Yesterday HMRC launched its latest advertising campaign, alerting people that they shouldn’t let the thought of doing their tax return "peck away" at them.
With only 99 days to complete your 2016 / 17 tax returns, here are 101 ways to stop your tax return packing away at your carried interest.
1 – 99
Complete your tax return on any of the 99 days remaining before the 31 January 2019 deadline to ensure penalties and interest do not unnecessarily increase your tax bill.
If you are a UK resident, non-domiciled individual who pays tax under remittance based taxation you do not need to pay UK tax on non-UK sourced carry unless you remit that carry to the UK.
Carry is non-UK source to the extent that:
- the location of the underlying investment is offshore; and
- the individual performs the services outside the UK.
When a person performs services both in and outside of the UK, carry can be split into UK-sourced carry and non-UK sourced carry. HMRC has indicated in its draft guidance that a degree of flexibility is permitted in establishing this split:
- the overarching principle is that the split needs to be on a just and reasonable basis;
- it may be appropriate to look at the place of performance over prior years, not just the year in which carry arises (a view that is supported by the legislation); and
- a simple day count methodology may not always be appropriate - for example if demonstrably more significant management duties are performed consistently outside of the UK a weighted approach should be considered.
Time should be taken to engage with this point well in advance of filing any tax return. Whatever method is used, documentation and records will be essential to support any position taken in a tax return.
Once a split has been determined, ensure the person responsible for making distributions splits the distribution and pays it into separate bank accounts. An unusual feature of the carried interest sourcing rule (and one that can trip up the unwary) is that if the UK and non-UK sourced carry is mixed up in one offshore bank account, when any amount is remitted to the UK, the non-UK source element of a distribution will be treated as remitted before any of the UK source carry. This is true even if a remittance is being made only to fund a tax bill.
Tip 101 is therefore to ensure that you have UK source carry paid into a different bank account to your non-UK source carry (you could split this down even further and have four separate distributions, to deal with UK source gains, UK source income, non-UK source gains and non-UK source income but that is another conversation).