Finance Act 1997 (Hansard, 21 March 1997)

§ Mrs. Angela Knight

The definition of "intermediary" for the purposes of the new relief aims broadly to distinguish between dealers and end-investors, on the lines recommended by the Securities and Investments Board in its report to the Chancellor in July 1996.

Sections 97 and 102 of the Finance Act 1997 define "intermediary" as a person who carries on a bona fide business of dealing in stock or securities, and who does not also carry on a business which the sections describe as an "excluded business". It will depend on the facts of the particular case whether a dealer is also carrying on an "excluded business".

One category of "excluded business" is a business which consists wholly or mainly in making or managing investments. Thus if the dealing firm also carries on a separate business of making and managing investments in exchange-traded chargeable securities or stock on its own behalf, that would be an excluded business and the dealer would not qualify as an intermediary, But if the dealer is holding such investments merely as an incidental part of a dealing activity taxable under case 1 of schedule D, and not as a separate business, that would not disqualify the firm from being an intermediary. For example, if the dealer buys and holds shares merely to hedge derivative contracts which it has made, that would not be regarded as a business of making investments for the purpose of the excluded business test.

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Similarly, the Inland Revenue would not regard a dealer as disqualified merely because the firm also makes and manages investments for clients, if the investments are not beneficially owned by the dealer. By contrast, if the dealer purchases investments for clients and the clients hold something short of beneficial ownership in those investments—as would happen, for example, under the American arrangements known as prime brokerage—that would be regarded as a business of making or managing investments for the purpose of the excluded business test.

A firm may also be excluded from relief if it carries on a business which consists wholly or mainly of providing services to persons with which the firm is connected, such as members of the same group of companies. For example, if he dealer carries on a business of taking positions in equities as a service to connected persons who would not themselves qualify for relief as intermediaries, the sections would exclude the firm from relief. The Inland Revenue would not however regard the dealer as disqualified if business with connected persons is merely an incidental part of the firm's business with third parties, or if the services the firm provides are not related to handling securities within the scope of stamp duty and stamp duty reserve tax—such as research, secretarial or cleaning services. If the dealing firm buys chargeable securities merely in order to hedge the group's exposure as a result of derivative contracts undertaken with third parties by other members of the group, that would not be regarded as an excluded business.

The sections include a power for the Treasury to make regulations to alter the definition of intermediary, if that proves necessary. That will give flexibility to respond to market developments, or to deal with any particular practical problems which emerge as the new regime is introduced.

I understand that concern has also been expressed about the way in which relief may be withdrawn if the Inland Revenue concludes that a firm which has been recognised as an intermediary has in fact been carrying on an excluded business. The treatment of a particular case will depend on the precise facts. For example, if the intermediary had been recognised on the basis of incorrect or misleading information which it had provided about the nature of its business, any relief already given would be withdrawn. Similarly, if the firm had knowingly started to carry on an excluded business after being recognised as intermediary, it would generally be appropriate to withdraw relief from the time the excluded business started. On the other hand, where the business was extended inadvertently into an excluded area, or there were genuine doubts about whether a particular part of the business came into the excluded category, the Inland Revenue's practice would be to give the intermediary an opportunity to modify or reorganise the business so as to retain intermediary status; and if a decision was taken to discontinue the relief, past transactions would not be affected. If firms have doubts about whether particular types of business are excluded business, they may discuss the issues with the Inland Revenue. The Inland Revenue will consider issuing guidance on other aspects of the new regime if it proves necessary.

In order to qualify for the intermediaries' relief, intermediaries will have to be recognised as such by the exchange of which they are members, under arrangements approved by the Inland Revenue.

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