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The UK government is contemplating action to prevent HM Revenue & Customs (HMRC) from implementing proposed Value Added Tax (VAT) changes that would affect investment fund services.
Senior executives from London’s financial sector have expressed significant concerns about the proposal, which aims to end the VAT exemption on outsourced fund administration services. This change would introduce a 20% tax on these services, impacting an industry valued at approximately £1.43 trillion.
The discussions have intensified following a meeting on Tuesday between senior finance leaders and City minister Emma Reynolds, where the executives voiced their apprehensions about the potential financial implications. They highlighted that the introduction of VAT could add an extra £147 million per year, an expense expected to be passed on to investors.
According to insiders, the government may step in to halt HMRC’s VAT plans, which would be seen as a significant relief for the UK’s financial services sector. Industry leaders have warned that the imposition of VAT could deter investment in the UK market, exacerbating existing challenges within the sector.
There are also suggestions that HMRC may attempt to retroactively recover four years’ worth of VAT under these new guidelines.
A collective of influential lobbying groups, including UK Finance, the Association of British Insurers, and the Investment Association, previously sent a letter to the Treasury in December, articulating their concerns about the proposed reforms. This letter stated that the changes could harm the UK’s reputation as a reliable and inviting place for business.
It underscored fears that the additional tax burden would hinder economic growth and undermine the government’s wider efforts to enhance investment and international competitiveness.
The letter also pointed out that the proposed VAT changes could make the UK less attractive as a domicile for funds, contrasting British regulations with those in large EU financial centers like Dublin and Luxembourg, which do not impose VAT on similar services.
Amidst these discussions, many funds focused on UK stocks are facing withdrawals as investors seek out cheaper alternatives, placing further pressure on companies listed on the London Stock Exchange.
Chancellor Rachel Reeves is facing pressure to rein in public spending to strengthen the national finances. Research commissioned by the Investment Association suggests that for every £1 billion of assets managed outside the UK, the Treasury could lose £1 million in taxes.
In closing, a government spokesperson acknowledged the significance of the UK’s asset management sector to the broader economy, noting ongoing discussions with stakeholders to assess the impact of HMRC’s current policy direction.
A request for comment from HMRC was not immediately met.
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