Increasing competitiveness of UK funds regime will be ‘challenging’

Hatice Ismail of Pinsent Masons was commenting following HM Treasury’s publication of a policy paper (54-page / 433KB PDF) summarising responses to its call for input as part of its review into the UK’s fund regime, launched in January 2021.

The policy paper outlines next steps in the government’s review of the UK’s fund regime. Priorities include reviewing the ‘genuine diversity of ownership’ condition; improving the tax efficiency of authorised ‘mixed funds’; and introducing a new unauthorised contractual scheme fund. The government is also considering options to reform the real estate investment trusts (REITs) regime, including in light of the new asset holding company regime.

Any tax reforms will be compatible with the government’s approach on tax avoidance and evasion and with the UK’s international commitments.

“It is clear that combatting the tax leakage problem for authorised ‘mixed funds’ will not involve a one size fits all solution,” Ismail said.

“HM Treasury wants to understand the practical reasons why tax elected funds (TEFs) – which prevent the tax leakage that can be suffered by mixed funds that are not ‘bond funds’ – can be difficult and costly to administrate and have therefore proved unpopular. Allowing for optional tax-exempt fund status would offer a simple solution for UK funds with an investment strategy not reliant on claiming relief under double tax treaties, so it is welcomed that HM Treasury is considering this option as a possible solution,” she said.

The paper confirms that the government is dropping proposals to extend corporate streaming to individuals and introduce a low tax rate for authorised funds, due to stakeholder reservations. However, a proposal to allow the ‘deemed deduction’ of distributions at fund level is being considered further.

The government will not be introducing a VAT zero-rate for fund management fees but will consult on possible ways to simplify the UK VAT treatment of management fees.

Ismail said: “It is disappointing that these solutions will not be coupled with the UK VAT zero-rating of management fees that the industry has been pushing for. This appears to be a lost opportunity to make the UK a more competitive jurisdiction of domicile for funds. The cost is considered too great by the Treasury and so is off the table, although of course the potential lost revenue as a result of not going down this route is more difficult to establish and indeed will never be known.”

The government’s review into the UK’s funds regime was first announced at the 2020 Budget. Covering both tax and regulation, its stated objective is to make the UK a more attractive location to set up, manage and administer funds, as well as supporting a wider range of more efficient investments better suited to investors’ needs.

A new tax regime for qualifying asset holding companies (QAHCs) has already been introduced as part of the review.