U.K. Tax Avoidance Plan Would Hit Hedge Funds Hard

May 31 2013 | 10:20am ET

British plans to limit tax avoidance could cost hedge funds dearly.

HM Revenue & Customs earlier this month announced plans to limit firms' ability to shield performance fees from taxation through limited liability partnerships. It also plans to limit profit allocations to corporate members, which are subject to a much lower tax rate.

The changes, should they come into effect, could cost hedge funds as much as US$20 billion per year.

Under the consultation document—issued as the U.S. and European countries seek to tackle offshore tax havens—HMRC would take on the practice of classifying employees as partners, as well as corporate memberships.

"It affects virtually everybody," Sigma Partnership's Joe Seet told the Financial Times. "Out of the 400-odd firms in London, more than 80% of them have these structures."

The consultation period for the proposal expires on Aug. 9. If approved, the new rules will come into force next year.

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