The response to the UK Funds Review: Steps forward, but a key missed opportunity | Cadwalader, Wickersham & Taft LLP


On February 10, 2022, the UK Government published its response to input received from various stakeholders as part of the review of the UK Funds Scheme. The response document summarizes the responses received and, recognizing that not all proposals can be implemented immediately, sets out the UK government’s priorities.

Two important proposals the UK government intends to continue work on include facilitating the roll-out of the Long Term Assets Fund (“LTAF”) and simplifying the VAT treatment of investment management fees. Both of these issues are explored in more detail below, along with a high-level overview of other proposals the UK government intends to push forward.


The LTAF is a new type of open-ended investment fund authorized in the UK which aims to support investors’ access to longer term and less liquid assets. LTAF should be taxed in the same way as other authorized UK funds. It is aimed primarily at investors in pension funds and insurance funds. As part of the response document, the UK government indicated that it would consult on whether restrictions on the promotion of LTAFs could be changed to allow distribution to a wider range of retail investors and that it would continue to assess whether further changes should be made to the way LTAFs are imposed.

Simplification of VAT on portfolio management fees

The VAT treatment of investment management fees was seen as a key element in ensuring that the UK is seen as an attractive jurisdiction for fund formation. This issue has been addressed separately from the UK Government’s call for input and, in particular, the UK Government intends to hold a separate consultation on the VAT treatment of investment management fees. However, the response document noted that the proposed consultation will not consider a zero rate of VAT for fund management fees given the current tax environment. Instead, the consultation will examine other options to “improve and simplify” the VAT regime for the management of funds.

Failure to consider the zero rate of VAT for investment management fees is likely to be a significant setback in achieving the goal of making the UK an attractive jurisdiction for managers to create, manage and invest in. administration of funds. Currently, investment management fees charged to a UK fund are subject to UK VAT at the standard rate (currently 20%). to investors in the UK). As such, UK VAT may be chargeable on investment management fees charged to new forms of unauthorized funds. While the VAT exemption for “special investment funds” could be widened, this would limit the ability to recover input VAT. If investment management fees were to be zero-rated for UK VAT purposes, this would allow input VAT to be reclaimed without requiring payment of VAT on investment management fees. Instead, it remains to be seen what improvements and simplifications are being considered in the upcoming consultation.

Other proposals to take forward

In addition to the measures outlined above, the UK Government also intends to push ahead with the review of the Genuine Diversity of Ownership (“GDO”) condition which must be met in order to access various tax benefits for types particular funds in particular circumstances. The GDO condition is intended to ensure that the funds are widely marketed and not set up to simply give a limited number of investors favorable tax treatment.

Further work on the UK Real Estate Investment Trust (“REIT”) regime will also be undertaken, including interaction with the new Qualifying Asset Holding Company (“QAHC”) regime.

The UK government has also said it is seeking to ensure the UK funds industry can effectively use the UK’s double tax treaties with EU member states by agreeing their status and complaints procedures. . Managing the loss of post-Brexit withholding tax relief under the EU Parent-Subsidiary Directive and the Interest and Royalty Directive is also part of the workflow of the ongoing treaty negotiations. of double taxation from the British government.

Further consultation and stakeholder engagement regarding the tax effectiveness of multi-asset permitted funds, including the testing of eligible investments to determine if a fund is a bond fund, the case for an optional tax exemption for authorized funds and whether authorized funds should be authorized to distribute capital will also be undertaken.

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

The UK Government’s review of the UK funds regime was, and continues to be, a major project, from which a number of benefits are expected to flow. While the introduction of new fund vehicles as well as other possible changes to the various tax and regulatory regimes will be welcome, achieving the UK government’s stated aim of making the UK a more attractive place to for asset managers will likely require additional work, in particular regarding the VAT treatment of investment management fees.


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