With the UK general election upon us shortly we focus on what the key manifesto pledges could mean for the asset management industry.

The media is awash with election polls, forecasts and policy summaries and each passing day brings a new twist, but for asset managers the same simple questions apply to all: What will be the impact on our portfolio? Will we still be able to manage our products and market to investors? Will we be able to compete for talent on the global stage? And, if we are lucky enough to be successful how will we be taxed?

The UK, specifically London, remains location of choice for European based asset managers. Over the years successive financial cycles have rotated, as have political parties. It weathered the storm of the 2008 financial crisis and subsequent regulatory onslaught – but the outcome of the 2019 election could well be a turning point.

From a tax perspective the UK ranks fairly evenly compared to its European peers – competitive but certainly not a tax haven. Headline rate comparisons do little to capture the nuanced detail wrapped up in legislation, nor do they reflect the various reliefs and special regimes on offer or indeed the attitude of tax authorities, however they do serve as a useful marker against which to benchmark.

What is clear is that whichever of the two main parties are triumphant fundamental changes appear to be guaranteed. The Conservative Party are resolute on leaving the EU and Labour are seeking to fundamentally rewrite the role of the state with a manifesto promising ‘real change’. Recent media reports of senior asset management roles already leaving the UK are ominous. With austerity being put into early retirement spending plans are at the forefront of all the manifesto pledges and funding is a critical component, accordingly tax policy plays a significant role in underpinning all the manifestos.

Conservative Party

With BREXIT taking center stage, the Conservatives have proposed fairly limited tax changes banking on the country appreciating some certainty. They have suggested a ‘triple tax lock’ to freeze the rates for income tax, NICs or VAT for the next five years. At the same time, they propose increasing the NIC threshold to £12,500 in line with the personal allowance.

The planned drop in corporation tax from 19% to 17% in April 2020 has been put on hold, but otherwise businesses fair pretty well with promises to support smaller businesses, increasing the employment allowance and reducing the business rates on small businesses. Furthermore R&D relief would be expanded to further encourage investments in cloud computing and data.

Proposals also include plans to build a fairer taxation system by continuing efforts to tackle evasion and reducing aggressive tax avoidance opportunities. The proposed measures to achieve this include the creation of a single, improved anti-tax evasion unit in HMRC, consolidating the existing anti-evasion and avoidance measures and powers as well as introducing a new package of anti-evasion measures to combat profit shifting.

The asset management industry is unlikely to be significantly impacted by the Conservative plans from a tax perspective – however how much the departure from the EU will impact the financial services and the wider economy sector is a matter of debate.

Labour

By contrast the Labour party proposals will have a significant impact on the industry and the wider economy as a whole. Whilst we summarise some of the key points below, we cover just some of the highlights. It is suggested readers take the time to read the 20 pages of Labour’s Fair Tax Policy for themselves.

On income tax the Labour party propose introducing a new 45% tax band at £80,000 pushing the existing 45% band to 50% for those earning in excess of £125,000. Assuming they do not remove the claw back of personal allowance after £100k this will leave an effective marginal 65% band between £100,000-£125,000.

Additionally, Labour propose introducing an Excessive Pay Levy, payable by corporate employers, which will be 2.5% on incomes over £300,000, 5% on incomes over £500,000 and 7.5% on incomes in excess of £1million. They promise that they will ensure that the definition of ‘pay’ is very broad so that the levy cannot be avoided. Asset managers structured as LLPs will be keen to understand if this impacts the self-employed.

Whilst the proposed rate changes are eye-catching and will have a direct impact on the amount of tax paid, far more significant are the proposals on wealth taxation. From a policy perspective Labour believe that all returns from wealth should be taxed as income – to achieve this they propose removing the current regimes for capital gains and dividends, instead simply taxing them at marginal income tax rates. Furthermore, they propose abolishing the non-domicile regime, arguing that all UK residents should be taxed at the same rate on their worldwide income, and publishing the tax returns of individuals earning in excess of £1million.

It’s worth taking a moment to consider what that means in practice. In the absence of anti-forestalling provisions or a mechanism to lock in unrealised gains at current tax rates the proposals would give UK residents an immediate incentive to crystallise gains. Meaning UK investors (and co-invested managers) could post significant redemption requests in the near future – the implications of which would need to be worked through. Reporting fund status would presumably be abolished.

The policy behind publishing tax returns is based on a long-standing tradition in some Scandinavian countries where all income tax returns are made public. However, the rationale as to why only those with income over £1m has not been explained. Concerns over personal privacy and security will be the main concerns across the industry.

The combined income and corporate tax changes are anticipated to give rise to effective tax rates in excess of 60%. Concerns over tax increases often come with warnings of competitiveness and capital flight. If these prove to be true, the industry could witness a burst of corporate activity with moves to relocate or convert equity stakes at current tax rates. In any case the timing and implementation of these policy changes would need to be carefully managed – at a time when BREXIT negotiations would be ongoing.

The taxation of multinationals also features heavily in the Labour proposals, with plans to treat corporate groups which are under a common ownership as unitary enterprises. By taxing each multinational as a single entity, the ‘unitary principle’, companies will be taxed on their total global profits by each country according to where they have real activities, irrespective of how they are structured.

Hedge funds and private equity funds get a special mention in this regard, with accusations of shifting profits to offshore entities where little or no tax is paid. Since the Labour party were last in power, legislation has been introduced to tackle diverted profits, disguised investment management fees, profit fragmentation and disguised remuneration (over and above the transfer pricing rules set by the OECD) all of which would prevent against such activity. It is hoped that this has not been overlooked. The industry is again singled out as part of a plan to launch a twelve-month independent inquiry in to the finance sector, tackling practices that are deemed to have caused public concern.

Labour plan to introduce a financial transactions tax (FTT) by extending stamp duty reserve tax to equity and credit derivatives, debt instruments (corporate bonds), forex spot and derivative trades, interest rate derivatives, commodities spot and derivative trades which would be at 50% of the underlying transaction costs. Financial firms will get a discount of 1/3 since they would have lower transaction costs. The proposals also include a residence principle’ meaning that the tax is not based on where the trade is transacted, but on who is carrying out the transaction.

Other proposals focusing on transparency in overseas Crown Dependencies, WHT for tax havens, the expansion of governance rules aimed at the facilitation of tax evasion, extending the time limit for offshore investigations and further taxation of offshore trusts. Recent action has already been taken on all these areas so it will be important to ensure that legislation is not duplicated.

Scottish National Party

Given the number of seats secured at the last election the SNP lead the best of the rest and are most likely to play the role of kingmaker. Scottish independence is clearly the main goal, but like the conservatives they want to freeze NICs and VAT in an attempt to help the majority. Income tax in Scotland is already 1% higher for most compared to the rest of the UK following that logic the majority must share the burden of additional tax. Other focuses aim to tackle tax evasion and avoidance, such as increasing transparency for international companies, reforms of beneficial ownership disclosures and introducing further actions against international tax avoidance.

Liberal Democrats Party

The Liberal Democrats share some of Labour’s views on simplifying taxation for individuals by taxing capital gains at the same rate as income and by restoring corporation tax back to 20%. They also focus on tougher measures to prevent corporate tax evasion and avoidance through reforms on the permanent establishment rules and the taxation of multinationals.

Green Party

The Greens also propose establishing a single consolidated income tax on all income and gains received by individuals. In addition, they aim to ensure that businesses pay their fair share of tax with proposals to tackle tax planning undertaken by multinationals and increase the corporation tax rate to 24%.

Final thoughts

Given that they are the incumbent, it is of little surprise that the Conservatives are offering the least change from a tax perspective. However, the full impact of Brexit and political trust are sure to dominate the next Parliament if  Boris Johnson is indeed victorious.

A Labour win, either outright or with the support of the SNP, would lead to some fundamental changes for the asset management industry. Not only that, but the Brexit debacle would roll-on and the question of Scottish independence could well be back on the table.

Among the rest a common theme is emerging with a focus on raising corporate taxation and simplifying the taxation of individuals to be assessed at income tax rates. Whoever is in charge, the manner in which these types of policy are implemented and how the burden is spread could have a significant impact on the industry and the economy as a whole.

Whoever the victor come the 12th, an emergency budget is expected in the near future with a view to bringing in the new policies by April 2020. The year ahead promises to be an interesting one.