The future UK funds regime

HM Treasury has published a summary of responses to its January 2021 Call for Input on a review of the UK funds regime, which focused on both tax and regulatory reform. The Call for Input was broad and relatively high-level, with the intention of identifying which reforms should be taken forward for more detailed consideration and how these should be prioritised. As well as outlining the feedback the government received for each area of the Call for Input, the response sets out the government’s conclusions and which measures will be progressed or explored further.

Objectives and outcomes

First announced by the government in the Budget 2020, the overarching objective of the review into the UK funds regime is to identify options which hold the potential to enhance the UK as a location to set up, manage and administer funds, as well as support a wider range of more efficient investments better suited to investors’ needs.

This general review sits alongside two key initiatives that the government has already taken forward, namely: a new tax regime for qualifying asset holding companies (QAHCs) in certain fund (and other) structures introduced in the Finance Bill to commence in April 2022; and facilitating the introduction of the Long-Term Asset Fund (LTAF) structure - for which the FCA published final rules in October 2021. You can read more on LTAFs here.

Under the umbrella of this more general review, in its response the government (alongside the FCA, where relevant) commits to:

  • make the taxation of funds simpler and more efficient, including reviewing the genuine diversity of ownership (GDO) requirement, considering further reforms to REITs and solutions to deal with the tax efficiency of multi-asset authorised funds;
  • expand the range of investment products available in the UK, including progressing work on permitting distribution of capital by authorised funds and exploring options for introducing a new type of fund structure – an unauthorised contractual scheme – aimed at professional investors; and
  • explore opportunities to support the wider funds environment, including by providing additional information on the fund authorisation process and by promoting the UK funds regime abroad.

The response also confirms that the government and the FCA, where applicable, will continue work on separate workstreams intended to enhance the UK funds regime, specifically: 

  • A consultation on options to simplify the VAT treatment of fund management fees. The response document confirms that this long-awaited consultation will be published “in the coming months”. Although strictly outside the scope of the Call for Input, the response document also provides some brief details. In particular, the government emphasises that it is aware of the importance of VAT for industry, and that the competitiveness of the UK’s VAT regime is a necessary condition for the UK to be an attractive location to domicile funds. However, it forewarns that it will not look at a VAT zero-rate for fund management fees at this time as the impact on the Exchequer would be “significant” and therefore it cannot be prioritised in the current fiscal context. The consultation will, however, examine other options to improve and simplify the VAT regime for fund management. This decision on zero-rating has informed the government’s approach to some of the new vehicle proposals, as discussed below.
  • Ongoing work to facilitate the rollout of the LTAF, including an FCA consultation on promoting LTAFs later in 2022. 

The government is clear (as it was in its Call for Input), that any tax reforms will be compatible with its robust approach on tax avoidance and evasion, and with the UK’s international commitments. The government will also ensure that the UK continues to exercise its taxing rights effectively. Further, any regulatory change will be supportive of the UK’s commitment to uphold the highest standards of regulation, supervisory oversight and investor protection.