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Ireland and Luxembourg have surged ahead in the investment funds market in recent years. Camilla Spielman asks whether the UK can catch up

Many participants in the open-ended investments funds arena have become increasingly concerned in recent years about the UK industry’s competitive position in relation to Luxembourg and Dublin. In October 2006, KPMG produced a report entitled, ‘Taxation and the Competitiveness of UK Funds’ for the Investment Management Association (IMA), the fund industry body. This report confirmed that the offshore fund centres in Luxembourg and Dublin have grown significantly over the last 10 to 15 years, and have become the leading European Union (EU) locations for funds intended to be sold internationally. Luxembourg has expanded principally as a base for retail funds, which are sold cross-border in Europe and beyond. In contrast, Ireland’s growth has been based on more specialist funds aimed primarily at institutional investors. UK-based funds, meanwhile, have grown, but at a far slower rate.

Would it matter if the UK continues to decline as a fund domicile, relative to Luxembourg and Dublin? After all, many UK fund managers already have substantial Luxembourg and/or Irish fund ranges. And the location of the fund does not normally affect the location of its investment management, which would be likely to remain in Britain.

However, if the UK were to lose its fund management business, the costs would be high. A KPMG/IMA paper entitled ‘The Value to the UK Economy of UK-Domiciled Authorised Investment Funds’, published on 30 November, 2007, demonstrated that such funds generate nearly £1m per £1bn in UK tax revenue of assets under management. According to the IMA there were UK funds under management worth £426.5bn at the end of August 2008, so the tax at stake is substantial.

Alongside wider economic events, three forces are coming together which put UK-domiciled funds increasingly at risk:

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