The five most common reporting errors for trusts to avoid

HM Revenue & Custom’s (HMRC) compliance team has identified the five most common errors made by UK administered trusts which are Financial Institutions (FIs) when fulfilling their obligations under the International Tax Compliance Regulations 2015.

These obligations relate to Automatic Exchange of Information (AEOI) which includes the Common Reporting Standard (CRS) and the Foreign Account Tax Compliance Act (FATCA). Any errors should be rectified by submitting amendments using an online HMRC AEOI account, or if relating to the FATCA FFI list, an IRS FATCA online account.

1.Trusts wrongly classified for AEOI purposes

A trust can be either a FI or a non-financial entity. A trust will be classified as an FI where more than 50 per cent of its income is from investing, reinvesting, or trading in financial assets, and another FI has discretionary authority to manage these assets wholly or in part. A trust or settlement is regarded as being managed by an FI where either one or more of the trustees is an FI or the trustees have appointed an FI, such as a discretionary fund manager, to manage the trust’s assets or the trust itself. Trusts that are FIs have to register and submit AEOI returns to HMRC if they have reportable accounts. More information.

2.Due diligence requirements incorrectly carried out

Trusts that are FIs must carry out due diligence on their financial accounts to determine whether any are reportable accounts.  For trusts, financial accounts are the debt or equity interests in the trust. The equity interests are deemed to be held by any person treated as a settlor or beneficiary of all or a portion of the trust, or any other person exercising ultimate effective control, including trustees and protectors.

The debt and equity interests of the trust are reportable accounts if they are held by a reportable person. For example, if a settlor or beneficiary is resident in a reportable jurisdiction (outside of the UK), their equity interest is a reportable account.

The trust that is an FI must apply the due diligence rules in order to determine the identity and residence of its debt and equity interest holders. Please see the due diligence rules.

A trust that has reportable accounts must report the account information and the financial activity for the year in respect of each reportable account. The account information includes the identifying information for each reportable person (such as name, address, jurisdiction of residence, taxpayer identification number, date of birth and account number), and the identifying information of the trust (name and identifying number).

3.Mistakes when reporting discretionary beneficiaries and trustees.

A discretionary beneficiary will only be treated as an account holder in the years in which it receives a distribution from the trust. Other reportable accounts are reportable regardless of whether a distribution is made in the calendar year. More information (para 253).

4.Reporting entities as controlling persons.

Where an equity interest (such as the interest held by a settlor, beneficiary or any other natural person exercising ultimate effective control over the trust) is held by an entity, the equity interest holder will instead be its controlling persons. As such, the trust will be required to look through a settlor, trustee, protector or beneficiary that is an entity to locate the relevant controlling persons. (This obligation corresponds to the obligation to identify the beneficial owners of a trust under anti money-laundering rules). More information (para 253).

5.Errors relating to the IRS FATCA Foreign Financial Institution (FFI) list.

A trust that registers on the IRS FATCA registration website as being a FFI, will receive a Global Intermediary Identification Number (GIIN) from the IRS, upon approval. Some UK administered trusts are incorrectly registered on the FFI list, including trusts that do not meet the definition of being an FFI, or that have already been terminated.

Where FFI registration has been approved but is no longer appropriate, the trust should cancel the agreement. Cancelling a registration agreement that is in approved status will mean it will no longer be published on the FFI List and the GIIN will no longer be valid. The FATCA registration user guide contains guidance on deregistration and cancelling the agreement.

 

Emily Deane TEP, STEP Technical Counsel

Top 10 FATCA/CRS reporting issues

Top 10 issuesWith reporting now underway in the UK for both FATCA (the US Foreign Account Tax Compliance Act) and the Common Reporting Standard (CRS), STEP has been liaising with HMRC on some of the more common reporting issues:

1. The financial institution (FI) has to re-register and is not able to view previous returns on the portal, because login details are unknown following staff changes.

Automatic Exchange of Information (AEOI) portal login details should be held securely and known only by those who need them. The FI should ensure that there is an appropriate procedure to maintain access to their portal. A pseudo email account might be an appropriate solution, providing the FI has robust security and data protection safeguards in place.

2. The FI misunderstands what constitutes an undocumented account.

HMRC has advised that FIs are wrongly reporting accounts as ‘undocumented’ when a self-certification requested from an account holder has not been completed. This has led to numerous accounts being erroneously reported with a GB resident country code. The definition of an undocumented account can be found at IEIM403100.

3. The FI makes a submission using the XML schema which is rejected due to inappropriate re-use of MessageRef, FIReturnRef and AccountRef.

The schema guidance gives comprehensive advice on use of references and can be found here.

4. The FI reports accounts where the account holder is not resident in a reportable jurisdiction.

Individuals who are not resident in a reportable jurisdiction (see IEIM402340) should not be reported. Some jurisdictions which have signed up to CRS are non-reciprocal, and some which have signed up are not yet ready to receive exchanges.

5. The FI reports accounts as being NPFFIs but resident country code is not US.

The term non-participating foreign financial institution (NPFFI) is for FATCA only, in respect of years up to 2016, and not applicable for CRS purposes. If used, the resident country code should be US.

6. The FI reports accounts that are excluded accounts and therefore non-reportable, such as registered pension schemes.

A full list of excluded accounts can be found at IEIM 401720.

7. The FI reports persons who are not reportable.

Under CRS, corporations with regularly traded stock and related entities are not reportable account holders, nor are governmental entities, international organisations, central banks or financial institutions. A list of exemptions to the term ‘specified US person’ under FATCA can be found in Article 1 (gg) of the UK-US Inter-Governmental Agreement (IGA).

8. The FI reports joint individual accounts as entity accounts.

A jointly-held individual account is not an entity account and the account information to be exchanged can be found at IEIM402140. However, partnerships, including general partnerships, are treated as entities, irrespective of their legal form (see IEIM400860).

9. The AEOI enquiry helpline is for financial institutions only.

HMRC requests that you don’t share details of the AEOI enquiry helpline with your account holders. This inundates its AEOI filing team and prevents it from being able to assist FIs with their reporting obligations.

10. The FI leaves filing to the last minute.

Filing submissions sufficiently in advance of the 31 May 2018 deadline allows FIs extra time to deal with any unexpected issues such as missing information, or inaccurate XML schema, that might lead to the submission being rejected.

STEP will continue to consult with HMRC on ongoing technical issues.

Emily Deane TEP is STEP Technical Counsel