With the attention of EIS fund managers and VCT advisers drawn towards the Christmas break and the new year fundraising push, the 22nd December 2014 – which seems a long time ago now – passed with many being unaware that this was the FATCA registration deadline. Many therefore failed to register with the IRS as required.

This failure to register may well have been due to a widely held but incorrect perception that FATCA only targets commercial banks when in fact it goes much further than this: EIS fund managers and VCTs along with custodians, family offices and many others will fall within the ambit of FATCA and will have certain due diligence and reporting obligations.

FATCA is the abbreviation for the Foreign Account Tax Compliant Act 2010, a piece of US legislation that puts an onus on foreign financial institutions to carry out due diligence on certain existing – and all new – investors to determine whether they are US citizens or US residents for tax purposes or whether they are US body corporates or body corporates controlled by US citizens or corporates and then report this information to the IRS.

It was introduced at the behest of the IRS due to a feeling that many US citizens were actively avoiding US taxes – and US citizens pay tax on their worldwide income and assets – by investing in foreign investment funds and depositing money in foreign bank accounts. The tentacles of the IRS are long but not long enough to monitor every recalcitrant US taxpayer and so with FATCA, the IRS sought the help of the foreign financial institutions to provide the information it requires to clamp down on overseas tax evasion.

One might wonder why UK fund managers and VCTs have to comply with legislation passed across the Atlantic? To implement FATCA worldwide, the US signed treaties with various countries to ensure that FATCA has global effect. The UK treaty is imaginatively called the “UK-US Agreement to Improve International Tax Compliance and to Implement FATCA” (the “Treaty”). This in turn was implemented by the Finance Act 2013 and The International Tax Compliance (United States of America) Regulations 2014 which came into effect on 30 June 2014 (the “Regulations”).

The Regulations provide for HMRC to be responsible for governing FATCA compliance in the UK. As such, once fund managers have registered with the IRS, it will be HMRC to whom UK financial institutions need to report. HMRC will in turn forward on details of reportable accounts to the IRS.

How do VCT and EIS fund managers fall within FATCA?

FATCA in the UK will catch any entity which is deemed under the Regulations to be a “financial institution”. Several categories of businesses are categorised as financial institutions, one of which is “investment entity”. It is this category which VCTs and EIS fund managers are likely to come within. This on the footing that they carry out individual or collective portfolio management or are otherwise investing, administering or managing funds on behalf of other persons.

Where a manager manages a collective investment scheme (“CIS”), if the CIS has its own separate legal personality, then it will be the CIS itself who will be the reporting financial institution. It is important to note that what constitutes a CIS for the purposes of the Regulations is wider than under section 235 of the Financial Services and Markets Act 2000. VCTs, for example, come within the CIS definition in the Regulations but not in FSMA. As a VCT is a body corporate with separate legal personality, it will be the reporting financial institution for purposes of FATCA, not its manager or where it is self managed for AIFMD purposes, its adviser.

In the case of CISs without their own legal personality, an example of which would be an EIS fund without withdrawal rights or an English limited partnership investment fund, it will be the manager or operator who will be the relevant financial institution in respect of that CIS.

FATCA Due Diligence and Reporting

VCTs and EIS fund managers will have to determine whether they have any reportable accounts and when they make their FATCA report to HMRC, provide details of any reportable accounts they do have.

For investment entities, a reportable account will include any equity or debt interests (other than interests that are regularly traded on established securities markets). As investors’ VCT shares are publicly traded, it therefore follows that a VCT will not have any reportable accounts. This does not mean the VCT will not have to file a report to HMRC; it still will but its report will merely state that it has no reportable accounts. An EIS fund manager however will have reportable accounts as the investors in its EIS funds will hold the beneficial interest in shares in unquoted companies.

A review of any existing “reportable accounts’ with a value of $50,000 (approx. £34,000) held by individuals needs to be carried out to ascertain whether the account holder is a US citizen or a US resident for tax purposes. To do this, a fund manager would need to look for signs of “US indicia”. This might encompass evidence of US citizenship, a US address or place of birth or a current US telephone number, standing instructions to transfer funds to a US bank account or a power of attorney granted to a person with a US address.

With new reportable accounts, a fund manager needs to ascertain where they are a resident for tax purposes, whether they are a US citizen and if they are, obtain their US taxpayer identification number (“TIN”). This information can be obtained from new investors with an upgraded application form.

Fund managers and VCTs will have to submit an annual FATCA report to HMRC before 31 May this year. The report will have to contain details of any reportable accounts including the name and address of the account holder, the account’s value and the account holder’s TIN. If an EIS fund manager or a VCT has no reportable accounts, the report merely needs to state this.

Penalties for non-compliance

The UK penalties for non-compliance are not too draconian though not insignificant enough for FATCA to be ignored completely. A fund manager has to pay a fine of £300 if it fails to comply with any of the Regulations and £60 for each subsequent day in which it does not comply after receiving the £300 which could, in theory, lead to a maximum fine of £21,840 per year.

If a fund manager or VCT has extensive US investments or is seeking to expand into the US, then a far more significant risk it faces than HMRC fines is the prospect of a 30% withholding tax imposed by the IRS on any US source income. This would include gains on a disposal of US assets. US companies may also want to see evidence of FATCA compliance before they receive any investment from UK financial institutions.

Next Steps

If they haven’t done so already, EIS fund managers and VCTs need to register with the IRS to obtain a global intermediary identification number; this number will need to be provided to HMRC in the annual report. It would also be sensible for EIS fund managers to upgrade their investor application forms for new funds so that prospective investors can provide all the requisite information or confirm that it is not applicable to them.

Finally, a process needs to be introduced – and internal responsibility designated – for the review of existing accounts and for compiling the HMRC report.

With HMRC’s 15 May reporting deadline only around the corner, it is important that FATCA compliance is on everyone’s agenda.