Offshore funds: calculation of reportable income
Published 5 December 2016
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Who is likely to be affected
UK taxpayers with investments in some offshore reporting funds.
General description of the measure
UK taxpayers with investments in offshore reporting funds pay tax on their share of a fund’s reportable income, and capital gains tax on any gain on disposal of their shares or units. This measure makes a change to the calculation of reportable income. Where performance fees are charged by investment managers to such funds they can substantially reduce or eliminate investors’ reportable income, even though they are charged by reference to the increase in value of a fund’s assets rather than its reportable income. Performance fees will no longer be deductible against reportable income and will instead reduce any gain on disposal.
Draft regulations will be published for comment by 27 January 2017.
Policy objective
This measure will ensure that UK taxpayers are taxed fairly on returns from their investments in offshore reporting funds.
Background to the measure
The rules for the treatment of UK taxpayers with investments in offshore funds were substantially reformed in 2009. From time to time, HM Revenue and Customs (HMRC) has made changes to the rules to ensure that they operate effectively and do not provide unfair advantages to those investing in offshore funds compared to UK equivalents. This change follows a review of the effect of performance fees being set against reportable income.
Detailed proposal
Operative date
The Regulations take effect for reporting periods commencing on or after 1 April 2017.
Current law
Current law on the computation of reportable income is included in Chapter 5 of Part 3 of the Offshore Funds (Tax) Regulations 2009 (Statutory Instrument 2009/3001 - ‘the Regulations’).
Proposed revisions
The Regulations provide that the starting point for computing the reportable income of a reporting fund for a period of account is ‘total comprehensive income for the period’ as that expression is used in international accounting standards, or a sum that equates to it. This sum must then be adjusted for particular items, including capital items and certain special classes of income.
The Regulations will be amended so that the sum must also be adjusted for payments of fees made to the manager of a reporting fund where they are calculated by reference to an increase in the net asset value of the fund. The change will take effect for reporting periods beginning on or after 1 April 2017.
Summary of impacts
Exchequer impact (£m)
| 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 |
|---|---|---|---|---|---|
| - | +10 | +25 | +15 | +60 | +70 |
These figures are set out in Table 2.1 of Autumn Statement 2016 as ‘Offshore Tax: close loopholes and improve reporting’. These figures represent the combined Exchequer impact of ‘Offshore funds: Calculation of reportable income’, ‘Foreign pension schemes’ and Tackling offshore tax evasion: A requirement to correct’, and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2016.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
The costing includes a behavioural effect to account for possible changes to the way fees are charged or an increase in tax planning.
Impact on individuals, households and families
This measure will affect UK investors in some offshore reporting funds. It is expected that this will therefore only impact high net worth individuals.
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
This measure is expected to only impact high net worth individuals. Such individuals are more likely to be older males.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on businesses. Affected businesses will incur negligible one-off costs of familiarisation with the new rules and making a minor adjustment to a calculation. There are not expected to be any on-going costs. There is no impact on civil society organisations.
Operational impact (£m) (HMRC or other)
This measure is not expected to have any significant operational impact for HMRC.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
HMRC will monitor and evaluate this measure through reviews of information returns from offshore reporting funds, and as part of regular and continuing engagement with the asset management industry and advisers.
Further advice
If you have any questions about this change, please contact Wayne Strangwood on Telephone: 03000 585493 or email: wayne.a.strangwood@hmrc.gsi.gov.uk.