes to take this up with me—

[Lord Razzall]

No, that is what I assumed.

[Baroness Wilcox]

The noble Lord assumed correctly, of course, which is excellent.

In answer to the noble Lord, Lord Young of Norwood Green, tax issues have been debated in the House of Commons and are now in place. I have not brought these details with me but I would be very happy to provide the noble Lord with those. I do not think that those details will make a fundamental difference to what we are asking for today. I hope he will bear with me on that. The noble Lord also asked about the corporation tax regime, which gives exemption to investment companies from corporation tax on their chargeable gains if they satisfy conditions.

In parallel, investment companies and their investor-shareholders will benefit from the removal of an unnecessary restriction. Investment companies will be able to pay dividends out of capital profits without losing their ability to benefit from the special distributions regime in the Companies Act.

Unless there are any further questions—