Offshore centres such as Luxembourg and Ireland are more attractive to fund investors than the UK.
A report produced by KPMG and commissioned by the Investment Management Association reveals in the last two years net sales of non-UK funds have grown from 1% to 20% of the UK market while the sales of UK funds abroad remain very low.
The IMA says the research of 26 investment management groups and 4 administration companies which manage more than 60% of UK authorised funds reveals many investment managers blame the move abroad on the UK’s unfavourable tax regime.
In the 58-page report, KPMG says although the UK is considered a “vibrant and leading centre for investment management” it is failing to attract new investment funds which are instead being set up in Luxembourg, Ireland and other offshore jurisdictions.
As a result, KPMG and the IMA suggest a series of recommendations to try and make the UK more attractive to the funds market, including:
- Improved consultation and trust between the industry, HM Revenue & Customs (HMRC) and the Financial Services Authority (FSA), particularly over issues of tax avoidance.
- Serious consideration of the abolition of the stamp duty reserve tax Schedule 19 regime, as it adds complexity to the UK tax regime, and creates an additional compliance burden for managers, as well as making UK funds harder to understand and less attractive to investors when marketed offshore.
- Allow authorised funds to trade without incurring a corporation tax charge and if necessary accompany the removal with the introduction of a targeted anti-avoidance measure.
The two companies are proposing these changes as the research reveals in the 10 years between 1995 and 2005, assets based in Ireland has grown by 31 times, and Luxembourg has grown by six times compared to just a three fold increase in the UK.
As a result, it says while there exists “significant opportunity to build on current market strength”, through selling UK domiciled funds into the EU and positioning the UK as an attractive fund domicile for alternative asset funds, the report warns this will not happen without a proportionate tax regime.
To achieve this, the IMA is calling for the UK industry to be subject to a simpler tax regime so it can compete directly with Ireland and Luxembourg, backed by supportive and constructive tax and regulatory authorities.
The trade body suggests UK authorities are “showing a renewed willingness to engage with such issues”, through its announcement in the 2006 Budget of a new initiative to promote the UK as a financial centre.
Jane McCormick, head of tax financial services at KPMG, says; “The survey also highlights there is not yet a clear EU domicile of choice for alternative investments. Given the strength of the UK’s financial services sector, there is a real opportunity for the UK to fill that gap. But changes to the tax system are required before the opportunity is lost.”
Meanwhile, Julie Patterson, director of regulation operations and taxation at the IMA, says the UK is losing out because when funds are established overseas many jobs go with them, leading to a loss of revenue for the UK.
She adds: “The fear is the UK investment management industry is approaching a tipping point with more and more of the value chain being domiciled overseas, But it is not too late to do something about it. The industry is not calling for tax breaks but for a simpler tax regime which will be beneficial to investors, the government and industry alike.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
Cautious, Balanced & Dynamic Growth
Cowardly, boring or sensible
Latest news and analysis
‘Most significant’ upgrade since launch
Changes happening over coming months