The abolition of taxes on UK investment funds is part of sweeping post-Brexit reforms the government should consider to ensure the City of London thrives as a global asset management center, according to an influential trade body.
The Investment Association, which represents the UK asset management industry, will this week call for rule changes to encourage the development of new, innovative funds that will not suffer any tax disadvantage compared to directly competing European funds.
He also wants the government to consider switching to a fully exempt tax regime for all British funds in order to allow the City to compete more effectively with the poles of rival European funds in Dublin and Luxembourg.
The reforms would advance Prime Minister Boris Johnson’s ambitions for the UK to grow as a global champion of environmentally friendly ‘green’ investment strategies, as well as support fund administration jobs by outside of London, he said.
âBrexit is an important opportunity for the UK to define an innovative and responsive policy framework for investment funds. This will allow us to continue to attract world-class companies to serve UK and international clients, while supporting the UK’s ambition to become the global hub for responsible and sustainable investing, âsaid Chris Cummings, Managing Director general of the association, which represents 250 people. members who together oversee assets of Â£ 8.7bn.
The proposals are the association’s submission to a treasury assessment on possible rule changes. The Financial Conduct Authority is carrying out a similar exercise, with the government and municipal regulator aiming to ensure that the investment industry can enjoy its new freedoms after the UK leaves the EU.
The IA said the uncertain outlook for UK-EU relations, especially on financial services, added increased urgency to the need for reform.
Simplifying the tax regime could also boost UK-based fund administration jobs outside London by removing the incentive for asset managers to use cheaper international centers.
âThe UK needs to ensure that it remains attractive to investment management firms who may face increasing pressures regarding location decisions,â Cummings said.
Most UK funds under the current rules do not pay tax due to exemptions on income from dividends from shares and deductions for interest payments by bond funds. These complicated arrangements deter international investors from regimes elsewhere that exempt funds from taxes.
Applying a zero rate of value added tax to all UK funds would ensure that they are placed on the same footing as equivalent products domiciled abroad. âThe UK needs a fund tax system that is easy to understand and operate while providing certainty for investors,â Cummings said.
The costs to the UK Treasury in terms of lost tax revenue would be minimal as the current system of exemptions reduces any VAT bill close to zero for fund managers.
Some association members fear that the move to a fully 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 get at most only limited benefits from double taxation treaties, according to the IA.
A rebranding exercise will be needed to promote UK mutual funds which were previously classified as Ucits (undertakings for collective investment in transferable securities) under EU rules.
Cummings said the UK government needs to send a strong message to investors that Britain will continue to provide “Ucits in everything but name” funds, with the same high standards of investor protection, liquidity and diversification.
AI also wants a new line of lightly regulated alternative investment funds developed for institutional clients to help government plans to ‘build back better’ after the coronavirus pandemic.
Amin Rajan, chief executive of Create-Research, an investment advisory firm, said the AI ââtax proposals were unlikely to provide a new competitive advantage for the UK fund industry.
âThe UK fund industry needs a much bolder plan than the AI ââproposals to thrive after Brexit,â he said. âInnovative ideas are needed to improve performance and investment products, customer service and costs. It is not known at this stage how the proposed tax changes will have a significant impact in any of these areas. ”