As it stands, annual management charges levied by fund houses are free of VAT, but the fees paid by clients of discretionary fund management firms are subject to the tax.
The review, announced today as part of the Budget, pledges “to consider the VAT treatment of fund management fees and other aspects of the UK’s funds regime.”
Under EU law, UK unit trusts, and Open-ended investment Companies (OEICS) and investment trusts are counted as “special investment funds”, and such funds are exempt from VAT.
With the UK leaving the EU’s regulatory system later this year, a new set of rules are needed.
The government said today: "The review will begin with a consultation, to be published at the Budget, on whether there are targeted and merited tax changes that could help to make the UK a more attractive location for companies used by funds to hold assets. The review will also consider the VAT treatment of fund management fees and other aspects of the UK’s funds regime."
It is thought unlikely that VAT would be introduced in areas where services are currently exempt. Ben Yearsley of Fairview Investments said adding VAT would have a "massive" impact on the funds industry. Adrian Lowcock of Willis Owen said he did not think such hikes would take place.
Jason Hollands, managing director for business development and communications at Tilney, said it is more likely that changes might be made to the VAT treatment of the fees that DFM clients pay.
The consultation forms part of a broader review of the UK’s funds regime planned for 2020. The Treasury said this review would cover direct and indirect tax, as well as relevant areas of regulation, with a view to considering the case for policy changes.
Separately, the government is also to set up an industry working group to review how financial services are treated for VAT purposes.
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