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HMRC internal manual

Offshore Funds Manual

Reporting funds: transactions not treated as trading: treatment of investment transactions - Regulation 80

If a reporting fund that is a ‘diversely owned fund’, (i.e. one that meets the conditions in regulations 74 and 75 (see OFM25200)) carries out an investment transaction as defined within regulation 81 (meaning of “investment transaction”) then the transaction in question will not be treated as a trading transaction. Specifically, this means that for the purposes of computing the reporting fund’s reportable income in accordance with Chapter 5 of the Offshore Funds Regulations the transaction in question will be treated as an investment transaction and cannot be re-characterised as a trading transaction but see the paragraph below under the heading ‘Capital and revenue’.

Where the conditions are met, all capital profits, gains or losses arising from “investment transactions” are treated as non-trading. Capital profits, gains and losses for this purpose are any profits, gains or losses treated as capital for accounting purposes under the IMA Statement of Recommended Practice (SORP).

Capital and revenue

Where regulation 80 applies, any investment transactions (as defined in regulations 81 to 89 - see OFM25500) are treated as non-trading transactions. Any gains and losses from “investment transactions” dealt with under the heading “net capital gains/losses” in accordance with the IMA SORP may be adjusted in accordance with regulations 64 or 65. Any other gains and losses from “investment transactions” remain included in the computation of reportable income.

For example, interest calculated under the effective yield method (or some similar method calculated under regulation 66) must be included within the computation of reportable income even where regulation 80 applies to prevent any capital profit on disposal of the instrument being characterised as trading income.

Reporting funds and trading

Where regulation 80 does not apply, it remains a question of fact whether or not activities carried out by a reporting fund amount to trading for tax purposes.

In such cases, the normal principles for determining whether or not there is a trade will apply and there is no automatic assumption that transactions which are not “investment transactions” for the purposes of regulation 80 will be trading transactions by default. Where a reporting fund carries out financial transactions and regulation 80 does not apply, the principles set out in the guidance in the Business Income Manual (‘BIM’), available on the HMRC website, should be considered.