HM Treasury has published a wide-ranging call for input on its review of the UK funds regime. The asset management industry contributes 1% of the UK’s GDP and the government’s overarching objective for the review is to identify options which will make the UK a more attractive location to set up, manage and administer funds. The review will be of keen interest to those involved in the structuring of funds.
Scope of the review
The review is wide-ranging in scope covering direct and indirect tax as well as funds regulation.
The review was announced in the 2020 Budget and also encompasses two separate work-streams: an ongoing consultation on tax treatment of asset holding companies and VAT treatment of fund management fees which the government intends to take forward this year.
From a tax perspective the review states that the UK funds regime is intended to put an investor investing through the fund in a similar tax position as if they had invested in the underlying assets of the fund directly. It is noted though that currently this is not always the case.
The call for input flags the example of multi-asset or “balanced” funds where any interest receipts would be taxable but under general principles any corresponding distribution would not be deductible resulting in “tax drag” in the entity. The regime notes that there are structures to mitigate this drag but that these are commonly not used and the government is keen to understand the restrictions imposed on structuring these types of funds.
Comment is also asked for on UK Real Estate Investment Trusts (REITs) with the government recognising the complexity of the present rules for these vehicles. Potential reforms to REITs being considered include the relaxation of the listing requirement, changes to how the close company test is applied, the application of the holders of excessive rights rules and how the ’balance of business’ test operates.
More radical reforms are also discussed, for example the government has indicated it is open to considering the option of making authorised funds exempt from tax altogether (in line with some other jurisdictions) and introducing an unauthorised tax-exempt structure for investment in alternative assets.
The call for input is not limited to the tax treatment of funds, but also considers UK regulation of fund structures, and the enhancement of the broader funds environment. The government’s areas of particular interest includes:
- UK authorisation: understanding the driving factors behind why firms creating fund products choose authorised or unauthorised fund structures.
- Speed to market: whether the UK Financial Conduct Authority’s authorisation regime allows for speed to market and whether there should be greater certainty about authorisation timescales.
- Qualified Investor Scheme (QIS): understanding the limitations of the QIS structure, and how it could be made more attractive.
Finally, the government has requested views on issues which cut across the tax and regulatory elements of the UK funds regime with the government is keen to understand why certain types of fund vehicle are located in other jurisdictions where they could be located in the UK, for example, in the context of exchange traded funds (which are commonly used Irish vehicles).
The government is also open to proposals for new fund structures, which seek to fill gaps in the current range of UK fund vehicles. For example the introduction of a Long-Term Asset Fund; and/or an authorised open-ended fund structure designed to enable investors, particularly pension schemes, to more confidently invest in illiquid assets (such as venture capital and infrastructure). Proposals for enhancements to existing fund structures will also be considered, principally in relation to investment trust companies and distribution of capital.
The deadline for responses to the review is 20 April 2021, following which there will be a review of the responses, before a consultation on specific proposals for reform. The wide scope of the review highlights how motivated the government is to maintaining the competitiveness of this key industry post-Brexit. The government has stated a commitment to prioritising those reforms which will have the greatest impact and those which can be implemented swiftly.