Chancellor Jeremy Hunt has abandoned plans to make sovereign wealth funds pay corporation tax on property and commercial enterprises after cabinet warnings that the move would hit inward investment and depress growth.
Kemi Badenoch, business and trade secretary, led pressure on the Treasury to drop the proposals after warnings that SWFs, which include some of the largest global investors, might pull out of UK projects.
“Kemi lobbied the Treasury very hard on this,” said one ally of Badenoch. “We fed into the Treasury review and argued that it would put off potential investors and hamper growth.”
The decision to drop the proposals came as a surprise to tax experts. Ahead of the Budget, Tim Sarson, UK head of tax policy at KPMG, told the Financial Times he thought it was a “racing certainty” the changes would be made.
Removing sovereign immunity of corporate taxes on property and businesses would have brought the UK’s taxation of foreign sovereign investors into closer alignment with their treatment in countries such as the US, Australia and Canada.
It would also have removed what some see as an unfair advantage over other institutional investors.
When launching a consultation last summer, Lucy Frazer, former financial secretary to the Treasury, said she did not expect the proposed change to “have a material impact on foreign investment into the UK”.
She said at the time: “Our reforms will provide more clarity on the tax exemptions on offer to sovereign investors, while also ensuring they deliver better value for money for UK taxpayers.”
The Treasury had planned to introduce the rules in April 2024, but Hunt canned the idea. One Treasury insider said the decision was taken on “growth and competitiveness” grounds.
Hunt’s allies said the idea predated his arrival in the Treasury last October and that he quickly realised it could drive away investment.
Buried deep in Hunt’s Budget “red book” is a statement that after considering “carefully”, the current exemptions would continue. “The government welcomes the 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 ‘carefully’ in paragraph 4.64 of the Budget document suggests that they know it was likely to be criticised.”
The consultation came on the heels of several notable 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 focused heavily on the need to increase investment, especially in those sectors.
Dan Neidle, founder of think-tank Tax Policy Associates, had backed reform of the system and said it was “curious” that Hunt had abandoned the plan to change what he regards as an unsatisfactory system.
“It creates an undesirable distortion in the market between sovereign wealth funds, and other investors, particularly in the real estate sector.”