The Offshore Funds (Tax) Regulations 2009

CHAPTER 5 U.K. THE COMPUTATION OF REPORTABLE INCOME

General U.K.

Duty to provide computation U.K.

62.—(1) This Chapter explains how reportable income is computed.

(2) A reporting fund must provide a computation of its reportable income for a period of account.

Computation of reportable income: general U.K.

63.—(1) The starting point for computing the reportable income of a reporting fund for a period of account is—

(a) in a case in which the fund prepares its accounts in accordance with international accounting standards, the “total comprehensive income for the period” as that expression is used in international accounting standards, or

(b) in any other case, the entries in the fund's accounts that are considered to equate to “total comprehensive income for the period” as that expression is used in international accounting standards.

(2) The starting point specified in paragraph (1) must be adjusted having regard to—

(a) capital items [F1 and miscellaneous items] (see regulations 64 and 65),

(b) special classes of income (see regulations 66 to 71), and

[F2 (c) any arrangements to adjust income based on the number of units in issue (see regulations 72 to 72B).]

(3) In the case of any one item, an adjustment under paragraph (2) may be made only once (even if more than one of the regulations mentioned in that paragraph apply to that item).

(4) The reportable income of the reporting fund for the period of account is the amount computed in accordance with the provisions of this Chapter and of Chapter 6.

(5) But if the computation gives rise to a negative amount, the reportable income is nil.

Textual Amendments

F1 Words in reg. 63(2)(a) inserted (with effect in accordance with reg. 1(2) of the amending S.I.) by The Offshore Funds (Tax) (Amendment) Regulations 2017 (S.I. 2017/240), regs. 1(1), 2(2)(a)

F2 Reg. 63(2)(c) substituted (28.6.2013) by The Offshore Funds (Tax) (Amendment No. 2) Regulations 2013 (S.I. 2013/1411), regs. 1(1), 5 (with reg. 1(3)(4))

Adjustments for capital items [F3 and miscellaneous items] U.K.

Textual Amendments

F3 Words in reg. 64 cross-heading inserted (with effect in accordance with reg. 1(2) of the amending S.I.) by The Offshore Funds (Tax) (Amendment) Regulations 2017 (S.I. 2017/240), regs. 1(1), 2(2)(b)

Treatment of capital items following IMA SORP U.K.

64.—(1) The capital items for which an adjustment is required are such profits, gains or losses as would fall to be dealt with under the heading “net capital gains/losses” in the statement of total return for the period of account if the accounts for that period were to be prepared in accordance with the IMA SORP.

(2) The amount specified in regulation 63(1) must be adjusted by—

(a) deducting gains that fall within the heading specified in paragraph (1), and

(b) adding losses that fall within that heading.

(3) A profit or loss from a trade may not be treated as a capital item for the purposes of this regulation. This paragraph is subject to regulation 80.

(4) For the purposes of paragraph (1) the IMA SORP applies to determine the “net capital gains/losses” of an offshore fund for a period of account in the same way that it applies to determine the “net capital gains/losses” of an authorised investment fund for an accounting period.

(5) In this regulation—

“authorised investment fund” has the meaning given in the Authorised Investment Funds (Tax) Regulations 2006 M1 ;

“the IMA SORP” means, in relation to any period of account for which it is required or permitted to be used, the Statement of Recognised Practice relating to authorised investment funds issued by the Investment Management Association in November 2008, as from time to time modified, amended or revised.

Marginal Citations

M1 S.I. 2006/964, to which there are amendments not relevant to these Regulations.

Treatment of other capital items [F4 and miscellaneous items] U.K.

65.—(1) The amount specified in regulation 63(1) must also be adjusted by adding the amounts specified in paragraph (2).

(2) Those amounts are—

(a) expenses directly related to acquisition or disposal of investments (other than those taken into account in arriving at the amounts specified in sub-paragraph (a) or (b) of regulation 64(2)), F5 ...

(b) costs relating to the setting up, merger or dissolution of the fund[F6 , and

(c) sums payable or allocated to the manager of a fund calculated by reference to an increase in the net asset value of the fund or a formula designed to reward the manager’s performance.]

Textual Amendments

F4 Words in reg. 65 heading inserted (with effect in accordance with reg. 1(2) of the amending S.I.) by The Offshore Funds (Tax) (Amendment) Regulations 2017 (S.I. 2017/240), regs. 1(1), 2(2)(c)

F5 Word in reg. 65(2)(a) omitted (with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Offshore Funds (Tax) (Amendment) Regulations 2017 (S.I. 2017/240), regs. 1(1), 2(3)(a)

F6 Reg. 65(2)(c) and preceding word inserted (with effect in accordance with reg. 1(2) of the amending S.I.) by The Offshore Funds (Tax) (Amendment) Regulations 2017 (S.I. 2017/240), regs. 1(1), 2(3)(b)

Adjustments for special classes of income U.K.

Effective interest income or comparable amounts U.K.

66.—(1) This regulation applies if the accounting practice used does not include—

(a) the effective interest method for computing interest income (as described in international accounting standard 39 and equivalent United Kingdom financial reporting standards), or

(b) another method of accounting for interest in such a way that the difference between the purchase price of an asset and the expected redemption price of the asset is taken into account as part of the interest income over the expected life of the asset.

(2) The amount specified in regulation 63(1) must be adjusted by the addition of the net income computed by taking into account the expected redemption price of any interest bearing assets over the expected life of the asset.

(3) The sum mentioned in paragraph (2) may be computed by any reasonable method which—

(a) takes into account the full expected gain or loss on the asset, and

(b) gives a reasonably comparable result to the effective interest method.

Income from wholly-owned subsidiaries U.K.

67.—(1) This regulation applies if a reporting fund has a wholly-owned subsidiary.

(2) For the purposes of this regulation, a company is a wholly-owned subsidiary of an offshore fund if and so long as the whole of the issued share capital of the company is—

(a) in the case of an offshore fund falling within paragraph (a) of the definition of “offshore fund” in section 40A(2) of FA 2008 M2 , directly [F7 or indirectly] owned by the fund;

(b) in the case of an offshore fund falling within paragraph (b) of the definition of “offshore fund” in that enactment, directly [F8 or indirectly] owned by the trustees of the fund for the benefit of the fund;

(c) in the case of an offshore fund falling within paragraph (c) of the definition of “offshore fund” in that enactment, owned in a manner which, as near as may be, corresponds either to paragraph (a) or paragraph (b) above.

(3) But in the case of a company which has only one class of issued share capital, the reference in paragraph (2) to the whole of the issued share capital shall be construed as a reference to at least 95% of that share capital.

(4) That percentage of the receipts, expenditure, assets and liabilities of the subsidiary which is equal to the percentage of the issued share capital of the company concerned which is owned as mentioned in paragraph (2) shall be regarded as the receipts, expenditure, assets and liabilities of the fund.

(5) There shall be left out of account—

(a) the interest of the fund in the subsidiary, and

(b) any distributions or other payments made by the subsidiary to the fund or by the fund to the subsidiary.

(6) The adjustments required under regulations 64 and 65 must be made to the amount determined under paragraph (4).

Textual Amendments

F7 Words in reg. 67(2)(a) substituted (with effect in accordance with reg. 1(2) of the amending S.I.) by The Offshore Funds (Tax) (Amendment) Regulations 2011 (S.I. 2011/1211), regs. 1(1), 33(a)

F8 Words in reg. 67(2)(b) inserted (with effect in accordance with reg. 1(2) of the amending S.I.) by The Offshore Funds (Tax) (Amendment) Regulations 2011 (S.I. 2011/1211), regs. 1(1), 33(b)

Marginal Citations

M2 Section 40A was inserted by paragraph 2 of Schedule 22 to the Finance Act 2009 (c. 10).

Income from other reporting funds U.K.

68.—(1) This regulation applies if a reporting fund (“RF1”) has an interest in another reporting fund (“RF2”).

(2) The excess (if any) of the income reported by RF2 in respect of RF1's interest in RF2 over the amount distributed by RF2 to RF1 must be added by RF1 to the amount specified in regulation 63(1) after making the adjustments specified in regulations 64 and 65.

(3) The adjustment specified in paragraph (2) must be made in the computation of the reportable income of RF1 for the period of account [F9 in which the fund distribution date of RF2 falls or, if earlier, in which the date on which the reported income from RF2 in respect of that reporting period is recognised in the accounts of RF1].

F10 (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(5) If [F11 RF2 does not make a report available in accordance with regulation 90(5)], RF1 must—

(a) include its best estimate of reported income from RF2 as an adjustment to the computation of its reportable income for the period of account in which the latest possible fund distribution date for RF2 falls (to the extent that any such amount has not already been recognised in the computation of RF1's reportable income for that or any earlier period of account), and

(b) make any necessary corrections to its best estimate in its computation of reportable income for the first later period of account in which it has sufficient information to make those corrections.

Textual Amendments

F9 Words in reg. 68(3) substituted (with effect in accordance with reg. 1(2) of the amending S.I.) by The Offshore Funds (Tax) (Amendment) Regulations 2011 (S.I. 2011/1211), regs. 1(1), 34(2)

F10 Reg. 68(4) omitted (with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Offshore Funds (Tax) (Amendment) Regulations 2011 (S.I. 2011/1211), regs. 1(1), 34(3)

F11 Words in reg. 68(5) substituted (with effect in accordance with reg. 1(2) of the amending S.I.) by The Offshore Funds (Tax) (Amendment) Regulations 2011 (S.I. 2011/1211), regs. 1(1), 34(4)

[F12 Index tracking funds U.K.

68A.— (1) This regulation applies if—

(a) a reporting fund has an interest in a non-reporting fund, and

(b) the conditions in paragraph (2) are met for a period of account.

(2) The conditions are that—

(a) in accordance with the reporting fund’s rule or the instrument constituting the reporting fund, the aim of the fund’s investment policy is to replicate the performance of a qualifying index,

(b) the main purpose of the investment in the non-reporting fund is to represent the composition of the qualifying index, and

(c) the capital and income returns of the reporting fund replicate as closely as practicable the returns of the investments comprised in the qualifying index.

(3) For the purposes of paragraph (2) an index is a “qualifying index” if—

(a) it is based solely on the value of securities listed on a recognised stock exchange or admitted to trading on a regulated market,

(b) an authority responsible for regulating offshore funds recognises the index on the basis that—

(i) its composition is sufficiently diverse,

(ii) it represents an adequate benchmark for the market to which it refers, and

(iii) it is published in such a way that it is widely available, and

(c) it is calculated and published by a body which is managed independently from the management of the reporting fund.

(4) Regulations 69 to 71 do not apply in respect of the interest in the non-reporting  fund.]

Textual Amendments

F12 Reg. 68A inserted (with effect in accordance with reg. 1(2) of the amending S.I.) by The Offshore Funds (Tax) (Amendment) Regulations 2011 (S.I. 2011/1211), regs. 1(1), 35

Income from non-reporting funds: first case U.K.

69.—(1) This regulation applies if—

(a) a reporting fund has an interest in a non-reporting fund, and

(b) the conditions in paragraph (2) are met for a period of account.

(2) The conditions are that—

F13 (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(b) the reporting fund has access to the accounts of the non-reporting fund;

(c) the reporting fund has sufficient information about the non-reporting fund to enable it to prepare a computation of reportable income for the non-reporting fund; and

(d) the reporting fund can reasonably expect to be able to rely on continued access to that information for the period in which it will hold the investment in the non-reporting fund.

(3) Regulation [F14 68(1) to (3)] applies as if the reporting fund were RF1 and the non-reporting fund were RF2.

(4) For the purposes of the computation mentioned in paragraph (2)(c), regulation 80 applies if (and only if) the non-reporting fund is a UCITS fund.

[F15 (5) For the purposes of applying regulation 68, “fund distribution date” means the date six months after the end of the period of account in which the income arose.

(6) If the period of account referred to in paragraph (5) is more than 12 months, there shall be two periods of account and two fund distribution dates for the purposes of applying regulation 68.

The first fund distribution date is the date six months after the end of the first 12 months in the period of account.

The second fund distribution date is the date six months after the end of the period of account in which the income arose.]

Textual Amendments

F13 Reg. 69(2)(a) omitted (with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Offshore Funds (Tax) (Amendment) Regulations 2011 (S.I. 2011/1211), regs. 1(1), 36(2)

F14 Words in reg. 69(3) substituted (with effect in accordance with reg. 1(2) of the amending S.I.) by The Offshore Funds (Tax) (Amendment) Regulations 2011 (S.I. 2011/1211), regs. 1(1), 36(3)

F15 Reg. 69(5)(6) inserted (with effect in accordance with reg. 1(2) of the amending S.I.) by The Offshore Funds (Tax) (Amendment) Regulations 2011 (S.I. 2011/1211), regs. 1(1), 36(4)

Income from non-reporting funds: second case U.K.

70.—(1) This regulation applies if a reporting fund has an interest in a non-reporting fund, but the conditions in regulation 69(2) are not met for a period of account.

(2) No adjustments may be made under regulations 64 and 65 in respect of the interest in the non-reporting fund.

(3) But if the condition specified in paragraph (4) is met, losses made by a reporting fund in earlier periods of account on an investment in a non-reporting fund may be set against gains made on the investment in the non-reporting fund to reduce the reportable income of the reporting fund, but only to the extent that the losses—

(a) have not previously had the effect of reducing income for the period of account in which they were incurred, or

(b) have not been used previously to reduce gains arising to the non-reporting fund.

(4) The condition specified is that the losses in earlier periods of account were all made during periods in which this Part applied continuously to the reporting fund.

Income from non-reporting funds if first case ceases to apply U.K.

71.—(1) This regulation applies if—

(a) a reporting fund has an interest in a non-reporting fund, and

(b) the conditions in regulation 69(2) have been met for an earlier period of account but are no longer met for a later period of account.

(2) Regulation 70 applies for the later period of account and for all subsequent periods of account.

Adjustments for equalisation arrangements U.K.

Treatment of reporting funds operating equalisation arrangements U.K.

[F16 72.— (1) This regulation applies if a reporting fund operates equalisation arrangements.

(2) If a person acquires an interest in the fund by way of initial purchase, the reportable income must be increased by an amount equal to that part of the acquisition price which is attributable to the undistributed income which has accrued to the fund in the period of account up to the time of the acquisition and which is taken into account in determining the acquisition price (“the equalisation amount”).

(3) If a participant disposes of an interest in the fund by way of redemption, the reportable income must be reduced by an amount equal to that part of the redemption price which is attributable to the undistributed income which has accrued to the fund in the period of account up to the time of the redemption and which is taken into account in determining the redemption price.

(4) For the purposes of these Regulations a person acquires an interest in an offshore fund by way of initial purchase if the acquisition is by way of subscription for or allotment of new shares, units or other interests issued or created by the fund or by way of direct purchase from the managers of the fund acting in their capacity as managers of the fund.

(5) For the purposes of this regulation a person disposes of an interest in a fund by way of redemption if the disposal is by way of cancellation of the units, shares or other interest or by way of direct sale to the managers of the fund acting in their capacity as managers of the  fund.]

Textual Amendments

F16 Reg. 72 substituted (with effect in accordance with reg. 1(2) of the amending S.I.) by The Offshore Funds (Tax) (Amendment) Regulations 2011 (S.I. 2011/1211), regs. 1(1), 9

[F17 Adjustments where funds do not operate equalisation arrangements U.K.

Textual Amendments

F17 Regs. 72A-72C and cross-heading inserted (28.6.2013) by The Offshore Funds (Tax) (Amendment No. 2) Regulations 2013 (S.I. 2013/1411), regs. 1(1), 6 (with reg. 1(3)(4))

Reporting Funds not operating equalisation: income adjustments based on reportable income for computation periods U.K.

72A.— (1) This regulation applies if a reporting fund does not operate equalisation arrangements and—

(a) the fund has given a statement under regulation 53(1)(k) that it intends to make income adjustments in a reporting period on the basis of reportable income, or

(b) regulation 72B(7) applies.

(2) The reportable income of the fund for a reporting period is the sum of the reportable income per unit for all the computation periods in the reporting period multiplied by the number of units in the fund in issue at the end of the reporting period.

(3) But if the sum results in a negative amount, the reportable income for that period is nil.

(4) Where a period of account consists of two reporting periods, the reportable income for the period of account is the sum of the reportable income for both those reporting periods.

(5) The reportable income per unit for a computation period is calculated by dividing the reportable income of the fund for the computation period by the average number of units in the fund in issue during the computation period.

(6) For the purposes of paragraph (5), the reportable income of the fund for a computation period means the reportable income of the fund for that period computed in accordance with this Chapter (ignoring regulation 63(5) and this regulation) and Chapter 6 of this Part.

(7) In the computation referred to in paragraph (6), this Chapter and Chapter 6 of this Part apply as if references to a period of account of the fund were references to a computation period.

Reporting Funds not operating equalisation: income adjustments based on accounting income for computation periods U.K.

72B.— (1) This regulation applies if a reporting fund does not operate equalisation arrangements and the fund has given a statement under regulation 53(1)(k) that it intends to make income adjustments in a reporting period on the basis of accounting income.

(2) The reportable income of the fund for a reporting period is calculated as follows—

where—

AIU is the sum of the accounting income per unit for all the computation periods in the reporting period,

RI is the reportable income of the fund for the reporting period computed in accordance with this Chapter (ignoring this regulation), Chapter 6 of this Part and regulation 93,

AI is the sum of accounting income for all the computation periods in the reporting period, and

U is the number of units in the fund in issue at the end of the reporting period.

This is subject to paragraphs (6) and (7).

(3) Where a period of account consists of two reporting periods, the reportable income for the period of account is the sum of the reportable income for both those reporting periods.

(4) But if the sum results in a negative amount, the reportable income for that period is nil.

(5) The accounting income per unit for a computation period is calculated by dividing accounting income for the computation period by the average number of units in the fund in issue during the computation period.

(6) Where RI is zero the reportable income per unit of the fund for a reporting period is zero.

(7) Where the difference in the amount of reportable income per unit for any reporting period in a period of account calculated using this method and the amount of reportable income per unit for that reporting period calculated on the basis of reportable income is or is likely to be more than 10% of the latter of those amounts—

(a) the fund must make income adjustments in that and future periods of account on the basis of reportable income, and

(b) the manager must give notice to HMRC of the change in the method of income adjustment with the information provided to HMRC in relation to that period under regulation 106 (reporting requirements).

(8) In this Part “accounting income” means an amount proportionally related to the reportable income of the fund determined from the interim or management accounts of the fund, but this amount must not be less than zero.

Supplementary provisions: average number of units and computation period U.K.

72C.— (1) For the purposes of regulations 72A(5) and 72B(5), the average number of units in the fund in issue during the computation period is the sum of the units in the fund in issue during the period after each unit has been multiplied by the fraction of the period for which it is held.

(2) In this Part a “computation period” means a period determined by a fund in accordance with the following rules.

• Rule 1

  A new computation period must start—

  (a)

  at the beginning of a reporting period, and

  (b)

  immediately after the end of a previous computation period.

• Rule 2

  A computation period must end—

  (a)

  at the end of a reporting period, and

  (b)

  at the end of a period in relation to which income is allocated to participants for distribution or accumulation.

• Rule 3

  If a reporting period consists of more than one computation period those periods must be of approximately equal length.]