Changes to gross interest distributions by UK OEICs, AUTs and investment trust companies

As part of our expert commentary on the 2016 UK Budget, we reported that following on from the introduction of the personal savings allowance from 06 April 2016 and the removal of UK withholding taxes on savings income paid by banks and building societies from that date, HM Government had announced that it will change the tax rules so that interest distributions paid (or treated as paid in the case of accumulation interests) by UK open-ended investment companies (OEICs), authorised unit trusts (AUTs) and investment trust companies (ITCs) may be paid without deduction of income tax from 06 April 2017.

HMRC is currently consulting with the Investment Association (the IA) on draft legislation which is expected to form part of the Finance Bill 2017 that would make this change. Typically, draft clauses for the Finance Bill 2017 would be expected to be published in late 2016, with the enactment of the Finance Bill 2017 expected in Summer 2017.

The IA’s circular 284-16 (the Circular) published on 23 August 2016 confirms that, as expected, UK authorised funds and ITCs will be required to start paying all interest distributions gross, ie, without deduction of basic rate income tax, from 06 April 2017. The IA has provided guidance to members on how to achieve this, particularly for funds with distribution periods that straddle 06 April 2017.

Funds that are affected by these changes will need to take action promptly and, where possible, before the start of the first distribution period with a payment date on or after 06 April 2017. Action to be taken by funds in response to the change will include:

• Changes to unit pricing, and
• The creation and implementation of appropriate procedures to enable the move from net to gross distributions.

To the extent this is not done, the Circular flags potential risks, including from a regulatory perspective as to whether the “treating customers fairly” obligation has been satisfied.

In particular, funds that have already commenced the distribution period with a payment date on or after 06 April 2017 will need to bear in mind the potential impact on investors that have either joined or left the fund during the distribution period.

For funds that operate distribution periods starting on 01 September 2016 and in respect of which the relevant payment date is after 05 April 2017, such that the new gross payment rules will apply, limited time is available to consider these processes to allow a move to gross pricing as soon as is practicable.

In connection with these changes, the Circular states that HMRC accepts that in determining a fund’s UK corporation tax liability, the full amount of any interest distribution may be deducted, including any income distributed by way of redemption proceeds. The Circular also states that, from the perspective of investors, amounts representing accrued income forming part of redemption proceeds should be paid gross of tax, even where the payment date is prior to 06 April 2017. The Circular does not consider the potential risks for funds moving to gross pricing should the relevant change in law not be enacted in Finance Act 2017, and it remains to be seen whether HMRC will itself issue any announcement in connection with the proposed changes.

Fund documentation, including constitutional documents and offering documents, will need to be reviewed in order to assess the impact of the above changes upon the fund and to consider what, if any, amendments are necessary. Any changes will need to be assessed in the light of obligations to notify and/or to seek investor/ FCA approval in FSMA/ OEIC Regulations and the FCA’s Collective Investment Schemes Sourcebook (COLL). Authorised fund managers should liaise with relevant services providers, in particular, accountants, auditors and depositaries, in order to establish and implement the necessary changes to fund accounting and pricing processes.

Please contact Neil Simmonds (Financial Services), Ursula Goniszewska (Financial Services) or Martin Shah (Tax) for more information.