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The UK Funds Review Response: Steps Forward But a Key Opportunity Missed

On 10 February 2022, the UK government published its response to the input received from various stakeholders into the UK funds regime review. The response document summarises the responses received and, in acknowledging that not all proposals can be taken forward immediately, sets out the UK government’s priorities.

Two important proposals the UK government intends to continue work on include facilitating the rollout of the Long Term Asset Fund (“LTAF”) and simplification of the VAT treatment of investment management fees. Both of these issues are discussed further below, together with a high-level overview of other proposals that the UK government intends to take forward.


The LTAF is a new type of UK authorised open-ended investment fund that is intended to support investor access to longer-term, less liquid assets. The LTAF is expected to be taxed in the same way as other authorised UK funds. It is primarily targeted at pension fund and insurance fund investors. As part of the response document, the UK government has noted that it will consult on potentially changing the restrictions on the promotion of LTAFs to allow distribution to a broader range of retail investors as well as continuing to assess whether any further changes should be made to the way LTAFs are taxed.

Simplification of VAT on investment management fees

The VAT treatment of investment management fees has been seen as a critical component of ensuring that the UK is seen as an attractive jurisdiction for the establishment of funds. This was being dealt with separate from the call for input from the UK government and, in particular, the UK government intends to hold a separate consultation into the VAT treatment of investment management fees. However, the response document noted that the proposed consultation will not consider a VAT zero-rate for fund management fees given the current fiscal context. Instead, the consultation will consider other options to “improve and simplify” the VAT regime for fund management.

Failure to consider VAT zero-rating for investment management fees will likely be a significant setback in achieving the aim of making the UK an attractive jurisdiction for managers to set up, manage and administer funds. Currently, investment management fees charged to a UK fund are chargeable to UK VAT at the standard rate (currently 20 per cent.) unless within a narrow exemption for “special investment funds” (broadly being UK authorised funds and certain non-UK UCITS marketed to investors in the UK). As such, UK VAT may be chargeable on investment management fees charged to new forms of unauthorised funds. Whilst the VAT exemption for “special investment funds” could be broadened, this would limit the ability to recover input VAT. If investment management fees were to be zero-rated for UK VAT purposes, this would enable input VAT recovery whilst also not requiring VAT to be paid in respect of the investment management fees. Instead, it remains to be seen what improvements and simplifications are considered as part of the upcoming consultation.

Other proposals to be taken forward

In addition to those measures set out above, the UK government also intends to take forward a review of the genuine diversity of ownership (“GDO”) condition that is required to be met in order to access various tax benefits for particular types of funds in specific circumstances. The GDO condition is intended to ensure that funds are widely marketed and not set up to simply give a limited number of investors an advantageous tax treatment.

Further work in relation to the UK real estate investment trust (“REIT”) regime will also be undertaken, including the interaction with the new qualifying asset holding company (“QAHC”) regime.

The UK government has also stated that it is looking to ensure that the UK funds industry can utilise the UK’s double tax treaties with EU member states effectively by agreeing their status and procedures for making claims. Addressing the post-Brexit loss of relief from withholding tax under the EU Parent-Subsidiary Directive and the Interest and Royalties Directive also form part of the work stream in the UK government’s ongoing double tax treaty negotiations.

Further consultations and stakeholder engagement in relation to addressing the tax efficiency of multi-asset authorised funds, including the qualifying investments test as to whether a fund is a bond fund, the case for an elective tax-exemption for authorised funds and whether authorised funds should be permitted to distribute capital will also be undertaken.

Naturally, the UK government also intends to undertake further work to promote the UK funds regime overseas.

The UK government’s review of the UK funds regime was, and continues to be, a wide-reaching project, from which a number of benefits are expected to come. Whilst the introduction of new fund vehicles together with further possible amendments to the various tax and regulatory regimes will be welcomed, achieving the UK government’s stated aim of making the UK a more attractive location for asset managers to set up will likely require further work, particularly as regards the VAT treatment of investment management fees.

Key Contacts

Adam Blakemore
T. +44 (0) 20 7170 8697

Linda Z. Swartz
T. +1 212 504 6062

Jon Brose
T. +1 212 504 6376

Andrew Carlon
T. +1 212 504 6378

Mark P. Howe
T. +1 202 862 2236

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