HM Revenue & Customs is writing to wealthy investors in offshore collective investment funds as part of its wider compliance crackdown.
A notification, issued by the Chartered Institute of Taxation on Friday afternoon (November 1), stated HMRC was to send letters to those invested in such funds to ensure they reported the dividends and gains of their investments correctly on their next tax return.
The ‘Wealthy and Mid-Sized Business Compliance’ arm of HMRC is sending the letter after the department’s research identified UK taxpayers were invested in these types of funds.
An HMRC briefing note stated: “We are tackling these risk areas through preventative measures by issuing this ‘one to many’ nudging letter directly to a subset of the wealthy population identified as being at the greatest risk of falling victim to these errors.”
The letter tells the investor they may need to take extra time to check how they treat income and gains from these investments as the process “can be complex”.
It urges the recipient to check they have correctly declared all interest and dividends from any offshore investment funds and to ensure previous tax returns were also up to date and filled out properly.
In particular, investors were told to check which type of offshore fund they had invested in.
Gary Ashford, partner and chartered tax adviser at Harbottle and Lewis, said: “The taxation of investments in such funds can be complex and over the years it will have become clear to HMRC that many UK residents, whether UK domiciled or non-domiciled, do not fully understand how to report income or gains on disposals properly.
“There have been various UK disclosure campaigns in recent years and many of the disclosures made will have included corrections on such matters, alerting HMRC to the scale of the problem.
“As automatic exchange of information has progressed HMRC will have become aware of UK residents holding overseas investments, including in offshore funds.”
In 2009 the UK introduced rules around offshore funds which placed them into two categories with different tax treatments: ‘reporting funds’ and ‘non-reporting funds’.
In general, ‘reporting funds’ — which have been approved by HMRC — are treated in a simpler way than non-reporting funds.
For example, interest in reporting funds is charged capital gains tax but in non-reporting funds it is charged income tax, which means if misunderstood investors in the latter can fall foul of significant tax underpayments as income tax rates are typically higher than CGT.
The rest of HMRC's letter provides investors with information about how to ensure their tax return is correct while a factsheet, which is sent out alongside each letter, gives detailed information about how the tax system works for each type of fund.
Mr Ashford said it had long been the case that significant tax issues could arise from such investments and advised investors and advisers to double check these matters had been correctly dealt with.