The abolition of taxes on UK investment funds is among sweeping post-Brexit reforms the government should consider to ensure the City of London thrives as a global centre for asset management, according to an influential trade body.
The Investment Association, which represents the UK’s asset management industry, will call this week for rule changes to encourage the development of innovative new funds that will not suffer any tax disadvantages compared with directly competing European funds.
It also wants the government to consider moving to a full exempt tax regime for all UK funds to allow the City to compete more effectively against rival European fund hubs in Dublin and Luxembourg.
The reforms would advance prime minister Boris Johnson’s ambitions for the UK to develop as a global champion of environmentally friendly “green” investment strategies, as well as supporting fund administration jobs outside London, it said.
“Brexit is an important opportunity for the UK to define an innovative and responsive policy framework for investment funds. This will ensure that we continue to attract world-class firms to serve British and international customers, while also supporting the UK’s ambition to become the global centre for responsible and sustainable investment,” said Chris Cummings, chief executive of the association, which represents 250 members that together oversee assets of £8.7tn.
The proposals are the association’s submission to a Treasury evaluation into possible rule changes. The Financial Conduct Authority is conducting a similar exercise, with both the government and City regulator aiming to ensure that the investment industry can profit from its new freedoms following the UK’s departure from the EU.
The IA said the uncertain outlook for UK-EU relations, particularly regarding financial services, added increased urgency to the need for reform.
Simplifying the tax regime could also provide a boost to UK-based fund administration jobs located outside London by removing the incentive for asset managers to use cheaper, international, centres.
“The UK needs to ensue that it remains attractive to investment management businesses that may face rising pressures regarding location decisions,” said Cummings.
Most UK funds under the current rules do not pay taxes owing to exemptions on income from equity dividends and deductions for interest payments by bond funds. These complicated arrangements deter international investors in comparison to regimes elsewhere that exempt funds from taxes.
Applying a zero rate of value added tax to all UK funds would ensure they are placed on the same footing as equivalent products that are domiciled offshore. “The UK needs a fund tax regime that is simple to understand and operate while also offering certainty to investors,” said Cummings.
The costs to the UK exchequer in terms of lost tax revenues would be minimal as the current system of exemptions reduces any VAT bill close to zero for fund managers.
Some association members are concerned that a move to a full-exempt tax regime could lead to unintended consequences, such as the potential loss of access to existing double tax treaties. But the “vast majority” of UK funds obtain only limited benefits at most from double tax treaties, according to the IA.
A rebranding exercise will be required to promote UK mutual funds that were previously categorised as Ucits (Undertakings for collective investment in transferable securities) under EU rules.
Cummings said the UK government needed to send a strong message to investors that Britain would still provide funds that were “Ucits in all but name”, with the same high standards of investor protection, liquidity and diversification.
The IA also wants a new suite of alternative investment funds subject to light touch regulation developed for institutional clients to help the government’s plans to “build back better” after the coronavirus pandemic.
Amin Rajan, chief executive of Create-Research, an investment consultancy, said the IA’s tax proposals were unlikely to deliver a new competitive edge to the UK fund industry.
“The UK fund industry needs a much bolder plan than the IA’s proposals if it is to prosper after Brexit,” he said “Innovative ideas are needed to improve investment performance and products, client service and fees. It is unclear at this stage how the proposed tax changes will have meaningful impact in any of these areas.”