The UK offshore funds tax reporting regime applies to investment funds located outside of the UK. The regime was introduced in 2009 when it replaced the Distributor Status regime. Offshore funds which comply with the regime can provide their investors with a tax treatment that is broadly similar to that provided by UK authorised funds.

So long as an offshore fund complies with the reporting regime, investors are subject to income tax on income that is generated by the fund and, ultimately, capital gains tax on their remaining profit on disposal. By contrast, investors in non-reporting funds are subject to income tax on any profit on disposal.

Once registered as a reporting fund, the fund is obliged to provide to investors reports setting out the amount of income per unit/share earned during the most recent reporting period. This is so that UK investors can understand how much income they have earned for the purposes of preparing their own tax returns.

KPMG reportingfunds.co.uk is a central repository that holds UK tax reports provided by funds to their investors in line with the UK reporting regime for offshore funds. It is intended to make it easier for investors to find reports and for managers to provide them. Funds are able to provide all reports published since commencement of the reporting regime in 2009.

This is a voluntary repository which enables funds and their managers to upload their reports to investors. If a report is not available on the repository, the fund provider may have chosen another route to meet the requirements of the regulations, such as providing it on their own website or as a hard copy.

In order for a unit / share class of an Offshore Fund to be treated as a reporting fund, the fund will need to make an application to HMRC. Once registered as a reporting fund this share class will be added to HMRC’s list of reporting funds which is updated periodically. This can be found on HMRC’s website at http://www.hmrc.gov.uk/cisc/offshore-funds.htm. Reporting status applies at unit / share class level – it is possible for one unit/share-class in a fund to have reporting status and another unit/share class in the same fund not to have reporting status.

We note that applications for reporting fund status can be applied for retrospectively (within limits) and there may be a delay in it appearing on HMRC’s list. If the status of a particular fund is unclear you should contact your adviser or the fund manager.

The following is the report format prescribed by KPMG reportingfunds.co.uk:

A UK Investor will need to use the Excess Reported Income amount to calculate a deemed distribution to include in their tax return. This is deemed to be received on the Fund Distribution Date.

UK taxpayers will also need to include actual Distributions received by them in their tax return that applies to the tax year in which they were received (the Date of Distribution).

If the fund applies full equalisation, UK investors who acquire units during a period can reduce amounts subject to income tax by the Equalisation Amount figure(s) provided.

The Currency of these amounts is also shown. To the extent that this is a non-GBP Sterling currency, investors will need to translate the amounts into GBP Sterling before using them for the purposes of their tax returns.

Please note that the rules for Tax Transparent Funds and Constant Net Asset Value (or NAV) Funds are different to the basic position outlined above. Please click on the links above for further details in respect of these types of investments.

These terms are covered in more detail below with examples – please click on the links to go straight to the relevant term. As a first step, it is important to decide whether you held the investment during a relevant period – this is covered in the section 4.2.

If a UK investor holds an investment in a reporting fund on the last day of that reporting fund’s “reporting period” (generally its accounting period) the excess reportable income figure is important.

For example, share class A of the Emerging Markets Fund of Offshore Umbrella Fund Plc has a reporting period which ends on 31 December 2013. Mrs Brown holds shares on 31 December 2013 so the next report, issued towards the end of June 2014, will be relevant to her. This is the case even if she sells the shares before the report is issued.

Reports also summarise distributions received in respect of a period and is a useful record for investors in receipt of such distributions. Investors may or may not have received a voucher at the time of the distribution.

In certain circumstances (for example where a fund has an accounting period that exceeds 12 months) there may be more than one report issued in respect of an accounting period.

Excess Reported Income is a per share/unit amount of income. This amount must be used by the UK investor to calculate an amount of income to be included in their income tax return. This is in addition to any distributions which may already have been received.

This Excess Reported Income is required to be treated as a distribution of income which is deemed to be received by the UK Investor on the Fund Distribution Date included on the report to investors.

The amount of income to be included in the tax return is calculated as follows:

Using the example below, Mr Smith held 100 shares in Share Class A of the Emerging Markets Fund of Offshore Umbrella Fund Plc on 31 December 2013 (i.e. the end of the reporting period). The report to investors indicates that there is Excess reportable income of GBP 1.5690 per unit in respect of this share class.

Mr Smith calculates his deemed distribution as follows:

100	X	GBP 1.5690	=	GBP 156.90
Number of shares		Excess reportable income		Mr Smith’s deemed distribution

The Fund Distribution Date is the date on which any Excess Reported Income attributed to an investor is deemed to be distributed to them.

This date is fixed at six months after the reporting fund period-end date (some early reports may include a different date as the rules have since changed).

Mr Smith holds 100 shares in Share Class A of the Emerging Markets Fund of Offshore Umbrella Fund Plc on 31 December 2013 (i.e. the end of the reporting period). He has calculated that he has excess reported income of GBP 156.90 to include in his tax return based on the information in the report provided by the fund. As the Emerging Markets Fund did not hold more than 60% of its portfolio in debt securities (or similar) during the year, the deemed distribution is treated as a dividend (see section 4.5).

The Fund Distribution Date is 30 June 2014. As such, Mr Smith is deemed to have received GBP 156.90 on 30 June 2014 and therefore needs to include this amount in his tax return for the tax year ended 5 April 2015.

Having used the Excess Reported Income figure to calculate a deemed distribution (see section 4.3), the investor must return this as either a dividend distribution or an interest distribution depending on the investments held by the fund in question:

• Where the fund holds more than 60% of its investments in debt securities (or similar) the distribution should be treated as interest and recorded on HMRC’s SA106 form as part of the investor’s tax return.
• Where the fund does not hold more than 60% of its investments in debt securities (or similar) the distribution should be treated as a dividend and recorded on HMRC’s SA106 form as part of the investor’s tax return.

KPMG reportingfunds.co.uk provides funds with the option for stating whether distributions are treated as interest or dividends, but completing this field is not mandatory.

In addition to the deemed distribution of Excess Reported Income which the relevant investors will pick up from the report to investors, they will also need to ensure that they include in their income tax returns details of any actual Distributions made in respect of the period which are relevant to them. Details of these Distributions may already been provided to the investor but they are also required to be replicated on the report to investors as shown:

As with Excess Reported Income, Distributions will need to be classified as dividend or interest and translated into GBP Sterling prior to being included in the investor’s tax return. The rules are as set out above [see section 4.5].

Mr Smith held 100 units in Share Class A of Emerging Markets Fund of Offshore Umbrella Fund Plc and received a distribution of GBP 246.90 on 15 January 2014. This is presented as GBP 2.4690 on the report to investors which is published on 28 June 2014.

Mr Smith needs to include the total distribution in his tax return. As this distribution was paid on 15 January 2014 it will need to be included in his income tax return for the period ended 5 April 2014.

The Date of Distributions shows the dates when actual distributions are paid. These are also included on the reports to investors and are used to determine in which income tax year any relevant distributions should be included. As the dates relate to when distributions were actually paid, they may differ to the Fund Distribution Date. As explained above, this is the date on which excess reported income is deemed to have been received by the investor. Dates of distributions and the Fund Distribution Date may fall in different tax years even though they appear on the same report to investors.

If the fund has chosen to apply “full equalisation”, it may also report Equalisation Amounts to investors. This number represents income accrued at the date of purchase and is only relevant to investors who acquired new shares or units in the fund during the reporting period.

Depending on the preference of the fund, Equalisation Amounts can be reported to investors in different ways including:

• As one number, an average to be used by all investors who acquired new shares / units during the period;
• As a series of numbers associated with specific distributions;
• As a series of numbers associated with dates on which shares / units were acquired – this means that investors can see income accruing at the date they purchased and calculate their own specific equalisation. This information can be included with the main report to investors or on documents such as contract notes provided at the time of purchase.

Once an investor has determined their equalisation adjustment this amount can be used to reduce the amount of distributions and / or Excess Reported Income brought into charge to income tax. The investor can choose in which order they offset the equalisation i.e. whether first against Distributions or first against Excess Reported Income.

Miss Jones held 50 units in Share Class A of the Balanced Fund of Offshore Umbrella Fund Plc on 1 January 2013. On 17 June 2013 she acquired 50 more units in this share class so that on the reporting period end of the fund (31 December 2013) she held 100 units.

The report to investors includes the following:

• Excess Reported Income of GBP 0.1601 per share and a Fund Distribution Date of 30 June 2014; and
• An actual Distribution of GBP 0.5671 received on 15 January 2014.
• An Equalisation Amount of GBP 0.4376 presented as a single number

As Miss Jones acquired 50 new units in the fund during the period she is able to use the Equalisation Amounts to reduce the amount of income subject to income tax.

GBP 0.4376	X	50	=	GBP 21.88
Full equalisation adjustment per share		Number of shares acquired during period		Full equalisation adjustment for Miss Jones

The impact on Miss Jones of this period ended 31 December 2013 can be summarised as follows – in this case she has chosen to offset the full equalisation first against Excess Reported Income:

	Total	Offset full equalisation of GBP 21.88	Net taxable income	Relevant tax year
	GBP	GBP	GBP
Excess Reported Income – Fund Distribution Date 30/06/14 GBP 0.1601/share x 100 shares	16.10	(16.10)	0.00	5 April 2015
Actual Distribution on 15/01/14 GBP 0.5671 x 100 shares	56.71	(5.78)	50.93	5 April 2014

Click here for a worked example as to how this Equalisation Amount can be used in a situation where investor specific numbers are presented.

Miss Jones also acquired 75 units in the distributing share class of the XYZ Growth Fund on 9 September 2013. Alongside the report to investors in respect of the year ended 30 September 2013, the fund provided her with daily equalisation rates – the amount of equalisation on 9 September was GBP 0.7239.

The amount which Miss Jones can use to offset against Excess Reported Income and / or distributions in respect of the year ended 30 September 2013 is GBP 54.29 (75 x GBP 0.7239).

Provided the investment is a reporting fund (or distributing fund if the previous regime applied to the period of investment) throughout the whole period it is held by the investor, any gain is subject to Capital Gains Tax rather than Income Tax. If this condition is not met, investors should consider whether they should make an election (see section 6 and section 7).

Any calculation of the gain or loss on disposal must allow for Excess Reported Income and reinvested distributions which have already been brought into account as taxable income. This is so that these amounts are not taxed again.

When disposing of an investment in a reporting fund it is important to check that reported income is not missed. If the investor holds an interest in a reporting fund on the period end date (for example 31 December 2013) but disposes of the investment on 10 January 2014, they must still include on their tax return for 5 April 2015 details of Excess Reported Income included in the 31 December 2013 report. This report is unlikely to be available until June 2014.

If an investor holds an investment in a non-reporting fund there is no requirement to tax reported income (other than actual distributions) but on disposal of the investment, unless the fund has secured reporting status (or distributor status under the old regime) throughout the period of investment, any gain will be treated as an “offshore income gain” and taxed at income tax rates.

If a fund changes from being a non-reporting fund to a reporting fund an investor may wish to make an election to treat themselves as disposing of their investment in the fund immediately before it became a reporting fund and then reacquiring it as an investment in a reporting fund. Any gain on this deemed disposal would need to be returned as an offshore income gain in the relevant income tax return. However, future gains are subject to capital gains tax rather than income tax. The pros and cons of an election depend on specific circumstances.

If the investment stood at a loss at the date the fund changes from a non-reporting fund to a reporting fund no election is required and the investor will be treated as being invested in a reporting fund from the date of acquisition.

If an investor holds an investment in a non-reporting fund there is no requirement to tax reported income (other than actual distributions) but on disposal of the investment, unless the fund has secured reporting status (or distributor status under the old regime) throughout the period of investment, any gain will be treated as an “offshore income gain” and taxed at income tax rates.

As such, where a fund changes from being a reporting fund to a non-reporting fund an investor may choose to make an election to treat themselves as disposing of their investment on the last day the fund was a reporting fund and re-acquiring it immediately afterwards. This election can only be made if the report to investors for the last relevant period of account has been provided to the investor. Any gain on this deemed disposal would be treated as a chargeable gain. On ultimate disposal, the investor is subject to income tax on any future gain.

A “constant Net Asset Value (or NAV) fund” is an offshore fund whose net asset value (expressed in the currency in which units are issued) does not fluctuate by more than an insignificant amount throughout the fund’s existence, as a result of the nature of the fund’s assets, and the frequency with which the fund distributes its income.

Although constant NAV funds can apply for UK reporting fund status there is no requirement on such funds to produce reports to investors.

If you hold an investment in a constant NAV fund with UK reporting fund status you will need to include your share of any relevant actual distributions received.

KPMG reportingfunds.co.uk flags the status of tax transparent funds which have chosen to participate.

There are a variety of ways in which a tax transparent fund will prepare relevant reports to investors and the format is likely to differ based on the type of investments held by the fund and the type of investor in the fund. This is because investors are treated as receiving their share of the underlying income and expenses of a tax transparent fund.