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Five tips to make UK fund tax returns easier

08 July 2021

As the summer approaches and yet another staycation beckons, the UK tax compliance season is starting to accelerate for UK based private equity funds. With audit and US tax reporting deadlines passing, thoughts are turning to the UK tax reporting, and soon to the investors’ and executives’ tax returns.

With these compliance challenges in mind, here are ‘five things you should know’ to help you manage UK partnership tax returns this year.

1. It’s more important than ever for the funds and the individuals to see eye to eye on tax – so put a process in place in advance

The profits and losses allocated to a partner on the partnership tax return are final and the individual must report that allocation in their personal tax return. A partner who disputes the allocations on the partnership tax return can only report different figures if they appeal to the First Tier Tribunal. This has the potential to be a messy process, and so it is important to align the UK tax information between what is reported for the fund and carry partnerships and for the fund executives. We can support you with providing tax information to executives to help manage this risk.

2. Multiple tiers of partnerships need to do detailed reporting – map out what returns are needed

If the reporting partnership holds investments in other partnerships, income and losses from each underlying partnership have to be reported separately. This can make for very lengthy tax returns! If the reporting partnership holds investments in five or more underlying partnerships, the separate income sources can instead be temporarily submitted on the approved HMRC template as a pdf attachment to the partnership tax return. This is commonly most onerous in ‘fund of fund’ structures which can have substantial numbers of underlying investee partnerships.

3. Each partnership might need four different tax returns – consider whether this affects your funds

If the reporting partnership has a partner which itself is a partnership (which will be true for almost all private equity fund structures), the partnership profit may have to be calculated on the assumption that there are UK and non-UK resident individuals and UK and non-UK resident corporates participating in the partnership. Preparation of partnership statements on all four separate basis can be avoided if the tax profile of the indirect partners are available for disclosure by the reporting partnership. In such case, only calculations under the basis which are relevant to the named partners need to be prepared. Practically, identifying all of the indirect owners can be challenging and this should be considered early in the process.

4. Nominees must be identified on the fund return –identify all the ultimate owners

Partnerships have to name all the beneficiaries of nominee companies in the partnership tax returns where those beneficiaries are liable to tax on their allocation of the profits of the partnership. Again this information is not always readily to hand – it’s best to prepare for this sooner rather than later.

5. Non-resident partners must have a UK tax reference number, or be eligible to use a notional one – review your investor base now to identify issues

HMRC has recently tightened up the rules around the information that non-UK resident partners have to provide on the partnership tax return. The current process means that non-UK resident partners who participate in a UK investment partnership often do not need to apply to HMRC for a unique tax reference (UTR) number. However, there is an exception where the English or Scottish limited partnership has a non-UK General Partner. HMRC has recently confirmed that the non-UK resident partners in these UK investment partnerships will now have to apply to HMRC for an UTR number.

Many private equity houses are rightly concerned about the impact of having a UTR for partners who have no UK tax nexus, and whether HMRC will issue correspondence or even tax returns in error, causing potential investor relationship issues.

For some private equity firms, the onerous nature of the UK filings can be a factor in deciding whether or not to locate their funds in the UK at all.  BDO have highlighted this in the recent Treasury Funds review – it remains to be seen whether simplification is on the horizon.

In the meantime, these five areas require careful consideration, early planning and good communication with relevant stakeholders – if you need support with these or any other tax reporting matters, please do not hesitate to get in touch.