There has been a bit of a shakeup in the world of offshore investment in the UK. The regulations governing offshore investments needed updating, and therefore the UK Government has proposed some amendments to current offshore funds regulations, the Offshore Funds (Tax) Regulations 2009, which came into force on the 22nd December 2009. These amendments will mean big changes for some, and not a great deal for others. But what exactly are these changes?
Changes to Offshore Definition and ‘Material Interest’
The new regulations have changed the definition of an offshore fund. Previously, the definition of offshore funds was tied to the regulatory definition of a ‘collective investment scheme’ under FSMA 2000 rules. However, some offshore funds did not fulfil all of the FSMA requirements. This meant that some funds were not classed correctly, leading to advantageous tax situations for some investors where the fund just fell short of FSMA requirements.
In addition, in order to be taxed, investors must have a ‘material interest’ in an offshore fund. The definition of a ‘material interest’ has always been rather vague, leading to confusion and unequal treatment of investors, and so the Government has decided to scrap this.
In place of the old classification system, the Government has introduced a ‘mutual fund’ testing mechanism. Non-UK funds that are classed as ‘mutual funds’ under the new testing system are also defined as offshore funds if they are also classed as non-UK resident for tax calculation purposes.
It is clear, however, that previous investors that were deemed to hold non-material interests in offshore funds may be unfairly subject to the new regulations. The Government has made provisions for any non-material investments made before 1st December 2009 to ensure that this doesn’t happen.
Distributing and Reporting
Distributing and non-distributing have been redefined as reporting and non-reporting, with almost all current offshore funds defaulting to non-reporting, with reporting status requiring subsequent application. Reporting funds are required to report at least 90% of all reportable income within 6 months of each period end to investors and HMRC. Failure to report income will potentially lead to loss of reporting status. Reporting fund status is desirable because it offers a higher degree of tax certainty and increased ease of administration.
Who is Affected?
All investors who were subject to tax deductions resulting from investments under the previous regulations will be affected by the new regulations. In addition, any investors in non-UK funds that were not previously subject to tax will now need to recheck their obligations, since the definition of an offshore fund has changed and the ‘material interest’ rule has been abolished.
For tax purposes, all income tax for the tax year 2009/10 will be subject to the new regime. Capital gains tax will only be affected for any capital gains made on or after the 1st December 2009. Corporation tax on income will be affected for accounting periods that end on or after the 1st December 2009.