Consultation on draft guidance relating to The Offshore Funds (Tax) Regulations 2009

Size: px

Start display at page:

Download "Consultation on draft guidance relating to The Offshore Funds (Tax) Regulations 2009"

Julian Nelson Bryan
5 years ago
Views:

Via Email 6 November 2009 Wayne Strangwood HM Revenue & Customs CT&VAT, 3 rd Floor 100 Parliament Street, London SW1A 2BQ Dear Wayne, Consultation on draft guidance relating to The Offshore Funds

1 Via 6 November 2009 Wayne Strangwood HM Revenue & Customs CT&VAT, 3 rd Floor 100 Parliament Street, London SW1A 2BQ Dear Wayne, Consultation on draft guidance relating to The Offshore Funds (Tax) Regulations 2009 The IMA represents the UK-based investment management industry. Our Members include independent fund managers, the investment arms of retail banks, life insurers and investment banks, and the managers of occupational pension schemes. They are responsible for the management of over 3 trillion of funds (based in the UK, Europe and elsewhere), including Authorised Investment Funds (AIFs), institutional funds (e.g. pensions and life funds), private client accounts and a wide range of pooled investment vehicles. In particular, our Members represent 99% of funds under management in UK AIFs (i.e. Authorised Unit Trusts and Open-Ended Investment Companies). We welcome the issuing by HMRC of draft guidance. We append to this letter our detailed comments on the guidance, which in the main are requests for additional wordings to provide clarification. However, we also note that a change may be needed to the relevant regulation (see comments under section 10), and we ask that the webpage of approved GAAPs be launched immediately so that funds can assess their position. Yours sincerely Stephen Lynam Head of Tax 65 Kings wa y Lond on W C2B 6TD Tel:+44(0) Fax:+44(0) w w w. i n v e s t m e n t u k. o r g Investment Management Association is a company limited by guarantee registered in England and Wales. Registered number Registered office as above.

2 Offshore Fund Regulations IMA s response to the draft guidance notes 1. OFM 01900: Overview of the 2009 offshore funds regime: transitional arrangements overview The first sentence states: Offshore funds may apply for reporting fund status for periods of account commencing on or after 1 December 2009 Schedule 1 of the Offshore Fund Regulations, states that an overlap period is defined as a period of account of an existing fund which has begun, but not ended, on the day these Regulations come into force. Furthermore, Regulation 3 (2) states that the fund may apply to HMRC to be treated as a distributing fund in respect of the overlap period. Therefore, by default, if a fund has not made the election under Regulation 3 (2), Schedule 1 implies that the fund would have to be a reporting fund for the full accounting period which overlaps 1 December There is inconsistency between the Regulations and the guidance in this regard, and we request that the position is clarified. 2. OFM : Investors in non-reporting funds: transparent and non-transparent funds Reference is made to Baker and Garland unit trusts as transparent and nontransparent entities respectively, and reference is also made to contractual-type entities. For taxpayers without much understanding of different types of offshore transparent entities (especially as contractual type entities do not exist in the UK), we suggest that some additional background or references are included in the guidance. For example, the guidance could cross-refer to INTM DT applications and claims: Applicants/claimants Trusts as a starting point but even this information does not in our view go into sufficient detail. In particular, a detailed technical explanation of the reasons why certain funds are treated as fiscally transparent should be included. 3. OFM 08600: Investors in non-reporting funds: disposals of interests: death of participant We suggest that an additional comment is made to emphasise the fact that an investment in a non-reporting fund could be punitively taxed on death (if there are sufficient assets for the estate to have a 40% inheritance tax charge). For a deceased investor in a non-reporting fund, an offshore income gain is deemed to arise prior to the asset being included in the deceased s estate. For example, an offshore income gain of 100 could suffer income tax of 40% (higher rate) or 50% (additional rate) leaving net income of 60 / 50 to be included in the estate. This amount could then be taxed at 40% resulting in an overall effective tax rate of 64%/70% respectively on the total gain from the non-reporting offshore fund. This compares with an investment in a reporting fund where no cgt would be payable.

3 4. OFM 09250: Investors in non-reporting funds: charge to tax on disposal of interest: remittance basis Given that effective 6 April 2008 any remittance of offshore fund income is first regarded as being sourced out of the offshore income gain - compared to the prior rule where the funds remitted were treated as representing a pro rata sum of the base costs and the gain - we suggest that a comment to this effect should be included as part of this guidance. 5. OFM 10200: Investors in non-reporting funds: offshore income gains: exception: interests in certain transparent funds We welcome the amendments to Regulation 29 and request that guidance on the new paragraph 4 is included as soon as possible. 6. OFM13650: Reporting funds: preparation of accounts: changes of accounting practice IMA welcomes the commitment that HMRC will maintain a list of approved GAAPs on the HMRC website, as announced in the HMT Further Steps consultation document. Given that the new regime commences on 1 December 2009, we request that this webpage is released immediately in order for accountants of offshore funds to understand as soon as possible whether any adjustments are needed to the fund s local GAAP to join the reporting fund regime. 7. OFM14260: Reporting funds: computation of reportable income: adjustments for special classes of income: effective interest income The last paragraph states: This does not prevent it being simplistic Given that the dictionary meaning of the word simplistic carries negative implications (i.e. suggestive of being too simple or misleading), we suggest the following wording: This does not require an overly complex approach 8. OFM 14700: Reporting funds: transactions not treated as trading: treatment of investment transactions The statement under the heading Capital and revenue that it does not prevent revenue profits from investment transactions being included in the computation of reportable income is an extremely important one and we suggest it should be given greater prominence. We also suggest that the words as defined in the Authorised Fund SORP are included after revenue profits.

4 9. OFM 15750: Reporting funds: tax treatment of participants in reporting funds: disposals of interests A UK investor in an offshore reporting fund may be required to prepare a capital gains tax ( cgt ) calculation that has additional complexities compared to the previous distributor status regime ( 1984 regime ) when disposing of units. Under the 1984 regime, much of the fund s income was required to be physically distributed to UK investors (sufficient to meet the 85% of UKEP test), and this meant that the value of the fund s assets were reduced by the distribution accordingly. Typically such funds tended to distribute not 85% but 100% of the revenue profits. The unit price therefore reflected the underlying assets capital return, and any subsequent unit disposal by UK investors reflected the capital return of the assets. Therefore, the cash the UK investor received on unit disposals could be used as the proceeds for the cgt calculation, without any concern of material double taxation. Under the reporting fund regime ( 2009 regime ), an offshore fund has the option whether or not physically to distribute income to UK investors. If a fund distributes its full income, then UK investors will be in practice in no different position when it comes to their cgt calculation than under the 1984 regime. This is because the unit price of the offshore fund will reflect only the capital return of the underlying assets (as all revenue returns will already have been distributed). However, if a reporting fund decides not to distribute some of or all its annual income, then the unit price will include an element of income return which has previously been charged to income tax as reported income. The UK investor will need to include reported but not distributed ( RBND ) income as enhancement expenditure for cgt purposes to avoid being taxed twice on the same income. We note that the guidance currently reflects these comments, but we believe that greater prominence needs to be made on this issue particularly in respect of individual investors, many of whom will not have tax advisers. Therefore, we suggest that case studies are included in the guidance to assist UK investors when disposing of their offshore reporting fund assets. This will assist in ensuring that the full economic return will be taxed at least once and not double-taxed. We also suggest that emphasis is placed on a notification to UK investors that any RBND income should increase the assets base cost and detailed record keeping of all RBND income previously charged to annual income tax over the life of the holding needs to be kept. Given that a UK investor may not be familiar with the concept of paying tax without receiving a cash dividend, we suggest that the Self Assessment Guidance is updated to alert taxpayers to declare their reported income and cross-refers to this section of the offshore funds guidance.

5 10. OFM 16660: Reporting funds: breaches of reporting fund conditions: consequences of breaches: minor breaches We welcome the statement that: if a single event results in more than one minor breach within a single period of account then only one minor breach is treated as arising in that period of account. However, we query why if one single event causes multiple breaches, why this is limited to one period of account. We suggest that this statement should be changed to permit one event that contaminates a number of accounting periods to be counted as one minor breach. If it is thought that an amendment would have to be made to the regulations (reg. 109 (4)) to achieve this, we ask that this be done.

RE: Consultation paper on draft RTS on prospectus related issues

To whom it may concern RE: Consultation paper on draft RTS on prospectus related issues The IMA represents the UK-based investment management industry. Our members include independent asset managers, the