HMRC has run many campaigns targeting groups of taxpayers to make them think about whether they have under-reported income. In the past, these campaigns have been sector-specific; for example, focussing on dentists or take-away shop owners.  

Nowadays, HMRC receives a huge volume of data from revenue authorities from all over the world. This data identifies individual taxpayers and their income from those countries. This means that HMRC can now target individual taxpayers based on specific evidence it holds. 

HMRC’s latest campaign is aimed at individuals who own units in offshore funds and who are dealt with by its Wealthy & Mid-sized Business Unit.

An offshore fund is not as exotic as it sounds. It is simply a collective investment vehicle which is resident outside the UK. The fund will combine money from different investors to make investments. Often funds will invest in multiple underlying companies to spread their risk.

There are two types of offshore fund from a tax perspective. Reporting funds have applied for and received ‘reporting fund’ status from HMRC. Taxpayers are taxed on income of the fund as a dividend in the year that the fund receives it, whether or not it is paid out to them, and any profit on sale is subject to capital gains tax.  

All other funds are known as ‘non-reporting’ funds. Income of these funds is not taxed unless it is actually paid out. Instead, when an investor sells units in the fund, the whole profit is subject to income tax, whether it is derived from income or capital gains. 

HMRC is targeting taxpayers who have not included their income or capital gains from offshore funds on their tax returns. As the top rate of income tax is 45 per cent and the relevant rate of capital gains tax is 20 per cent, HMRC is also targeting those who may have reported non-reporting fund sales as subject to capital gains tax rather than income tax.  

This campaign is focussed on ‘wealthy’ taxpayers dealt with by HMRC’s specialist unit. How HMRC defines wealthy for these purposes is unclear, but anyone can to be a target.  

Taxpayers should not ignore any letter they get from HMRC asking about investments in offshore funds. HMRC is writing because they have information suggesting that tax has been underpaid and it will take increasingly aggressive action to pursue taxpayers until a suitable response is provided. If you receive one of these letters, don't ignore it and if you need advice call me on 01244 660866.

 

Noel Guilford