Inland Revenue Throws Spanner In The Works Of New Funds

by Jason Gorringe, Tax-News.com, London

03 February 2004

The UK Inland Revenue’s refusal to change its tax treatment of income from hedge funds is likely to kill interest in a new hedge fund based product aimed at private investors, due to be launched at the commencement of the next tax year in April.

The controversy is centred around the Revenue’s treatment of a fund’s notional gains, which the tax man currently classes as trading income, attracting tax on an annual basis, even if the fund's income falls short of the tax liability. This is despite assurances from the UK financial regulator, the Financial Services Authority (FSA), that the new funds have been approved after consulting with the tax authority.

The Revenue however, denies that it has been formally consulted by the FSA on a possible change to the tax rules, and as a consequence it has no plans to change them.

"The 'consultation' took the form of us attending various roadshows and listening to the views of interested parties. There was no formally instituted review, and therefore no timetable," the IR commented according to the Financial Times, adding that any changes were a matter for government ministers to make.

The new funds are designed to adopt similar trading strategies to that of hedge funds such as shorting the market and more widespread use of derivatives. However, industry experts have indicated that the funds will have to be shelved if the existing tax rules remain in place.

The FSA had hoped the first investments could begin shortly after approving the new funds at its March board meeting

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