The Treasury should support the continued operation of offshore financial centres, according to the Association of Investment Companies (AIC).
Responding to the Foot Review, the AIC has recommended the Treasury backs British offshore financial centres which are home to almost a third of investment companies whose shares trade on UK markets.
The Foot Review, due in September, will probe the interdependence between the UK and offshore financial centres, as well as assess the risks arising from the current economic climate.
Growth of the closed-ended investment company sector has been almost entirely offshore over the past five years, raising £16.5bn compared to £2bn onshore.
The AIC believes this represents a vote of confidence in the regulatory and professional standards of offshore centres, such as the Channel Islands.
It estimates over £300m is paid to the UK in management fees each year by Channel Islands-domiciled investment companies, illustrating the positive contribution the offshore investment company sector makes to the UK.
Taking into account fees paid to UK-based investment banks and brokers related to IPOs, the AIC estimates an additional £400m has been paid into the UK since 2001.
"The growth of the offshore investment company sector has been a real positive for the evolution of the industry as a whole, allowing the sector to adapt to meet demand for investment strategies which cannot be delivered tax efficiently in the UK," says Daniel Godfrey, director general, AIC.
He stresses tax efficiency should not be confused with tax avoidance, as returns by UK investors in offshore funds are taxed in the usual way involving no tax loss to HM Treasury.
Godfrey also believes the investment company sector would not have developed in the way it has without its offshore counterpart.
"The direct consequence of this would have been reduced choice and competition for investors and a lower volume of financial services activity in the UK, with lower potential tax revenues and employment opportunities," he adds.
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