Ministers plan to shelve UK funding funds VAT tax hit | USAEMALL.com

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The government is looking to block HM Revenue & Customs’ plans to apply VAT to UK investment fund services, following a backlash from senior City executives.

The tax authority was seeking to end an exemption that would mean outsourced fund administration would no longer be free from the 20 per cent levy, according to people close to the situation. 

Senior finance executives met City minister Emma Reynolds on Tuesday to push back against HMRC’s proposals for the £1.43tn industry, warning that it could cost an extra £147mn a year — an expense that would probably be passed on to investors.

But people close to the plans told the Financial Times that the government could now intervene and stop HMRC from applying VAT to the sector.

The move will come as a reprieve to the UK’s financial services industry, which had privately warned government that adding the levy would deter investment into the UK. HMRC was also considering clawing back four years’ worth of VAT, one of the people added. 

A group of influential City lobby groups, including UK Finance, the Association of British Insurers, and the Investment Association, wrote a letter sent in December to the Treasury warning about HMRC’s plans.

The letter, seen by the Financial Times, said the reforms would “damage the UK’s reputation as a stable, predictable, and welcoming place to do business”, and could “undermine the government’s broader goals of boosting economic growth, investment and international competitiveness”.

It added that the plans would “impose” an additional 20 per cent tax burden on many “financial services customers, including investors in UK domiciled funds”.

The proposal “risks undermining the UK’s attractiveness as a domicile for funds and making it an international outlier”. In contrast, large EU bases for funds such as Dublin and Luxembourg did not apply VAT on these services, the letter argued.

The warning came as funds managed by stockpickers grapple with customers withdrawing their money in favour of cheaper investment products.

Funds holding UK stocks in particular are suffering from customer outflows, putting further pressure on companies that are listed on the London Stock Exchange. 

Chancellor Rachel Reeves is also under pressure to cut spending in an attempt to bolster the country’s weak public finances.

According to research commissioned by the Investment Association, the exchequer could lose £1mn in taxes for every £1bn of assets under management that moves to a non-UK fund.

“We strongly urge you to intervene at the earliest opportunity to prevent irreparable harm to the industry and to the UK’s standing as a global financial hub,” the letter said.

A government spokesperson said it recognised “the importance of the UK’s world-leading asset management sector to the economy”. It “continues to meet with stakeholders to understand the impact on firms of the current policy position”, they added.

HMRC did not immediately respond to a request for comment.