Offshore fund investors warned to check tax reporting

With two months to go before the 2018/19 self assessment tax return submission deadline, offshore fund investors need to check their tax reporting, before HMRC does, to avoid penalties

HMRC is ramping up its focus on offshore investors to improve rates of compliance and raise more tax, but falling foul of the complex rules could result in harsh penalties, warns KPMG.

If an investor misreports tax liability, HMRC can look back as far as the 2011/12 tax year and potentially charge penalties of up to 200% of the tax owed. 

There are two types of offshore funds for UK tax purposes – ‘reporting’ and ‘non-reporting’. Income that is not distributed from reporting funds, known as excess reportable income, still needs to be declared to HMRC each year.

KPMG stressed that even some tax advisers have not picked up on the excess reportable income reporting obligation and fund managers are under no obligation to contact customers with this information directly.

Bond fund distributions are subject to a different rate of income tax than equity fund distributions, so it can be difficult to identify which is which but getting it wrong can result in an underpayment of tax.

It is important to note that gains on non-reporting funds are subject to income tax, not capital gains tax (CGT).

Income is generally taxed at a higher rate and does not benefit from the annual exempt amount that applies to capital gains.

Iona Martin, tax director at KPMG UK, said: ‘Offshore fund investing is a complex bit of the tax system and even if people have filed their reports the same way for years without any issues, it doesn’t mean they have been doing it correctly.

‘HMRC is now on red alert and is using all powers available to it where taxpayers have been getting it wrong.

‘If you invest via a fund or wealth manager, you will need to make sure you have ready access to the necessary information and there can be practical challenges, particularly if investing in a number of funds.

‘So, any offshore fund investors would do well to just check with their adviser or manager ahead of submitting their returns this year. Anyone who waits for HMRC to tell them they’ve been getting it wrong will face a fine that’s potentially 50% higher than it would be otherwise.’

The filing deadline for self assessment returns is 31 January 2020.

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