Ministers are looking to block a proposal from HM Revenue & Customs (HMRC) to apply VAT to investment funds following warnings from City bosses.
According to a report in the Financial Times, the customs body had been trying to end the carve-out that allowed third-party fund management operations to be free from the 20 per cent consumption tax.
Senior executives from the world of finance met City minister Emma Reynolds earlier this week to warn against the proposals.
They argued the move would exert a £147m hit on the finance sector – most of which would be passed onto investors – and deter foreign investors from ploughing money into the UK.
In a reprieve to the finance sector, ministers could now step in to stop HMRC from levying the tax for fear of the knock effects it would have on their growth agenda.
The report is the first indication that the government might reappraise the plans.
It follows a letter that a group of influential lobbyists wrote to the Treasury in December warning of their potential to wreak damaging knock-on effects.
The letter – signed by UK Finance, the Association of British Insurers and the Investment Association – said the VAT plans would “damage the UK’s reputation as a stable, predictable and welcoming place to do business”.
The letter added that they were also likely to “undermine the government’s broader goals of boosting economic growth, investment and international competitiveness,” suggesting the UK could lose out on investor cash to Dublin and Luxembourg.
The intense lobbying campaign came as actively managed funds battled several structural headwinds.
Outflows have plagued top UK funds in recent years as investors reallocate their money into cheaper passive funds or US-focused competitors managed outside the UK.
A government spokesperson told the Financial Times that ministers realised “the importance of the UK’s world-leading asset management sector to the economy”. They continue “to meet with stakeholders to understand the impact” of any tax reforms, they added.
HMRC was approached for comment.