IFM37800 - Carried interest: information provided in a tax return

Information provided in a tax return

Individuals are required to account for the UK tax they owe, and if HMRC suspects the right amount of tax has not been returned, HMRC can open enquiries into individuals’ tax returns.

Where insufficient information is included in a tax return, this can lead to HMRC having difficulty understanding what is being returned. This can result in compliance checks being opened to verify figures or understand adjustments. When an individual does not have access to information required to complete the compliance check, this can mean:

  • the check can take longer,
  • the individual incurs more professional fees, and
  • the firm needs to look back at records relating to earlier periods, incurring time costs or further professional fees.

What could be disclosed alongside a tax return?

To avoid these issues arising, HMRC encourages fund managers to provide as much information as possible in respect of the carried interest they have received in their tax returns. This could include:

  • explanatory entries in the so-called “white space” of the tax return
  • a computation showing how the carried interest figures were calculated
  • copies of any document available to the fund manager showing the sources of carried interest and explaining any reliefs or claims (a “tax pack”)

Although there is no statutory requirement to provide such additional information, doing so reduces the chances of compliance checks being opened to verify figures or understand adjustments.

The following examples show situations in which additional information disclosed alongside the tax return could have reduced the possibility of a compliance check being opened into an individual.

Example 1

It appeared to an HMRC caseworker that an individual’s carried interest entitlement was satisfied by a distribution of interest. The sum was liable to both income tax and CGT (with relief from double tax being available under TCGA92/103KE). The individual only entered a figure in the carried interest box of their tax return, so it was not clear that the interest had been reported. A compliance check was required to confirm. Neither the individual nor their representative had the information available to explain the breakdown of the figures on their return, which delayed the compliance check being concluded.

Example 2

An individual reported trading profits under the Disguised Investment Management Fee rules on their tax return but provided no details of how this had arisen. HMRC had information that indicated that the individual received management fees from multiple sources but was unable to reconcile this with the information in the return. A compliance check was required to verify that all management fee income had been properly reported.

Example 3

An individual working for a US-based firm included carried interest on their tax return. The firm’s policy was to only provide tax reporting prepared for US tax purposes to its UK-based fund managers, so the US tax basis was used for the UK tax return. This resulted in the return being incorrect. This resulted in lengthy information gathering to understand the correct UK tax position, and adjustments being required to correct the tax position.

Difficulties and obligations

HMRC recognises that due to the international nature of many firms, and the complexity of underlying fund structures, the information necessary to accurately report carried interest may not always be readily available despite the fund manager’s best efforts to obtain it.

This does not alter the statutory obligation on a UK tax resident individual to account for the correct amount of UK tax treatment on any carried interest they receive – if HMRC suspects the right amount of tax has not been paid, it will take action.

Relying on tax reporting tailored for other jurisdictions (for example a US tax form) to complete a UK tax return is, absent any steps to obtain further information, unlikely to constitute reasonable care. As explained in the preceding paragraph, in order to satisfy their obligation to take reasonable care HMRC would expect fund managers who are only provided with tax reporting tailored for other jurisdictions to use reasonable efforts to obtain further information, including requesting this from their firm.

Relying on tax reporting tailored for other jurisdictions (for example a US tax form) to complete a UK tax return is, however, unlikely to constitute reasonable care. HMRC would expect fund managers who are only provided with tax reporting tailored for other jurisdictions to request further information from their firm.