Investor tax reporting services
For UK Tax purposes, It is necessary to determine whether the fund is an offshore fund and whether the "Unlisted Trading Company Exception" (UTCE) applies. If the fund is an offshore fund but does not meet the UTCE, it is recommended to register for the UK "reporting fund status" (RFS) regime.
UK Tax - RFS regime
Key Features
Up-front registration |
✅ |
| Taxation mechanism | Income based |
Annual reporting |
✅ |
Deadline of the reporting |
6 or 10 months after financial year-end |
| Reporting to | Her Majesty's Revenue and Customs (HMRC) |
| Complex tax adjustments | Target funds, derivatives, bonds |
Main features
The UK Tax Reporting rules ('the rules') are part of UK anti avoidance tax legislation designed to bring investors taxation in offshore funds in line with those that invest in UK Funds.
An offshore AIF that complies with the relevant registration and reporting obligations under these rules is regarded as a fund having UK Reporting Fund Status ('UK RFS').
The rules determine whether a gain realised on disposal of an interest in an offshore fund will be treated as a capital or income receipt, in the hands of the investor. For most categories of investor, taxation of disposal proceeds as income will result in a higher tax charge than if taxed as capital returns. Hence, UKRFS is typically beneficial to UK investors and a useful marketing tool.
Funds with UKRFS meet certain annual conditions by reporting their ‘income’ returns to UK investors and HMRC. Investors are taxed on the income returns of the fund annually (whether distributed or not) but benefit from capital gains treatment on any gains realised on exit from the fund.
In contrast, non-reporting funds are offshore funds that do not obtain UKRFS—that is, they do not subject their investors to tax on the deemed annual income returns of the fund). In this case, any gain realised on disposal is treated as income in the hands of UK investors. However, tax is deferred on any undistributed profits until the point of disposal.
To enter the regime, an upfront application must be submitted to the UK tax authorities ("HMRC") before the financial year-end of the fund. The fund must then submit the annual tax reporting to HMRC within 6 months (extension to 10 months possible) after its financial year-end.
Specific attention for AIFs
Consideration of the fund investment strategy
The fund 'trading' or 'investing' for UK tax purposes? Only 'investing' funds can generate capital gains. We recommended to perform an upfront analysis to ensure the fund is eligible to the UK RFS regime.
Consideration of the fund structure
Most offshore funds are eligible to enter, except for funds with ‘guaranteed returns’ or partnerships. However, it’s required to perform some analysis about whether the fund is technically eligible and also to define at which level applications need to be made (e.g. series, share class, master and/or feeder, etc.). Consideration may also be required to determine whether the fund is opaque or semitransparent for UK tax purposes which, in turn, impacts the reporting calculations and process. Private equity funds need to be checked precisely to see if the fund meets the conditions to enter the reporting regime.
Benefits of the regime
The RFS regime provides a significant advantage as investors benefit from capital gains treatment on any gains realised on exit from the fund which are considerably lower than income gains tax rates that would have applied for a non reporting fund.
Partnership
Limited Partnership
Foreign partnerships are not obliged to report a UK tax return. It is still possible to provide investors with the same reporting that UK partnerships are obliged to provide to their UK partners.
Limited partnerships are fully transparent vehicles and, therefore, cannot join the UK Reporting Fund regime. Transparent AIFs entail a separate tax calculation for UK investors. The taxable income (distributed income or deemed distributed income) of the AIF flows through to the investors at the end of the AIF’s tax year (“look-through” principle). The investors can then report their allocable profit of the AIF on their tax returns on an annual basis.
Scope of services
Assessment of the eligibility of a fund to enter the reporting regime: Trading versus investing analysis;
Registration and maintenance with HMRC;
Calculation of all complex adjustments (derivatives, interest on convertible bonds, investments held in limited partnerships, income from non-reporting and reporting target funds;
Annual reporting;
Assistance in relation with the Partnership tax reporting.
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