NEWS & VIEWS
How well do you understand the complexities of offshore reporting fund data?
According to HMRC, offshore reporting funds have grown by over 20% in the past two years. This increase from 76,777 funds in April 2020 to 93,167 in April 2022 can be partly attributed to tax incentives: funds that report to HMRC are subject to the lower capital gains tax rates of 10% or 20%, contrasted with non-reporting funds, which are subject to income tax up to 45%.
The growth of reporting funds is also accompanied by an increase in the data required to calculate a client’s tax liability correctly. Once a fund is approved by HMRC, accurate data is needed to ensure the fund’s tax implications are understood. This information also aids offshore investors in providing accurate tax returns to HMRC, a task where many turn to accountants for assistance. Therefore, it is important to ensure that your data gathering strategy is efficient and precise.
Are you accurately reporting on clients’ offshore investments?
The question of what should be included on a tax return may seem simple enough, but the process of collecting the information can be far more complex. Have you ever reviewed a client’s tax liability report only to find that vital data is missing? Perhaps the data was unavailable or too difficult to locate while you were gathering information.
The data you need to ensure the accurate reporting of offshore fund investments includes:
• Excess Reportable Income (ERI) rates
• Actual Distribution Rates
• Equalisation policies and equalisation rates (e.g. yearly/quarterly/daily)
• Distribution types (Dividend/Interest)
• Reporting period
• Fund distribution date
• Ongoing reporting fund status check
• Currency conversion rates
• Transparent fund identification
• Constant NAV fund identification
Collecting this data is a tedious and time-consuming manual exercise. For example, you may need to contact each fund manager or visit their individual website to collect information on excess reportable income and equalisation. Two variables that are vital in correctly calculating your clients’ tax position. As you can imagine, collecting and processing this data yourself can be an inefficient use of your time.
The complex nature of offshore fund data
At FSL, we hold a comprehensive database of offshore reporting funds and their associated data. We understand the complexity of gathering and processing the data, and witness the regular changes made by fund managers.
Whether a fund is classed as dividend or interest is a key factor for calculating tax liability, and knowing a fund’s asset allocation is imperative. Our database shows that during the 2020/21 tax year, 46% of funds paid out in dividend and 32% paid out in interest. It also shows that a further 22% were originally unidentified and required further interaction with fund managers to allow for accurate reporting.
The equalisation policy and rate are other areas of confusion and data discrepancies. Part of the notional or actual distribution may be classed as a return of the investor’s capital, decreasing the amount treated as income while also decreasing the base cost of the fund units. Reporting these correctly is essential for your clients’ tax liability. Our 2020/21 database of reporting funds showed that 42% of funds operated equalisation policies. Again, the type of equalisation policy in operation is crucial. Based on our data, 22% operated daily equalisations and 16% operated yearly equalisations. The remainder operated equalisation policies that are harder to identify or interpret.
The fund distribution date also plays a key role in the reporting of data. This is the date that the “payment” took place; therefore, it determines which tax year the notional income falls into. Our 2020/21 offshore reporting funds database showed that 43% of fund distribution dates were in June, 8% were in March and 13% in December; the others were spread irregularly throughout the rest of the year.
Ensuring you record the correct currency in which an offshore fund reports is also essential to your tax calculations. Note that currencies can vary wildly and are not always consistent with the fund’s country of origin. Our database showed 14% of funds reported in GB pounds, 6% reported in US dollars, 3% reported in Euros and the rest included Japanese yen, Hong Kong dollars, Swiss francs, Chinese renminbi, Danish krona, Australian dollars, Canadian dollars, and even Hungarian forint.
Furthermore, there are several ‘special’ funds known as Tax Transparent Funds, which are still classified as reporting funds but you ‘look through’ the fund for the nature of the actual or notional income. Around 1% of funds within our 2020/21 database were for Tax Transparent Funds.
How can outsourcing aid the process?
Outsourcing your data collection to a third party like FSL can help mitigate any risks of incomplete or inaccurate data. It will also ensure that your data is up-to-date and fit for purpose, improving the precision of your tax reports.
Plus, outsourcing will help you save time as all the data is in one place ready for you to use. This allows you to focus on your clients’ tax return and ensure it complies with HMRC rules rather than wasting time gathering data.
We provide the industry’s most comprehensive database of offshore reporting funds and their details. Our database is created based on our clients’ needs to suit their bespoke offshore reporting fund data requirements.
Our team has a wealth of knowledge that can help you streamline the tax reporting process, aided further by our tax consultancy specialists. We can support across several different functions: data cleansing and reconciliation, tax reporting and processes, and tax pack validation. The team can help analyse your data, resolve any current issues, and prevent future obstacles. Our tax reporting consultancy service provides guidance on best practice, smoothing out problems where necessary.
Regardless of your client – be it an institutional investor, business, individual, or anything in between – our solution is designed to provide you with the highest quality data to serve your clients better.
For more information and to request sample data please visit: https://www.financialsoftware.co.uk/products/offshore-reporting-funds/