UK: Offshore Fund Reporting Regime

Last Updated: 27 August 2013
Article by Kari Campbell, Colin Aylott and Tim Lyford

The current offshore fund reporting regime was introduced in 2009 to replace the distributing fund regime. As with its predecessor, the primary purpose of the offshore reporting fund regime is to remove scope for UK investors to roll up income in offshore funds with the intention of this being taxed as capital upon the eventual disposal of their investment.

Under the previous regime, the distributing fund regime, the fund was required to distribute a certain level of income, whereas the current regime is more flexible in that participating offshore funds have no such obligations imposed on them. Instead investors are taxed on income received by the fund throughout the duration of their investment, regardless of whether it is actually distributed, the upside then being that the true capital element of any gain arising on disposal is taxed as such. This is in contrast to the default position for non-participating funds where gains realised on disposal of investments will be taxed wholly as income.

Considerations for funds looking to join the regime

Any offshore fund that either has UK investors, or is looking to target the UK market, should consider the benefits associated with obtaining reporting fund status if they have not already taken such steps. As described above, reporting fund status secures capital treatment on gains realised by investors. Given that the maximum capital gains tax rate is currently 28% compared to the maximum income tax rate of 45% from April 2013, this is likely to appeal to prospective and current investors alike.

Before making an application, funds obviously need to consider the administrative costs associated with participation in the regime, and in some instances where UK investment is minimal, it might not necessarily represent the best option. Equally, where funds roll up income and do not distribute income, this will result in investors effectively being taxed on income not yet received. In such instances, reporting fund status may not be appropriate given the potential cash flow burden imposed on investors.

Funds participating in the regime

Funds that have obtained reporting fund status are obliged to comply with a number of reporting requirements. In most cases, the fund's reporting will be synchronised with its year end. The legislation is complex, and there are many issues that need to be considered as part of the reporting process, however, a fund's reporting obligations can be broadly summarised as follows.

  • Ensure that accounts are prepared in accordance with IAS, or where the local GAAP do not correspond, provide details and supporting computations to HMRC of how equivalent values are arrived at.
  • Provide HMRC with a computation of reportable income for each reporting period.

The computation of reportable income requires the adjustment of the fund's total comprehensive income (or equivalent value) to remove items deemed to be capital in nature by the relevant UK legislation. In many instances there will also be additional requirements to adjust for other items, most significantly equalisation, interests in other investment funds and giving effect to the 'effective interest method' (a form of bond amortisation under IAS). It is the reportable income figure (allotted on a per share basis), less income already distributed, that UK investors are ultimately taxed on.

The computation of reportable income must be submitted, along with supplementary documents and declarations, to HMRC within six months of the reporting period end.

Provide a corresponding report to UK investors of the fund's reportable income

A report must be provided to every UK investor capturing the information deemed necessary by the relevant legislative provisions for the investor to prepare their tax return (whether that be personal or corporate). Although a fund need not provide investors with a copy of the underlying computations, details should be provided in respect of reportable income, actual distributions made in the period and, depending on the elections made by the fund in the application process, equalisation. The report must be made available to all UK investors, although the fund is not necessarily required to physically distribute individual copies of the report to each investor. For instance, making the information available on the fund's website will suffice. The six month deadline in place for submission of documents to HMRC also applies. A copy of the report made available to UK investors must be provided to HMRC.

How to apply for reporting fund status

New and existing funds wishing to make an application to join the regime must apply to HMRC by the later of the end of the accounting period for which they intend for reporting status apply and three months after interests in the fund were made available to UK resident investors. There is a formal application process whereby funds must provide supporting financial documentation to HMRC (namely a copy of its prospectus), along with statements regarding the intentions of the fund in respect of accounting policy and equalisation methods to be employed.

Only investment funds falling within the UK statutory definition of 'offshore fund' are eligible to make an application to join the regime. The definition has been broadened in recent years, although any funds that are not mutual funds are automatically precluded from entry.

We can help

The reporting fund regime offers a degree of flexibility to participating funds in the operation of their distribution policy, whilst acting to secure the separation of income and capital from a taxation perspective for UK investors.

At Smith & Williamson we are perfectly positioned to offer a holistic range of taxation services to offshore funds wishing to participate in the regime. From initial reviews of eligibility and preparing applications, to completing annual reporting documents and dealing with any ad-hoc queries, our team of experienced individuals, who have acted for a number of funds since the inception of the regime, are able to assist.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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