UK ministers consider blocking HMRC VAT proposal on investment funds

Ministers are reportedly considering intervening to prevent a proposal by HM Revenue & Customs (HMRC) to impose VAT on investment funds, following warnings from City leaders.

The Financial Times reported that the customs authority had been attempting to remove the exemption which allowed third-party fund management services to avoid the 20 per cent consumption tax, as reported by City AM.

Senior finance executives met with City minister Emma Reynolds earlier in the week to express their concerns about the proposals.

They cautioned that the move could result in a £147m burden on the financial sector, much of which would likely be passed on to investors, and could discourage foreign investment in the UK.

In what may be seen as a concession to the finance industry, ministers might now intervene to halt HMRC's plans due to concerns about the potential impact on their growth agenda.

This report marks the first sign that the government may reconsider the plans.

It comes after a December letter from influential lobbyists to the Treasury, highlighting the damaging consequences the VAT changes could have.

The letter, signed by UK Finance, the Association of British Insurers, and the Investment Association, argued that the VAT proposals would "damage the UK's reputation as a stable, predictable and welcoming place to do business."

The letter further suggested that these actions could "undermine the government's broader goals of boosting economic growth, investment and international competitiveness," indicating that the UK might lose investor funds to Dublin and Luxembourg.

This comes amidst a fierce lobbying campaign as actively managed funds face several structural challenges.

Top UK funds have been experiencing outflows in recent years as investors shift their money into less expensive passive funds or US-focused competitors managed outside the UK.

A government spokesperson told the Financial Times that ministers acknowledged "the importance of the UK's world-leading asset management sector to the economy."