HMRC intend to write to UK based taxpayers who they believe may have invested in offshore funds asking that they check their tax position. A briefing provided by HMRC’s Wealthy & Mid-Sized Business Compliance team highlights common errors such as not declaring excess reportable income (ERI) from offshore funds with reporting fund status (RFS). Another common error is the failure to tax gains from non-RFS funds as income.

Letters are due to go out in November and will be accompanied with a fact sheet providing detail on how such investments should be taxed in the UK. The move demonstrates HMRC’s continued focus on offshore tax compliance following the introduction of the Common Reporting Standard (CRS).  Under the CRS regime tax authorities around the world receive unprecedented levels of information on taxpayers direct from financial institutions both onshore and offshore.

It is mandatory for offshore funds with RFS to provide details direct to HMRC on the gains and income generated at the fund level as part of their annual compliance process. Importantly this includes ERI which represents undistributed income that a UK taxpayer must include in their self-assessment tax return. This represents a ‘dry’ tax charge for investors and can be significant for certain types of funds that have high income yields from their underlying portfolio.

A full list of all offshore funds with RFS status is published by HMRC monthly:

Gains from offshore funds that do not have RFS are assessed in the hands of UK taxpayers as income – subjecting them to significantly higher levels of taxation, albeit deferred until such time the gain is crystallised. From a policy perspective this prevents UK investors using offshore funds to get exposure to income generating investments that are rolled up and taxed at lower capital gains rates upon disposal.

Taxpayers will need to review their tax affairs carefully and consider the potential for penalties and interest to be raised, particularly where the requirement to correct provisions are applicable which carry the potential for a 100-200% tax-based penalty plus an additional asset-based penalty. Where non-compliance is identified taxpayers should consider how best to approach HMRC and whether it is appropriate to use the Worldwide Disclosure Facility (WDF).

At the fund level the action is likely to see an increased demand for RFS as UK investors better understand the complex rules around offshore investments. Demand has already increased due to other changes to the UK tax system – such as the changes to the Non-Domicile regime. Recently deemed-domicile investors may not have previously appreciated the need to have RFS for their investments. At the individual level the action is likely to increase the demand for high quality personal tax advice and compliance services.

Larkstoke Advisors can assist fund managers in applying for RFS for their funds and the ongoing reporting obligations to both HMRC and investors. Where fund managers are approached by UK investors requiring support Larkstoke can assist in helping them understand their ongoing and historic compliance obligations.