Major changes for Non-UK Resident Companies

Major-Changes-Blog
Share on facebook
Share on twitter
Share on pinterest

Non-resident companies chargeable to corporation tax

From 6 April 2020 significant changes come into effect for non-resident companies. The income from UK property received by these companies currently chargeable to income tax on the UK taxable property income, will become chargeable to corporation tax.

These companies would then be subject to the rules which apply generally for the purposes of corporation tax, including the limitation to corporate interest expense deductibility and loss relief rules. Below we outline some key points to be aware of. The changes could have important implications for cash flow planning, deductibility of interest and compliance Requirements.

 

1. Registration with HMRC

The non-resident companies would be required to register with HMRC for corporation tax (“CT”). Although HMRC are already aware of these companies through the current NRL scheme, a new CT reference number will be issued to the company.

 

2. Tax rate for corporation tax

The rate of corporation tax, which is currently 19%, is due to reduce to 17% from April This is lower than the income tax rate for non-resident companies of 20%, which will continue until April 2020 for non-resident landlords.

 

3. Key dates for filing corporation tax return and payment of corporation tax

Similar to the current income tax regime that applies for non-resident companies, the corporation tax regime is a self-assessment regime, meaning that the taxpayer is responsible for calculating its taxable profits including whether any reliefs apply, tax adjustments are required or whether any anti-avoidance rules apply.

A corporation tax return will be due to be filed with HMRC within 12 months of the end of the relevant accounting period together with the company’s annual accounts. Both of these are then submitted electronically to HMRC in iXBRL format.

For companies that do not prepare accounts in line with the tax year, a time apportionment of income and expenses will be needed for accounting periods that straddle the commencement date. Profits or losses arising in the period to 5 April 2020 will be subject to income tax, with any income arising from 6 April 2020 being subject to corporation tax. 

For example

Proportion taxed under income tax regime (daily apportionment) Proportion taxed under corporation tax regime (daily apportionment)
Accounting year end 31 December 2020
95/365
275/365
Accounting year end 31 March 2021
5/365
360/365

The deadline to settle a company’s corporation tax liability for the accounting period will depend on the size of the company.

Small companies and groups with taxable profits of less than £1.5m will pay their corporation tax nine months and one day after the end of the accounting period.

Companies and groups with taxable profits of more than £10 million for the current year, or with taxable profits of more than £1.5 million for the current and previous year, will be required to pay their corporation tax liability in advance in four quarterly instalments. This does not however apply if the company’s tax liability is less than £10,000 for the current Year.

 

4. Income tax losses – transition to corporation tax

The transition from income tax to corporation tax effectively deems cessation of the business, even though the actual business not only continues, but continues to be subject to UK tax.

Under the income tax legislation, unused income tax property losses on cessation of a property business expire, given that they can only be carried forward against property business profits. However, on the assumption that the income tax loss is a commercial loss, the government considers that it would be reasonable to carry forward this loss from the income tax regime into the CT regime.

The pre-5 April 2020 income tax losses do not carry over as CT losses but will be preserved in a new category of income tax loss – Income Tax Property Losses (“ITPLs”). ITPLs will only be available to offset post-April 2020 property business profits.

The non-resident companies will be restricted to an annual overall loss utilisation threshold of £5 million, plus 50% of any profits remaining over and above £5m.

However, the ITPLs will not be subject to the 50% CT loss cap discussed above. If the property business is terminated, the losses will be extinguished.

 

5. Income tax losses

Non-resident companies will be required to analyse their expenses and split them between

rental, management and non-trade expenses. These are expected to be treated as follows:

  • Expenses directly related to the renting out of the property, e.g. agents fees, will be streamed to offset rental income only.
  • Expenses which relate to the management of a non-resident company will become ‘management expenses’ and will only be deductible against the UK property profit (which is broadly net rental income) in the year. Excess management expenses will be carried forward to be offset in future years. However, if the non-resident company carries on other activities (e.g. it owns non-UK properties or subsidiaries) relief will only be given for expenses directly linked to its UK property business.
  • Any non-trade expenses will not be relievable.


6. Financing costs post April 2020

Currently, non-resident landlords get relief for interest as an expense in working out income tax profits. The only limits on deductibility are the ‘wholly and exclusively’ condition and transfer pricing rules.

From April 2020, the position will be very different. First, financing costs will no longer be deductible as property business expenses. Under corporation tax, interest and finance charges will instead be treated as non-trade deficits which will be offset against financial income, with the excess available to offset rental profits. The loan relationship and derivative contract regimes will now apply and these are very detailed. Issues may arise especially in respect of connected party lending.

Secondly, from 2020, relief for finance costs i.e. non-trading deficits (under the CT regime) against property profits will have to be claimed.

Thirdly, the connected company and unallowable purpose tests will need to be considered.

In some cases, the hybrid rules may apply.

 

7. Corporate interest restriction

Given the rationale behind the move to CT, non-resident corporate landlords will need to navigate the new corporate interest restrictions, which (broadly speaking) limit tax relief for finance costs to a percentage of taxable profits (potentially as low as 30%).

Non-resident corporate landlords, therefore, face a much heavier compliance burden under

  1. Some (particularly those with high leverage and/or significant shareholder debt) may

find that some of their finance costs are no longer deductible.

 

As far as the corporate interest restrictions are concerned, the guaranteed £2m interest capacity (the de minimis) may help some avoid restriction. This is not a solution for all, though. After all, the £2m is a group (not a company) attribute, and, in any event, assuming interest at 3%, would only cover annual interest on a loan under £67m.

We would recommend that early advice is taken for highly leveraged non-resident companies and those with shareholder debt.

 

8. Chargeability to capital gains tax

The UK legislation has been extended to include chargeability to capital gains on disposals of all types of immovable UK property by non-residents (individuals, companies, trusts and personal representatives), for gains accruing on or after 6 April 2019.

From 6 April 2019, the rules will apply also to non-residential property such as offices, factories, warehouses, shops, hotels, leisure facilities and agricultural land located in the UK in addition to residential properties.

All non-resident persons’ gains on both direct disposals, and indirect disposals i.e. disposal of shares in property rich companies (i.e. 75% or more of its value is derived from UK property), of interests in UK land will be taxable in the UK.

There are provisions included in the legislation to rebase properties at 6 April 2019 so that only gains accruing after this date are chargeable. However, in respect of direct disposals, there are instances where the historic cost may be more beneficial and therefore, can be applied instead of the rebased value.

Furthermore, all non-UK resident companies will be charged to corporation tax (currently at 19%, reducing to 17% from April 2020) on their gains from 6 April 2019, rather than Non-Resident Capital Gains Tax. Therefore, a corporation tax return may have to be filed during the 2019/2020 tax year if there is a gain realised on immovable UK property by a non-resident company – a year earlier then requirement for the non-resident company to be compliant with the corporation tax regime. 

 

 

Going forward

We strongly recommend that all non-resident companies review the impact of changes as soon as possible.

In particular, those companies potentially affected by interest restriction need to start planning ahead of the changes.

If you would like to discuss the changes, please contact your usual contact manager or

Akshi@telic.co.uk and Vipool@telic.co.uk. Alternatively, please contact us by telephone on 0208 5151234.

If you would like to discuss this further, don’t hesitate to get in touch.

Share this post with your friends

Share on facebook
Share on twitter
Share on linkedin