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

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.