Travers Smith's Alternative Insights: The UK budget and the competitiveness agenda

A regular briefing for the alternative asset management industry.

The British government's ambitions to use its new freedom to diverge from EU laws to give the UK a competitive edge have, inevitably, been delayed by the more urgent need to focus on COVID recovery. Although the government is in the middle of a wide-ranging tax and legal review of the UK funds regime, many of the proposals are still at the discussion stage. As a result, the 2021 budget, and this week's widely anticipated "Tax Day" – a moment for the government to launch consultations on a wide range of reform proposals – were much less dramatic than they might have been for the private funds community.

This relative lack of concrete announcements should not obscure the important discussions that are going on. Indeed, as our online checklist shows, there are many proposals being contemplated in the UK, as well as important EU reforms that will affect all European managers. But while many of the EU changes are imminent, a number of UK ones – some of which could be really important in the years to come – are still in the development phase.

The UK budget was not without its news for private funds. The continued economic support for businesses suffering the economic impacts of the pandemic, and the longer-term measures aiming to stimulate business investment, will be helpful for many UK portfolio companies, whereas the tax measures were more of a mixed bag. Asset managers will need time to digest the combined impact of the general corporation tax measures – including the increase in rate to 25% from 2023 – the temporary extension of the trading loss carry back rules, and a 130% super-deduction for qualifying capital allowances. A more clearly positive step came in relation to the measures to improve the so-called "anti-hybrids" rules, which seek to address under-taxation caused by structural mismatches – such as in the way a payment is treated (equity vs. debt, for example) or in the different ways that jurisdictions might treat entities (tax transparent vs. opaque). The proposed changes look set to go ahead, and they should ease (if not completely solve) several of the issues that have troubled the industry since the regime was introduced in 2017.

Even less exciting for the asset management industry was the first, and over-hyped, "Tax Day". Its focus was on general tax administration and compliance, rather than to launch consultations on substantive tax changes – although debt funds may be interested in proposed reforms to the securitisation company regime (and, in particular, the "retained securitisations" proposals).

From an asset management perspective, the lack of industry-specific tax measures makes sense, given the ongoing Funds Review. Although still seeking industry input on most of its ideas, the direction of travel is promising. The focus is on identifying options which will make the UK a more attractive location to set up, manage and administer funds, and which will support a wider range of more efficient investments better suited to investors’ needs.

...Although still seeking industry input on most of its ideas, the direction of travel is promising. The focus is on identifying options which will make the UK a more attractive location to set up, manage and administer funds, and which will support a wider range of more efficient investments better suited to investors’ needs...

The Funds Review could lead to some very helpful changes for UK-based fund managers – including the introduction of a new tax privileged asset holding company regime, the creation of new fund vehicles, and significant reform to the Real Estate Investment Trust (REIT) rules – and industry bodies are busy engaging with the UK tax authority and the government in relation to them. Given all this ongoing discussion, the lack of further reform proposals, or an interim raft of reforms, is both understandable and generally welcome.

It is perhaps regrettable that the long-awaited review of the VAT treatment of asset management fees has not yet materialised. Various court decisions have left the EU's VAT fund management exemption in a bit of a mess, and – now that the UK is no longer bound to apply EU law – there is an opportunity to put in place a more coherent and competitive regime. However, the continuing delay may give the UK authorities time to get the ultimate proposal right and balancing the various needs of different parts of the industry will be quite tricky.

At some point, of course, most people expect significant announcements on more general tax matters, including on capital gains tax and the taxation of the self-employed. Here, the UK government will need to be careful not to undo its good work on reforms arising from the Funds Review, given that the success of that initiative relies heavily on the general tax position of the UK. Now is probably not the time to be making significant changes, especially those that might hinder the recovery. If and when they do come, the government will need to be mindful of its longer-term competitiveness agenda for the UK's financial services industry.

So, although the recent UK tax "events" have been fairly quiet for the alternative asset management sector, significant reforms are on the way – and there are reasons to be optimistic about their impact.

For more of our content on alternative asset management, please visit our designated hub here.

View our Budget 2021 content here.