Earlier this year, British tax authorities reportedly were preparing to impose higher tax rates on private equity firms because of “perceived anomalies” that led to their vast returns. Now, it’s hedge funds’ turn to get the eye. The Wall Street Journal reports that U.K. hedge giant GLG Partners recently settled with HM Revenue and Customs after the agencies accused the firm of trying to lower its tax liability by shifting some income and expenses to its Cayman Islands unit, GLG Partner Services. Terms of the settlement were not disclosed, but the news of the high-profile case should have hedge funds wondering if the tax man will come a-knocking at their door soon. There’s lots of potential revenue at stake. Since the hedge fund industry in the U.K. has taken off, “a lot of structures were put in place which led [officials’ to believe that the fund manager wasn’t being fully taxed with respect to its U.K. activities,” former tax official John Neighbour told The WSJ. So, for example, if a hedge fund parks $1 billion in assets in an offshore entity like the Caymans and returns 20%, that amounts to $200 million of non-taxed revenue - which adds up to nice pocket change for the government at a tax rate of between 30% and 40%, according to Robert Mirsky of Deloitte & Touche’s London hedge fund practice in a WSJ interview.
