Non-UK (‘Offshore’) Investment Funds: Are you reporting income and gains correctly?

27th November 2019

If HMRC spot a pattern of errors across Tax Returns, they like to issue what they call ‘nudge’ letters to try and educate taxpayers. It also presents the opportunity for HMRC to try and increase the level of penalties should such a mistake be discovered at a later date.

HMRC is currently issuing a ‘nudge’ letter to taxpayers who may have invested in ‘offshore’ investment funds explaining how such funds are classified and how income and gains are taxed.

Without special rules, when Income Tax rates are higher than Capital Gains Tax rates offshore investment funds allow tax arbitrage by converting income into capital gains. The original rules to combat this taxed income paid by a fund as income while, unless a fund was granted approval by HMRC, any gains realised on its sale were also taxed as income. Unfortunately, this seemingly easy system was replaced in 2009 with a similar system but with one notable but significant change. Gains continued to be taxed as income unless the fund had HMRC’s approved status but instead of simply being taxed on income paid by the funds, investors are now taxed on their share of the fund’s underlying income for the period. While the fund manager is required to provide information as to what that share is, there is no obligation on the fund to give that information directly to each investor so many choose to bury basic information somewhere on their website so the investor has to find it and then calculate the amount they should report.

It is therefore not surprising that errors have become more common place. So while this nudge letter will focus minds, it perhaps doesn’t deal with the root cause of the problem.

Other common mistakes are not taxing gains on ‘Non-Reporting Funds’ as income and taxing income arising from a corporate fund as dividend income when in fact it has breached certain conditions that mean the income should be reclassified as interest.

So, if you hold or have held interests in ‘offshore’ investment funds you may well receive such a letter. If you are a client of ours, we already have this covered.

Where there have been historical errors, we can make the necessary disclosures and work with HMRC to limit or even avoid any penalties that may be levied.

For further information, please contact James Walker or your usual haysmacintyre contact.

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