Update: HMRC Responds on Investment Funds 18% Tax Rate

Corporate tax rates are coming down to 18% by 2020. But where does that leave investment funds that are currently taxed at 20%? Will the funds rate also come down? Satwaki Chanda has received a response from HMRC to this question. Please see the earlier article for background information. 

This is the text of the original email I sent HMRC on Friday 31 July 2015:

Subject: Corporation Tax Main Rate and Authorised Investment Funds

Dear Miss Milner

I have a query about the forthcoming changes to the corporation tax main rate, which is intended to come down to 18% by 2020.

For many years, authorised unit trusts and OEICs have been subject to corporation tax at a special rate of 20% - this was at a time when the main corporation tax rate was higher at 30-33%. Technically they are taxed at the basic rate of income tax currently in force - which happens to be 20% (ICTA 1988 s 468(1A), followed by CTA 2010 s 614).

What is going to happen to authorised funds when the main corporate tax rate starts decreasing?

The Finance Bill as it currently stands sets out the future rates in Clause 7. However, these changes wouldn't apply to authorised funds as they would still be subject to CTA 2010 s 614. I can't find anything in the Bill that repeals the latter provision.

Is this intentional? Or is it intended that authorised funds will also be subject to the same 18% corporate rate in due course?

Thanking you in advance.

Satwaki Chanda

This is the response I received this Wednesday evening 5 August 2015:

Dear Mr Chanda

Thank you for your email. As you note, and as set out in CTA 2010 s 614, the rate of corporation tax in relation to an open-ended investment company is  related to the basic rate of income tax, not the rate of corporation tax.  The government has no plans to change this link.

Kind regards

Ellen [Milner]

What does it all mean?

Of course this doesn’t answer the question directly. The funds rate will remain linked to the basic rate of income tax – whether this rate will also come down to 18% is another matter. It is unlikely that such a rate change will be made just to satisfy the requirements of retail investment funds. In which case we might have the anomaly of retail funds being taxed at higher rates than the companies in their investment portfolios.

However, as mentioned in my previous article, these funds don’t pay much tax anyway, given the way that they are structured. Accordingly, the anomaly between the funds rate and the main corporate rate is unlikely to have an unduly adverse impact.