Cross-border tax reporting regimes: are you ready for the new obligations?

Written on 6 Nov 2015

Background

The UK has signed up to a number of international agreements and treaties that require cross-border reporting of information about taxpayers. The aim is to increase tax transparency, so that each tax authority has a fuller list of taxpayers (and their taxable income and assets), and to make it increasingly difficult for taxpayers to conceal their assets offshore. Reporting obligations will be significantly extended as of January 2016.

The law… and the consequences for funds

UK “financial institutions” are required by law to collect information about their investors and account holders and report information to HMRC about certain non-UK tax resident investors.
“Financial institutions” in this context does not simply mean banks and building societies but also covers entities:

  • whose main business is investing in or managing shares, bonds, partnerships, unit trusts and other financial instruments and securities on behalf of investors; or
  • at least 50% of whose income comes from investing in such assets on its own account but which is managed by another financial institution (e.g. a professional manager that falls into the category above).

Accordingly, fund managers and a large proportion of fund vehicles (including fund partnerships, carry partnerships and trusts) will be caught by this definition. For a fund that is within the definition, it will be a UK “financial institution”. and so will be subject to the UK reporting regime if it is a partnership that is controlled and managed in the UK or if it is a trust and at least one trustee of the unit trust is UK tax resident.

A brave new world

The UK’s first international agreements came into effect on 1 July 2014. These related to the United States (in respect of FATCA) and to the Isle of Man, Guernsey, Jersey and Gibraltar (agreements colloquially known as “CDOT” or “UK FATCA”). Under those agreements, UK “financial institutions” were required to report information on investors who were tax resident in those territories.

From 1 January 2016, these reporting obligations will be significantly extended to cover investors who are tax resident in a further 69 jurisdictions, including all EU Member States, Australia, Canada, India and Mexico, and more jurisdictions are expected to follow. The first reporting deadline for the extended regime will be 31 May 2016.

What does it all mean in practice?

A fund or fund manager that is a UK “financial institution” will need to:

  • collect information about the tax residence of all of its investors (and, in certain circumstances, their 25% beneficial owners);
  • identify from that information which investors are resident in jurisdictions covered by the reporting regime; and
  • compile and submit the electronic report to HMRC by 31 May 2016.

The information to be reported varies depending on whether the investor is an entity or an individual, but includes the name, address, tax residence, taxpayer reference number, value of their investment, and total value of payments made to them.

There is an initial penalty of £300 for the failure to report, unless there is a reasonable excuse for such failure.