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Private equity executives in the UK risk falling foul of tax rules around the reporting of carried interest, experts have warned, after HM Revenue & Customs tightened its guidance on self-assessment tax returns last month.
HMRC cautioned that its compliance checks are more likely if PE fund managers’ returns include “insufficient information” on their carried interest, a performance-related reward that grants managers a share of the profits after investors above a pre-determined hurdle rate. The authority stressed it wants to see as “much information as possible” from PE executives.
Many private equity firms operating in the UK are part of international, typically US-based, firms and executives regularly use information provided by their US head offices for tax reporting purposes. However, the US runs on a calendar tax year while the UK’s runs from April to April, leading to inaccuracies on UK managers’ tax returns.
It is not uncommon for UK managers to get information in a very “US-centric way,” said Lewin Higgins-Green, head of Emea employment tax and reward at FTI Consulting. “As the carry figure is for a calendar year, people will just pretend it’s for the UK [tax] year and convert the USD figure into pounds and report that. Loads of people do that at the moment.”
“Technically it’s never been correct and you shouldn’t have been doing that, but lots of people did,” he added.
HMRC warned this could open them up to receiving penalties — which are on a sliding scale of 0 to 100 per cent of the tax due — for not “taking reasonable care”.
In its updated guidance, HMRC acknowledged the difficulty PE executives face, but added that this difficulty “does not alter the statutory obligation” on a UK tax resident to account for the correct amount of tax on any carried interest. “If HMRC suspects the right amount of tax has not been paid, it will take action.”
Tax experts at Macfarlanes law firm said HMRC’s change to its guidance “has the potential to cause concern” for executives in the PE industry.
“The new guidance is likely to increase the compliance burden and, potentially, the risk of challenge for individuals who have previously relied on non-UK specific tax reporting information in preparing their returns,” two of its associates wrote on its website last month.
The note continued: “HMRC’s example of a US tax form being insufficient is particularly unhelpful, since many fund managers use at least some non-UK focused tax reporting information in preparing their tax returns and this approach has, broadly, been accepted by HMRC to date, where UK specific information is not readily available.”
Higgins-Green said that part of the difficulty for executives stemmed from the UK’s unusual tax year. The 12-month reporting window has ended in April since the UK switched from the Gregorian calendar in the mid 1700s.
“It’s very bizarre that we in the UK stick rigidly with our April 6-April 5 year, it makes it really difficult for people who have global things going on,” he said.
HMRC said: “We’ve not changed the way carried interest should be reported. Everyone is responsible for their own taxes and our updated guidance will help customers get it right first time, reducing the risk of a compliance check.”
