Responding to a consultation paper released last week by the Financial Services authority on the issue, the IMA, which represents the UK asset management industry, welcomed the FSA's contribution to the debate, but noted that any discussion of the regulation of UK hedge funds will remain academic unless there is significant reform of the tax regime, since funds will otherwise have no incentive to come onshore.

In its reponse to 'Hedge Funds and the FSA' last week, the industry body stressed that in order for it to be viable to offer hedge fund investment to the UK's retail investors: 'It must be made clear that capital gains will not be taxed at fund level, irrespective of the fund’s investment style and strategy.'

It went on to add that: 'Moreover, as long as the Government applies SDRT to funds, and precludes investors from rolling up income tax free until disposal and insists on unnecessary withholding taxes, the UK will continue to be at a disadvantage.'

Although in his pre-budget report, Chancellor Gordon Brown raised the possibility of equalising the tax treatement of offshore and onshore fund gains, recent reports have suggested that such reform may be delayed, as unlike countries such as Singapore and the United States which have already undertaken reviews of the situation, there is no consensus yet in the United Kingdom as to how to move foward.

Speaking to Reuters last week, Julie Patterson, director for regulation and tax matters at IMA explained that it is this uncertainty which is stopping hedge funds from considering moving onshore:

'Hedge fund managers are nervous as to what the answers are when it comes to tax, so they stay offshore,' she explained, adding: 'For the sake of UK Plc, this is a ridiculous situation. Britain risks missing the boat on hedge funds.'