VAT Could Hit Hedge Funds In U.K.

Jul 23 2010 | 12:03pm ET

More tax changes in the U.K. may make Europe’s largest hedge fund center even more unfriendly to hedge fund managers.

Britain has already seen some managers quit the jurisdiction to avoid its new 50% top income tax rate. But now, changes to the country’s value-added tax system could add another burden to hedge fund managers, two KPMG employees write in Hedge Funds Review.

While offshore hedge fund management fees have been taxable under the VAT regime, any VAT paid has been recoverable. But following a European Court of Justice ruling and changes in the hedge fund industry, that may no longer be the case.

After the court case, the VAT exemption was changed to cover offshore funds offered to U.K. retail investors—but the exemption doesn't cover those funds not actively marketed to British retail investors, like many hedge funds, although it isn’t clear how “retail investor” is to be defined under the new regime, according to KPMG’s Darren Mellor-Clark and Ed Murphy.

Those that are deemed available—and availability to high-net worth investors may be enough—may be restricted from recovering VAT incurred.

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