Most often, we hand over the bulk of our investments and income to advisors at our bank or our private asset managers for prudent distribution and gainful returns. From here, any information or paper work received, is usually passed on to auditors or tax experts for help with navigating through the complicated world of tax compliance. What most people fail to realise is that sometimes, information gets lost in passing or simply does not come to notice of the investor.
This is how the U.K Tax Authority HM Revenue & Customs (HMRC) have concluded that there are quite a few U.K Residents who are missing to report or falsely reporting income and gains from their investments in off-shore funds. This is helping them reduce their tax burden and save significantly. In October this year, the government announced that they will be mailing a number of residents about their off-shore holdings.
It is not a surprise that many U.K Residents seem to have come under the radar as off-shore funds are not completely disclosed to the investor during their efforts to prudently distribute their funds. But before we see what the tax and legal implications of this are, let us understand the finer details.
So, what is the concept of Off-shore funds?
There are many regions around the globe where the amount of tax burden is significantly less. Most of the financial advisors prefer parking investors’ money here in an open-ended investment for lesser outflow and higher gains. This is known as off-shore funds. A mutual fund constituted by a trust outside the U.K is also considered as off-shore funds according to the country’s legislation. Because off-shore funds can usually be in the form or transparent or opaque entities, it gets classified into reporting and non-reporting.
Tax liability of Off-shore investors
When the off-shore funds are transparent, the income from the investment will be considered following the underlying income as it comes up, even if it is not distributed to the U.K investors. The manager of the fund is liable to send a regular update on income and dividends in the form of a report.
If the off-shore funds are opaque, the gains will be considered as an equal offering if it is a company, or as a share in the trust if it is an offshore unit trust.
When the interest gained from either of these are disposed, it is considered and taxed under capital gains.
When the income is cumulated rather than distributed, it is a non-reporting fund. In order to curb tax avoidance, most times, the interest earned from this is taxed under income tax rules.
The risks involved in misrepresenting liability or gains in non-reporting funds are high. On the one hand, ERI income on these funds is completely over looked or miscalculated or annual exemption is applied as income from these funds are considered under the capital gains rule. Another potential risk for non-reporting funds ensues when losses are required to capped at zero as well as when the indexation is not handy.
Implications of non-compliance
With the HMRC taking serious action to impose sanctions against misreporting, it has become imperative to reassess assets and ensure that all investments are prudent. Off-shore holdings are most of the time scrutinized ardently for their ability to be tax evasive and tax avoiding. Huge penalties to the tune of 100% of tax lost for civil penalty in the case of tax evasion and, in the case of assets held overseas, 200% penalty for non-compliance is being imposed. This can cause a significant dent in one’s smooth business functioning.
With the international scrutiny on off-shore non-compliance, it is hardly surprising that the HMRC is cracking down on U.K investors of off-shore funds. With the rules of taxation getting more complex and exchange of information making taxation more transparent, the need for an expert and robust service provider who can help your company stay legally secure, grows by the day.