Excess reportable income (ERI) is the profit earned by an offshore fund that isn’t distributed to investors, whether as dividends or interest.
Offshore funds can either be ‘reporting’ or ‘non-reporting’. Funds can apply for reporting status with HMRC if they agree to comply with several rules, like the requirement to have an independent audit and annually report a calculation of reportable income.
These requirements bring the offshore fund more closely in line with the rules for UK funds, meaning they can have a similar tax treatment.
How is ERI taxed?
When an investor sells a position in a non-reporting fund, HMRC will assume all income within the investment has not been taxed and will charge the profit on the sale at the investor’s marginal income tax rate.
Reporting funds, on the other hand, are treated differently by HMRC. This is because reporting funds are required to publish an excess reportable income rate for all the income recorded in the fund, confirming the amount that would have been paid if the fund had paid out. This undistributed income is calculated each year, and investors must pay income tax as if they had received it.
When they sell their fund units, they get extra base cost because they’ve already paid tax on the benefit of keeping the income within the fund. As a result, any gains are taxed as capital gains rather than income.
Why does accurate ERI information matter?
Excess reportable income doesn’t affect every investor – only those with interests in offshore funds outside of an ISA or a SIPP. But with more and more investors having a holding in an offshore reporting fund amid the growing popularity of managed portfolio services, excess reportable income is becoming an increasingly pressing issue.
If ERI information is missing or recorded incorrectly on a tax return, an investor can be fined up to 200% of the tax due, plus interest and potential late payment penalties.
HMRC is also clamping down on unreported offshore interests and investment. According to a report by the Financial Times in September 2023, HMRC sent nearly 24,000 nudge letters in the 2022/23 tax year, up 31% on the previous year, as part of their effort to crack down on tax avoidance.
Does my firm need to provide ERI data?
Though the onus is ultimately on the investor to provide the right information on their tax return if they invest in offshore funds, this information isn’t easy to find. By ensuring that your firm has accurate, up-to-date offshore fund information, you can help your clients avoid hefty penalties and protect against reputational risks for your business.
Access to high-quality ERI data could also help set your firm apart from the competition and ensure you better meet stringent consumer duty standards. This is because if your firm is offering offshore funds to invest in, without being able to satisfy ERI reporting requirements, it could be argued that you are not adequately providing investors with the support they need to avoid foreseeable harm.
How can Raw Knowledge help me?
Sourcing ERI information by yourself can be a frustrating and laborious process. Funds aren’t required to provide ERI data in a standardised way and the information that is there isn’t always accessible on their website or up to date. At Raw Knowledge, we do the heavy lifting of sourcing hard-to-find offshore funds data so you can focus on what matters most: your clients.
Our ERI data solution provides you with a full data set for tax reporting, including fields rarely provided on a fund manager’s original documentation such as equalisation rates and the identification of asset breakdowns.
All our data is verified, structured and traceable, with an internal validation process at each stage, so you can have complete confidence that your reporting will be accurate. In the rare cases we don’t have full coverage of your targeted fund universe, our dedicated team are ready to dig deeper and conduct primary research to source the information you’re looking for.
Want to find out more? Get in touch with our team today.
