UK hedge funds paid tax at record levels in 2014, according to the latest report from the Alternative Investment Management Association (AIMA).
The report indicated that the UK hedge funds paid approximately £4 billion in taxes to the HM Revenue and Customs last year, an increase of around £1.7 billion in 2009.
UK hedge funds tax payments expected to increase further
According to AIMA, the growth of the hedge fund industry and the recent changes in the tax system in the United Kingdom was the primary reason behind the increase in tax contribution.
The association forecasted that the tax payments of UK hedge funds will increase further in 2015 due to the changes in partnership tax rules that were implemented last year.
According to AIMA, the £4 billion in tax payments by UK hedge funds last year could pay for approximately a dozen new NHS hospitals. The associations released the data amid claims that the hedge funds are exploiting loopholes or tax breaks to avoid paying stamp tax on UK share purchases.
UK hedge funds did not receive £145 million in tax break
According to AIMA, the claim that UK hedge funds received a “tax giveaway” worth £145 million is incorrect. The association explained that the measure refers to the repeal of schedule 19 Finance Act 1999, which requires a stamp duty reserve tax (SDRT) charge on authorized funds including unit trusts and open-ended investment companies in United Kingdom.
“These investment vehicles are not hedge funds, nor are they permitted to adopt investment strategies of the sort used by hedge funds, “ said AIMA. The association emphasized that UK hedge funds “did not benefit directly or indirectly” from the repeal of the stamp tax last year.
In addition, AIMA pointed out that there has been no exemption for UK hedge funds from stamp duty on equities transactions. Hedge funds are legally responsible to pay stamp duty on purchases of UK equities just like other market participants.
Certain types of equity derivatives are not subject to stamp duty
AIMA also emphasized that the claim that UK hedge funds are using a loophole to avoid duty is not true. The association explained that the use of derivatives as an investment strategy has been a practiced for more than two decades by all levels of investors (hedge funds, pension funds, insurance companies, traditional investors) in the UK stock markets.
According to AIMA, certain types of equity derivatives such as equity swaps and contracts for difference are not subject to stamp duty. The exemption for such derivatives existed since the introduction of the tax under the Finance Act of 1986.
The association noted that a series of governments considered and rejected “removing or restricting the exemption because it was found to have more damaging consequences that the amount it could raise.” The liquidity of the general market not just the derivatives market would be severely impacted.
In a statement, AIMA CEO Jack Ingles said, “Despite some of the recent highly publicized claims, it is clear that the tax contribution of the 500 firms and 40,000 people working in the hedge fund sector in Britain has actually increased to record levels in recent years.”
Ingles emphasized that ordinary savers and pensioners benefited from the changes in the stamp duty payments on UK authorized unit trusts and open-ended investment companies. The repeal has nothing to do with hedge funds. He added that there were confusions regarding the two different stamp tax rules.
Furthermore, Ingles emphasized that the proposal to impose stamp duty in certain derivatives transaction will have a negative impact on all participants (from ordinary savers to large institutional investors) on the London Stock Exchange. He said such move would” undermine the competitiveness of the City of London and increase the cost of capital to ordinary British businesses.”