Reporting Fund Service

It can be essential for non-UK funds and their managers looking to attract UK investors to consider the impact of the UK’s offshore fund tax regime.

Registering the fund under the UK’s reporting fund regime is often seen as beneficial and can provide incentives for UK investors to invest. A reporting fund may also be more attractive to UK investors by preserving Capital Gains Tax rates on a future disposal.

In addition, as the UK fund regime evolves, it is important for funds to stay on top of any changes surrounding the regime and understand the impact for the fund and its investors going forward.

Overview

The UK reporting fund regime allows a fund to pick and choose which sub-fund and share classes should be brought within the regime – the application and calculation can be prepared on a share-class-by-share-class basis.

The default position for a UK investor in a non-UK fund that doesn’t have UK reporting fund status is that the individual would pay tax at Income Tax rates (currently up to 45%) on realising any investment, together with any distributions received annually. By comparison, if the non-UK fund is within the UK reporting fund regime, realised gains will instead be subject to Capital Gains Tax rates, generally at 20%.

In order to qualify for this tax rate under the reporting fund regime, an investor will also be annually subject to tax on their share of the fund’s undistributed income. Each year, the fund must calculate the excess reportable income per share, net of allowable expenses and any distributions made.

The investor must pay tax on any distributions they receive from a reporting fund, together with the calculated excess reportable income annually. The investor would generally pay tax at the Income Tax rates on these income amounts.

It should be noted that the investor could be paying UK tax on excess reportable income (as a deemed distribution), when they have not necessarily received any cash from the fund (this would be a dry tax charge). However, over the life of their investment in the fund, the UK investor would usually expect to be subject to a lower effective tax rate compared to investing in a non-reporting fund.

It is also worth noting that there are specific rules for funds and its UK investors that are classified as bond funds and tax transparent funds. There can be specific complexities to consider around fund of funds, funds issuing series of shares, effective interest calculations, approach to equalisation, potential income adjustments, and hedging arrangements.

Initial application

There is an initial application that normally needs to be submitted before the end of the accounting period in which the fund intends to register under the reporting fund regime (or within three months of shares being made available to UK investors, if later).

Going forward, if further share classes are issued or sub-funds launched, then consideration should be given to whether the additional share classes should be brought within the Reporting Fund regime and, if so, further initial applications will be required.

Annual reporting

Following the initial application, the fund is required to prepare and send to HMRC and its investors annually various documents, including a calculation of the excess reportable income for the relevant shares. This is due within six months of each accounting period end. In summary, the following are generally required each year:

• A computation of the reportable income and excess reportable income per share class or per series where the fund issues series
• A report to investors including the ERI amount, and to be shared with the investors in the fund as well
• A copy of the audited financial statements
• A declaration confirming that the fund is compliant with the reporting fund regulations
• Completion of the relevant HMRC form

We can provide an end-to-end solution for UK reporting funds, which can include the following:

• Advising on the UK tax rules as applied to reporting and non-reporting funds
• Advising on and reviewing the PPM/prospectus of the fund from a UK tax perspective
• Advising funds on UK tax implications of transferring from a non-reporting status to reporting, and from reporting status to non-reporting
• Preparation of the initial application to obtain UK reporting fund status
• Advising on, reviewing and supporting with the preparation of the annual excess reportable income calculations, supporting documents, disclosures and declarations. We can also liaise with HMRC in respect of the fund
• Providing advice regarding changes to a fund structure, including introducing new share classes, conversions and mergers, together with the impact of changes to tax rules