ERI tax to be paid before tomorrow

[wickham]

My stockbroker has sent me a letter saying that Excess Reportable Income on some equity funds needs to be paid by tonight.

The stockbroker apologised and said "ERI values should have been reported to investors by the Fund Manager of each relevant Offshore Fund during the six months up to the notional 'distribution date'. However, a delay in reporting and the inconsistent manner with which Funds actually report has created an industry-wide issue." Excuse or not, it hasn't left me much time as HMRC charges interest and a penalty that could be 100% or 200%.

ERI is where a fund has reportable income that is not distributed.

If a fund holds back some income (ERI), which I have to pay tax on now, and then distributes the income next year or later, I'll be paying tax twice. Is this correct?

[Hariseldon58]

The excess reportable income issue is not widely understood and I imagine 90%+ of investors will be potentially liable to this.

There is a article in the FT this weekend covering this.

You are not being required to pay tax ahead of time , the deadline is for previous years.

ETFs that reinvest income are rather like accumulation units of OEIC’s, there is clearly tax to pay on reinvested income , none of the brokers that I use or have used have ever provided the information for your tax return.

The complication is that if you own the ETF on the relevant date then you are deemed to have received the income and it is deemed to be paid 6 months later, for some ETFs this pushes it into the following tax year when you might not even own it.

The extra complication is that the ETFs that do pay out income as dividends can generate very small amounts of ERI, yet the broker does not inform you and the information is on the ETFs providers website , it’s not always easy to find. Much easier when they are in an ISA or SIPP

I suspect that HMRC will be pragmatic on this issue and the brokers will start providing the information at the end of this years tax year.

[wickham]

The letter I received was for a previous tax year and 2017/2018.
Having paid tax on the ERI for a previous year now, will I be liable for tax on the same money when it is paid out as a dividend in a future year?

[wickham]

To explain a little better what I mean, I was told that a company made a profit, allocated sums as dividends but didn't pay it all out. Consequently this excess money remains available for distribution as dividend and inflates the dividends that can be paid out in future years, so I will pay tax twice on the excess carried forward. Is that not true?

[Alaric]

The excess reportable income issue is not widely understood and I imagine 90%+ of investors will be potentially liable to this.

It seems to be an added complication with Dublin based ETFs which represents most of the ETFs generally available to retail clients. Irrelevant if you hold them through ISAs or SIPPs, but perhaps not if held in a taxed account.

The excess documentation funds are now obliged to provide under an EU directive tell you things you already know about the effects of compound interest, but appear completely silent about tax reporting.

If there's a choice between a passive fund in the form of an Dublin ETF and an active one in the form of a UK Investment Trust, if the ETF has obscure and difficult to validate tax reporting requirements that could be a tie break in favour of the IT.

[Hariseldon58]

Wickham
I don’t think you will pay tax twice on ERI as you explain your question.
The situation might be that income is received, most is paid out as dividends but a small part may have been used to pay expenses of the fund perhaps. It’s that small amount that has been spent but not distributed that remains taxable but clearly it won’t be paid out later and thus not taxed twice.

Less than ideal, it’s likely that brokers will provide the information in the future but I have been reducing my accumulating ETFs in my taxable account to avoid these very issues but now it seems that the other ETFs also represent a liability in a taxable account.

Annoying !

[Alaric]

Less than ideal, it’s likely that brokers will provide the information in the future but I have been reducing my accumulating ETFs in my taxable account to avoid these very issues but now it seems that the other ETFs also represent a liability in a taxable account.

It occurred to me that if it's immensely difficult to research and report taxable income in these ETFs with excess reportable income, it's equally difficult for HMRC to contest the validity of a tax return only declaring income received or income reported.

It's a point in favour of the IT reporting structure as against ETFs where it's a specific concession that the IT is enabled to retain income for future distribution without adverse tax consequences.

[Hariseldon58]

Alaric

The ETF taxation situation is somewhat messy ! You have the question of whether they have reporting and or direubution status and then you the Excess Reportable Income.

Whilst the ETFs are generally offshore, there is no reason nowadays why they could not be onshore, as the rules were changed a few years ago to allow this.

If one thinks of the complexity of an accumulating OEIC or buying Gilts with equilibrium then ETFs are really not so bad. The present difficulties are simply lack of information from the brokers.

With an Investment Trust you receive a tax report from the broker stating income received ( which can be foreign income for some trusts) then a similar report for an ETF could be provided that was simply the sum of dividends paid plus a small bit over for the ERI.

The Investment Trust structure has many positive points, a closed end fund doses not need worry so much about liquid if it’s investments, this is a huge plus in a falling market, no redemptionsnon a daily basis, discounts, separate board overseeing management, ability to pay dividends from reserved income or capital gains , gearing....

The ETF has positive points too, just a shame that the level of tax reporting is presently sub par, it’s likely to get better soon.

[daveh]

Well I topped slice a share in my HYP that had done very well and used the cash to bed and isa other shares which ended up with moving the cash from the top slice from within the ISA to my taxable account. This brought my taxable dividend income below the £2000 dividend allowance but left me with a lot of uninvested cash in the taxable account. So I bought some VVAL (ETF) which has accumulation units. I looked on the Vanguard site and could find nothing that said I would be taxed on the income received by the ETF, but not distributed. I have now looked much harder and found that the undistributed income will be taxed (as income), which rather defeats the object of purchasing it. Fortunately I didn't hold on the relevant date for this tax year (18/19) which is 30June18 and provided I sell by 30June19 I will not be due to pay tax on them in 19/20.

The situation seem rather complicated, with the ERI being taxed as income and then the purchase cost being reduced to account for the income that has been rolled up in the accumulation units. I had been hoping that I would just pay (or not) CGT when I sold with the rolled up dividend increasing the CGT.

[Alaric]

So I bought some VVAL (ETF) which has accumulation units. I looked on the Vanguard site and could find nothing that said I would be taxed on the income received by the ETF, but not distributed. I have now looked much harder and found that the undistributed income will be taxed (as income), which rather defeats the object of purchasing it.

It's always been the case with mainstream OEICs (and ETFs), that even if you held Accumulation units, you were liable to tax on the distributions. That didn't matter unduly in the past, since there was no additional tax to pay if you were a basic rate taxpayer and anyway you received on OEICs an annual statement of income accumulated into the asset price.

With ETFs it's become doubly complicated, firstly that the £ 2000 dividend rule is likely to make a lot more people liable and secondly that mechanisms for notification of this potentially taxable income aren't well established and reliable.

[wickham]

In my rush to inform HMRC of the ERI I used the official form. I thought it would be a simple task to inform them of the amount and they would work out the tax as they had from my annual tax return.

In fact I was confronted by a very complicated form that made me feel like a criminal. It asked me to state whether I had made a simple mistake or various other reasons for not including it in my return like deliberate evasion. It also asked for the total amount invested offshore which I didn't know precisely and I'm not sure why this is relevant. It also asked me to state the amount of tax I owed whereas the annual tax return had been calculated automatically. I paid 40% immediately although after doing some research since I think it should have been about 38%. The difference is negligible. It also asked me to state the interest and penalty applicable so I stated 0.

I don't have an accountant and don't want to employ one. Tax for individuals needs to be radically simplified.

[daveh]

So I bought some VVAL (ETF) which has accumulation units. I looked on the Vanguard site and could find nothing that said I would be taxed on the income received by the ETF, but not distributed. I have now looked much harder and found that the undistributed income will be taxed (as income), which rather defeats the object of purchasing it.

It's always been the case with mainstream OEICs (and ETFs), that even if you held Accumulation units, you were liable to tax on the distributions. That didn't matter unduly in the past, since there was no additional tax to pay if you were a basic rate taxpayer and anyway you received on OEICs an annual statement of income accumulated into the asset price.

With ETFs it's become doubly complicated, firstly that the £ 2000 dividend rule is likely to make a lot more people liable and secondly that mechanisms for notification of this potentially taxable income aren't well established and reliable.

Its now very complicated and not easy to find out what the tax situation is from the company (in this case Vanguard's) website. I knew before hand that this might be the situation so looked hard through to see if the non distributed income was taxed as income or not, and couldn't find anything about it in any of the documents relevant to the ETF. I actually found it by searching for "Excess Reportable Income" (ERI didn't work) on Vanguard. This thread was useful as it gave me the correct search terms to try.

I'm reasonably sophisticated when it comes to investments and failed to find the info knowing that this might be the situation and trying to find it. It would be very easy for a less sophisticated investor not to find this, have tax to pay and fall foul of the tax person. It would be interesting to know if this would appear in my tax certificate issued by my broker, but I plan selling before June 30th next year to avoid the situation - fortunately I should be able to do a bed and ISA with next years ISA allowance.