UK Ministers intervened on HMRC lan to impose VAT on UK Investment Funds
The UK government is considering halting HM Revenue & Customs’ (HMRC) proposal to impose VAT on investment fund management, following strong opposition from City leaders.
HMRC had sought to remove a long-standing exemption that allows third-party fund management to remain free from the 20% tax.
Financial executives met City Minister Emma Reynolds to warn that the move would cost the finance sector £147 million—most of which would be passed to investors—and deter foreign investment. Ministers may now intervene, fearing the tax’s impact on economic growth.
The pushback follows a December letter from industry groups, including UK Finance, the Association of British Insurers, and the Investment Association, warning that the VAT change could harm the UK’s reputation as a stable financial hub. They cautioned that it might drive investment to Dublin and Luxembourg, undermining the government’s economic growth and competitiveness goals.
The lobbying effort comes amid broader struggles for actively managed UK funds, which have faced investor outflows in favor of lower-cost passive funds and US-based alternatives. A government spokesperson acknowledged the asset management sector’s importance and said ministers are engaging with stakeholders to assess the impact of any tax reforms.
HMRC clarifying Fund Management VAT Rules
HMRC reforms followed Budget 2020 announcement and a consultation launched in December. The changes aimed to clarify the VAT treatment of fund management and enhance the UK’s competitiveness in the sector.
Historically, the UK relied on EU VAT Directive Article 135(1)(g), which exempts Special Investment Funds (SIFs) from VAT. Without a clear definition of SIFs in UK law, both HMRC and the industry have faced uncertainty in applying exemptions.
The government intends to codify both existing UK VAT exemptions and retained EU law into UK statute, ensuring consistency and legal clarity for fund managers. This move is expected to enhance the UK’s appeal as a global fund management hub by providing a more predictable tax framework.
