ETC tax gulf due to structural inconsistencies

UK tax on gains from exchange-traded commodities (ETCs) can vary between 18% and 50% due to inconsistencies in product structure, according to tax experts.

Exchange-traded product issuer Source says its ETCs are all subject to income tax rates ­- up to 50%.

Other issuers, such as ETF Securities, say their ETCs incur capital gains tax (CGT) at 18% or 28%, as they have filed for and received distributor or reporting fund status.

The issue comes to light following media scrutiny over the tax treatment of gains from ETFs for UK investors. Tax partners say investors holding ETFs that do not have distributor or reporting fund status could pay income tax as opposed CGT.

However, there is less clarity surrounding the treatment of ETCs, as the tax position depends on the specific structure of the product.

PricewaterhouseCoopers UK asset management tax partner Teresa Owusu-Adjei says: "The position depends on whether the features of the ETC itself mean that it's regarded as an offshore fund.

"If it's regarded as an offshore fund, then it falls within the requirement for getting reporting fund status, or you suffer the punitive income rate."

She says an ETC is regarded as an offshore fund depending on whether the features of the product are close enough for it to be regarded as such, based on specific details in the ETC's documentation.

ETF Securities product developer and structurer Townsend Lansing says: "We believe our ETCs are CGT eligible. While we don't give tax advice, we've done a lot of work at looking at our structure and based on that, we're comfortable with that internal view. Naturally, investors must speak to their own advisers to confirm the tax treatment of ETCs."

Source CEO Ted Hood says: "We have been advised that ETCs are securities and are taxed under the rules applicable to securities and not to funds.

"Our understanding of the reporting rules is that they are for offshore funds and clearly our ETCs aren't funds, they're securities backed by assets."

He adds: "We can't apply for reporting fund status, so our ETCs are all subject to income tax."

Lansing at ETF Securities says: "It is true that these tax rules are confusing, leading to ambiguity on treatment and difficulty understanding how to apply them."

HMRC manager of the operational team for collective investment schemes Eric McLennan says the tax treatment of ETCs "is in a state of flux".

He says: "There are different views as to whether ETCs are within the offshore funds regime, on the basis they are offshore funds, or not in the regime because they aren't funds in themselves."

"This is an issue we are looking at actively at the moment and it'll be towards the end of August before we come out with a firm view."