OSFG01100 - UK Equivalent Profits

Paragraph 5 Schedule 27 ICTA 1988

In making a computation of UK equivalent profit (UKEP), the basic proposition is to regard the fund as if it were a UK resident company. The computation then follows the principles for UK corporation tax, but subject to specific modifications.

The UKEP is the amount that would be the total profits of the fund, after allowing for any deductions available against those profits, on which corporation tax would be chargeable.

Any expenses that cannot be deducted in arriving at the measure of income from a particular source can only be allowed in calculating the profit chargeable to corporation tax if the fund can meet the criteria to be regarded as a company with investment business (section 130 ICTA 1988) and the expense qualifies to be treated as a ‘management expense’ (sections 75 and 75A ICTA 1988).

There is no automatic presumption that an offshore fund will be regarded as a company with investment business and not every expense that an offshore fund incurs will necessarily satisfy the criteria to be deducted as a management expense. HMRC publishes guidance on its views on management expenses in its Company Taxation Manual.

A summary of some of the specific modifications is given below.

UKEP – Modifications and Extensions

  • The account period for which application for certification is made is regarded as an accounting period (for corporation tax) of the deemed company
  • The fund is assumed to be resident in the UK only for the particular account period being tested. Consequently it cannot bring in losses of either an earlier or a later period
  • ‘Profits’ does not include chargeable gains. But this exclusion does not extend to gains on disposal of interests in non-qualifying offshore funds (offshore income gains)
  • UK company dividends or distributions which would not ordinarily be ‘profits’ for UK corporation tax should be brought into the computation as if they were dividends or distributions of a company resident outside the UK
  • Certain deductions that might otherwise not be allowable can be brought into the computation of profits. In particular
  • any sum that cannot be deducted from ‘income’ because of a restriction imposed by the law of a territory outside the UK, and that restriction exists by reason of an excess of losses over profits (paragraph 5(4)(a) and paragraph 1(6) Schedule 27 ICTA 1988)
  • capital taxes meeting the criteria in paragraph 5(4)(b) Schedule 27 ICTA 1988.
  • sums arising from UK gilts forming part of the income of the fund are to be included
  • Certain provisions applying to UK companies in relation to exchange gains and losses (sections 125 – 133 FA 1993), and to profits and losses on interest rate and currency contracts (sections 159 – 160 and paragraph 1 Schedule 18 FA 1994)are to be ignored.
  • For periods ending after 21 July 2004, where the fund already existed at that date, the fund may make an election under paragraph 1(3) Schedule 26 FA 2004 in relation to income from ‘creditor relationships’ and under paragraph 2(3) in relation to income from derivative contracts, to calculate that income in accordance with the rules applicable to corporation tax.

Any such election must be in writing and be made within 6 months of the end of the first accounting period for which it is to apply. The election should specify the name of the fund, the OFC reference and the first accounting period for which it is to apply. Once made, any such election is irrevocable for that and all later periods

  • Where a fund comes into existence after 21 July 2004, it must calculate its UKEP, including its income from ‘creditor relationships’ and from derivative contracts in accordance with the rules applicable to corporation tax.
  • Where a fund or sub-fund existed before 21 July 2004 and a new class of interest is established after that date, the new class of interest must calculate its UKEP in the same way as the fund or sub-fund does for periods after 21 July 2004
  • Likewise, where an umbrella fund existed before 21 July 2004 and a new sub-fund is established after that date, the new sub-fund must also calculate its UKEP in the same way as the umbrella fund does for periods after 21 July 2004
  • Where the fund itself invests in unit trust schemes or offshore funds, then that investment may, for the purposes of this computation, be subject to the special rules in paragraph 4 Schedule 10 FA 1996
  • Trading: Whether or not the activities of an offshore fund amount to trading will turn on a consideration of the full facts and circumstances of that fund’s particular activities. It is not possible to give any specific guidance on this subject

If a fund is regarded as carrying on a trade then the profits of that activity will also form part of the UKEP

In general, however, a fund whose main objectives and activities are investment, is unlikely to be regarded as carrying on a trade in respect of transactions in its investment portfolio.

  • Where the fund has investments in other offshore funds or unit trust schemes, and seeks to rely on the impact of paragraph 6 Schedule 27 ICTA 1988 it will also need to consider the effect of paragraphs 7, 8 and 9 on the UKEP computation, to bring into account Excess Income from those other funds.

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