The rental profits of UK property businesses generated by non-UK resident companies currently fall within the UK Income tax (IT) regime, with profits charged at a rate of 20%. However, from 6 April 2020, such profits will fall within the UK Corporation Tax (CT) regime, which is currently charged at a rate of 19%.
Generally, the UK CT rules are considered more complex than the UK IT rules, and so non-UK resident companies operating UK property businesses will need to familiarise themselves with the differences between the regimes. The important aspects to consider under the corporation tax regime are as follows:
- Differences in relief for finance expenses. Under the UK CT regime, interest and other finance costs are not taken into account in arriving at the taxable profit or loss of the UK property business, but instead relief is provided under the loan relationship regime, subject to the corporate interest restriction.
Under the loan relationship rules, interest expenses and other finance costs are generally brought in as non-trade loan relationship debits and are offset against interest income and other finance receipts for the period. Where non-trade loan relationship debits exceed the credits, the result is known as a non-trade loan relationship deficit, which may be offset against profits of the UK property business or carried forward for relief in later periods.
There is a limit on the amount of non-trade loan relationship deficit that a company or group can deduct under the UK CT regime, known as the Corporate Interest Restriction.This restriction has a de-minimus of £2m of net interest expense per annum per standalone company or group.
Differences in the loss relief rules under each regime. Under the income tax regime, property rental losses can only be offset against future rental profits of the business without restriction on the amount of losses. Under the UK CT regime, the use of such losses may:
- be offset against other profits in the same accounting period
- be group relieved and offset against the profits of other companies in the group – group relief is not available under the income tax regime
- any remaining losses may be carried forward and offset against other profits in later accounting period, subject to some restrictions and as long as the property business is still being carried on in that accounting period
Differences in administration. Currently non-resident companies are required to submit a non-resident company paper tax return (SA700), which must be submitted by 31 January following the tax year. Under the UK CT regime, companies are required to submit a Company Tax Return online. As part of this submission, companies will be required to file company accounts and tax computations which will generally need to be produced in the Inline eXtensible Business Reporting Language (iXBRL) format.
Under UK CT rules, the profits of a company are calculated by reference to the company’s accounting period, which in most circumstances is the period for which the company prepares accounts.
The filing deadline for a Company Tax Return is generally 12 months from the accounting period end.
The payment deadline is generally nine months and one day from the accounting period end, however a company may be required to make payments by instalments where its taxable profits exceed £1.5m in a year.
Consideration will also need to be given to transitional rules that may apply to non-resident companies as they move into the CT regime.
Where a period of account straddles 6 April 2020, the profit or loss arising in the first period to 5 April 2020 will be chargeable to IT and the profit or loss arising in the second period from 6 April 2020 will be within the charge to CT.
Non-resident companies with unrelieved losses that arose under the UK IT regime at 5 April 2020 will be able to carry these losses forward into the CT regime to offset against future rental profits of the UK property business. The losses arising under the IT regime may not be offset against other types of profits recognised in the non-UK resident company.
Companies with capital allowance pools under the IT regime at 5 April 2020 will not be subject to a balancing adjustment on transfer of these pools to the CT regime.
Finally, a brief mention on VAT, although the rules discussed above will not disturb the VAT treatment, it is useful to remember that a non-resident landlord, whether incorporated or not, owning UK property does not normally create a “fixed establishment” for VAT purposes in itself. Nor is an establishment capable of receiving or making supplies created by the simple fact that the company is a UK corporate with a registered address in the UK.
In recent times HMRC have sought to clarify when a fixed establishment is created for VAT purposes, including when the non-resident landlord appoints a UK agent or representative to carry out their instructions. Whilst there are circumstances where a fixed establishment could be created by using a UK property agent, most contracts with third party property managers should not.
Therefore, it should still be the case following the direct tax changes discussed above, that UK costs eg management of a property investment portfiolio, incurred by the non-resident landlord are still considered to be supplied the overseas landlord and so potentially outside the scope of UK VAT, provided that there is no other establishment in the UK capable of receiving those services.
In summary, although the changes will mean that non-UK resident companies with UK property businesses will potentially be subject to a lower tax rate under the CT regime, they will also be subject to the Corporate Interest Restriction and the additional administrative burdens and complexities inherent in this regime.
If you require further information on the proposed changes or wish to discuss your current position to see if there are any options with regards to UK or overseas properties, please contact John Elliott or Tom Ryan on 0151 236 1494.
