HMRC update their Investment Funds Manual (at IFM37800 and IFM37850).
In recent years, we’ve seen an uptick in the number of HMRC enquiries into the tax returns of fund managers receiving carried interest. These enquiries can be complex and difficult to resolve.
Particular problems arise for executives working in international private capital businesses, where HMRC recognises it can be hard for executives to get hold of the information needed to accurately report their carry returns. For example, a fund manager might only provide US tax reporting (in the form of a K1) to its executives, offering no specific guidance on how distributions should be reported for UK tax purposes.
HMRC have released new guidance on the steps taxpayers can take to minimise the risk of HMRC enquiries in relation to carry. Key points to note:
Perhaps unsurprisingly (given their legal duties to collect and administer UK tax), HMRC have relatively limited sympathy with taxpayers who rely on tax reporting tailored for other jurisdictions to complete their UK returns, saying that fund managers must pay the correct amount of UK tax and HMRC will take action if they don’t. However, in an ‘olive branch’ to industry, HMRC explain that it can only charge penalties where a taxpayer has failed to take ‘reasonable care’. Generally, this means fund managers should use reasonable efforts to obtain the necessary information, including asking their firm. Where they do this, HMRC should not charge penalties if the return is incorrect.
HMRC encourage the disclosure of ‘as much information as possible’ and in this regard, they clearly like ‘tax packs’: information provided by firms to their executives setting out how carry distributions should be reported for UK tax purposes. HMRC recognise there is no statutory obligation on firms to provide this information but indicate enquiries are less likely where the information is provided.
Much of the current complexity in carry reporting derives from the fact that carry is (as a starting point) taxed according to the underlying nature of the return: is the return a gain/interest/dividend? Looking ahead to the new carry rules (to be introduced from 6 April 2026), we expect that the tax treatment of carry should be simplified given the rules will operate as an exclusive tax charge. We would therefore hope that this leads to a reduction in the amount of information that HMRC expects from executives.
HMRC update their Investment Funds Manual (at IFM37800 and IFM37850).
In recent years, we’ve seen an uptick in the number of HMRC enquiries into the tax returns of fund managers receiving carried interest. These enquiries can be complex and difficult to resolve.
Particular problems arise for executives working in international private capital businesses, where HMRC recognises it can be hard for executives to get hold of the information needed to accurately report their carry returns. For example, a fund manager might only provide US tax reporting (in the form of a K1) to its executives, offering no specific guidance on how distributions should be reported for UK tax purposes.
HMRC have released new guidance on the steps taxpayers can take to minimise the risk of HMRC enquiries in relation to carry. Key points to note:
Perhaps unsurprisingly (given their legal duties to collect and administer UK tax), HMRC have relatively limited sympathy with taxpayers who rely on tax reporting tailored for other jurisdictions to complete their UK returns, saying that fund managers must pay the correct amount of UK tax and HMRC will take action if they don’t. However, in an ‘olive branch’ to industry, HMRC explain that it can only charge penalties where a taxpayer has failed to take ‘reasonable care’. Generally, this means fund managers should use reasonable efforts to obtain the necessary information, including asking their firm. Where they do this, HMRC should not charge penalties if the return is incorrect.
HMRC encourage the disclosure of ‘as much information as possible’ and in this regard, they clearly like ‘tax packs’: information provided by firms to their executives setting out how carry distributions should be reported for UK tax purposes. HMRC recognise there is no statutory obligation on firms to provide this information but indicate enquiries are less likely where the information is provided.
Much of the current complexity in carry reporting derives from the fact that carry is (as a starting point) taxed according to the underlying nature of the return: is the return a gain/interest/dividend? Looking ahead to the new carry rules (to be introduced from 6 April 2026), we expect that the tax treatment of carry should be simplified given the rules will operate as an exclusive tax charge. We would therefore hope that this leads to a reduction in the amount of information that HMRC expects from executives.
