AS 2014: Govt launches £360m tax crackdown on hedge and private equity funds

The Government has launched a crackdown on hedge funds and private equity funds disguising income by rolling management fees into performance fees to avoid paying income tax.

In the Autumn Statement today, Chancellor George Osborne said the Government was looking to introduce legislation from 6 April which would ensure hedge and private equity funds were charged income tax for their services.

The Government is looking to raise £2.8bn through an income tax avoidance crackdown with the investment manager aspect expected to raise £360m over four years.

A number of hedge funds have rolled their management charges into performance fees therefore avoiding income tax and only being liable for capital gains tax.

Wording in the Autumn Statement document says: “Historically, these fees were charged to tax as income; however over the last few years private equity funds in particular have structured themselves in ways to avoid tax by enabling these fees to be charged to CGT.

“This measure, taking effect from April 2015, will ensure the fees are charged to income tax as trading income as they represent work undertaken to manage the investment and are not dependent on investment performance.”

Despite fears some hedge funds could be caught by the changes, the Alternative Investment Management Association says the crackdown is not aimed at hedge funds.

Chief executive Jack Inglis says: “This measure is not aimed at the hedge fund sector, where the established relationship between investment fund and investment manager shows the clear flow of fixed fee income being just that: income that is taxed as income.”