Chancellor Jeremy Hunt has dropped plans to allow sovereign wealth funds to pay corporation tax on property and business enterprises, amid Cabinet warnings that the move would hit investment and reduce growth.
Cammy Badenoch, the business and trade secretary, pressured the Treasury to drop the proposals after warnings that SWFs, which include some of the biggest global investors, could pull out of UK projects.
“Cammy lobbied the Treasury very hard on this,” said an aide to Badenoch. “We fed into the Treasury review and argued that it would deter potential investors and stifle growth.”
The decision to drop the proposals came as a surprise to tax experts. Ahead of the Budget, Tim Sarson, head of UK tax policy at KPMG, told the Financial Times that he thought it was a “racing certainty” that changes would be made.
Removing sovereign immunity from corporate tax on property and businesses would bring UK taxation of foreign sovereign investors into closer alignment with their treatment in countries such as the US, Australia and Canada.
It would also remove what some see as an unfair advantage over other institutional investors.
When launching the consultation last summer, former financial secretary to the Treasury, Lucy Fraser, said she did not expect the proposed change to “have a material impact on foreign investment in the UK”.
She said at the time: “Our reforms will provide greater clarity on the tax exemptions on offer to sovereign investors, while ensuring they provide better value for money for UK taxpayers.”
The Treasury had planned to introduce the rules in April 2024, but Hunt shot down the idea. A Treasury insider said the decision was based on “growth and competitiveness”.
Hunt’s colleagues said the idea predated his arrival at the Treasury last October and he quickly realized he could pull off the investment.
Hunt’s budget was buried deep “The Red Book” There is a statement that after “careful” consideration, the current exemption will continue. “The government welcomes constructive engagement with sovereign investors during the consultation,” it says.
Sir Edward Troup, a leading tax lawyer and former Treasury official, said: “The use of the word ‘cautiously’ in paragraph 4.64 of the Budget document suggests that they know it is likely to be criticized.”
The consultation came on the heels of several significant SWF investments in the UK. In May, the Qatar Investment Authority pledged to invest £10bn in the UK over the next five years, including in the technology, healthcare, infrastructure and clean energy sectors.
Hunt’s budget focuses heavily on the need to increase investment in those sectors in particular.
Dan Needle, founder of the think-tank Tax Policy Associates, supported reforming the system and said he was “curious” that Hunt had abandoned plans to replace it as an unsatisfactory system.
“It creates an unwanted distortion in the market for sovereign wealth funds and other investors, particularly in the real estate sector.”
