From 6 April 2020, all non-resident companies are subject to corporation tax on UK property income and the non-UK resident landlord regime ceased to apply for non-resident companies.

This article outlines some of the key tax changes affecting UK property rental income earned by non-UK resident company landlords (NRLs), the transition to corporation tax and the main differences that apply from April 2020. These changes, however, do not make the non-resident company UK tax resident.

Overview

Prior to April 2020, NRLs were subject to UK income tax rather than corporation tax on their UK property rental income.

Some NRLs may already be subject to corporation tax if the company:

• Carries on a trade through a UK permanent establishment, or
• Carries on a trade of dealing in or developing UK land.

However, a company may also have been filing income tax returns in respect of UK property rental income.

Additionally, from 6 April 2019 disposals of UK investment property by non-resident companies have been subject to corporation tax.

This article considers the corporation tax position of a NRL that solely receives UK property income and does not seek to provide an overview of the previous taxation treatment.

New regime

From 6 April 2020, the taxation of UK property rental income of NRLs changed to bring such income within the scope of corporation tax.

The corporation tax regime operates under self-assessment, where the responsibility is placed on the taxpayer to consider the application of the tax legislation and calculate their tax liability.

If the NRL has any other income subject to income tax (such as offshore receipts in respect of intangible property), these rules do not affect the tax treatment of that income. The changes covered in this article apply to the UK property rental income only.

There are a number of differences between the calculation of taxable profits for income tax purposes and corporation tax purposes.

The transition period

The final income tax return to be filed for the period ending 5 April 2020 is due to be filed on or before 31 January 2021.

Relevant accounting period

As most companies do not prepare accounts or financial statements for the period ending 5 April, there will be a requirement to apportion income and expenses to calculate the taxable profits for the periods subject to income tax and corporation tax.

HMRC have automatically registered existing NRLs for corporation tax with a first accounting period from 6 April 2020 to 5 April 2021. If the company’s accounts are not prepared to 5 April, the company must notify HMRC of the correct accounting reference date. This date will then become the end of the accounting period for future periods. Failure to notify HMRC may result in late filing penalties, which are by reference to the accounting period-end.

Tax payments

A transitional rule has been introduced so that quarterly corporation tax instalment payments for ‘large’ companies and ‘very large’ companies will not apply to the first accounting period. For the first period starting on 6 April 2020, any corporation tax liability will be due for payment on or before 9 months and 1 day after the end of the period.

Any overpayments held on a company’s income tax account up to and including 2019/20 will be repaid to the company.

If a company is liable to income tax on other income after 6 April 2020, payments on account of income tax for 2020/21 are still required but will need to be reduced in relation to the UK property rental business which is no longer subject to income tax.

Capital allowances

On transition, the capital allowances tax written down values of any pools as at 5 April 2020 will transfer from income tax to corporation tax. There will be no balancing charge or balancing allowance.

For the first accounting period for corporation tax, a time apportionment may be required to calculate the writing down allowance available for this period.

Income tax losses carried forward

Similarly, UK property rental losses carried forward as at 5 April 2020 will transfer from income tax to corporation tax under a new loss category – pre-April 2020 income tax property losses.

Any pre-April 2020 income tax property losses may be utilised as follows:

• Losses will be available for offset against future UK property business profits (and non-trading loan relationship income linked to the UK property business). However, these losses will expire if the UK property business ceases.
• There is no restriction to the amount of losses that can be utilised.
• The losses must be utilised in priority to any corporation tax losses arising after 6 April 2020.
• It is not, however, possible to surrender the losses in the form of group relief or offset the losses against chargeable gains.

The standard corporation tax loss relief legislation will apply for any UK property rental losses arising on or after 6 April 2020.

New considerations for corporation tax

Tax return filings

Corporation tax compliance is based upon accounting periods rather than the income tax year. The filing deadline is 12 months after the end of the accounting period.

Corporation tax returns must be electronically filed with accounts and tax computations suitably tagged in iXBRL format. There are exceptions from iXBRL tagged accounts, for example where a balance sheet is not prepared for the UK property business, and instead, PDF accounts may be filed with the iXBRL compliant tax computation and return.

Using a tax agent

A new agent authorisation (either paper form 64-8 or online authorisation) will be required for a tax adviser to deal with the company’s corporation tax. Any previous income tax authorisation will not automatically apply.

Tax payments

The payment date of corporation tax should be considered for each accounting period. This will depend on the taxable profits and number of related 51% group companies at the end of the previous accounting period.

A summary of the three categories of taxpayer to consider are:

1. Not large companies – Tax payments are due on or before 9 months and 1 day after the end of the accounting period.
2. Large companies – Tax payments must be paid in quarterly instalments (starting 6 months and 13 days after the start of the accounting period).
3. Very large companies – Tax payments must be paid in quarterly instalments (starting 2 months and 13 days after the start of the accounting period).

Loss utilisation

As a consequence of coming within the charge to corporation tax, NRLs may be able to utilise losses arising after 6 April 2020 within the company or group. However, the various methods, timings and conditions will require more consideration than previously was the case under income tax.

Some of the ways to utilise any losses arising after 6 April 2020 are as follows:

• Current period offset of losses against profits of a different activity of the same company that is subject to corporation tax (such as a trade of dealing in or developing UK land).
• Carried forward losses may be offset against total profits of the company provided the UK property rental business is still being carried on. The loss utilisation is restricted to 50% of the profits in excess of the group deductions allowance of £5m per annum on a group basis.
• Surrender of the losses by way of group relief to other group companies that are within the charge to UK corporation tax. The surrender by way of group relief can be in the same period in which the losses arise (Part 5, CTA 2010) or they can be carried forward and group relieved against future group profits (Group relief for carried forward losses under Part 5A, CTA 2010).

Capital allowances and land remediation relief

Capital allowances continue to be available to offset against the UK property rental income.

NRLs will be able to avail of land remediation relief as the companies are now within the corporation tax regime.

Loan relationships and derivative contracts

Tax relief for interest and other finance expenses of the UK property business is available under the loan relationship legislation rather than as part of the net profits arising from UK property. Normally the costs are aggregated to determine a non-trading loan relationship profit/ deficit for the period.

Additionally, profits or losses from derivative contracts held for the UK property business may be included in the calculation of the non-trading loan relationship profit or deficit for the period.

It may be possible for a company to elect into the Disregard Regulations to ‘disregard’ certain derivative contract movements, subject to meeting the necessary conditions.

Corporate Interest Restriction (CIR)

The CIR legislation applies a limit to the amount that a company or group may deduct for interest and other financing costs.

Broadly, CIR limits tax relief for interest deductions to 30% of ‘Tax EBITDA’, subject to a cap based on the net group-interest expense of the worldwide group.

CIR does not apply to a company or group of companies that have a net deductible interest and other financing costs of less than £2 million for a 12-month period.

Additionally, there is an option to apply the group ratio or, where the necessary conditions are met, a public infrastructure exemption. The rules and conditions are complex and are not covered in this article.

Hybrid mismatches

A further area of corporation tax legislation that may apply to NRLs for the first time from 6 April 2020 is the hybrid and other mismatches legislation (Part 6A, TIOPA2010).

Primarily the hybrid mismatches legislation seeks to disallow corporation tax relief in the UK if there is a direct or indirect mismatch arising from, or in connection with any hybrid entity, hybrid financial instrument or multinational company. A mismatch can either be a deduction/non-inclusion mismatch or a double deduction mismatch.

Conclusion

The transfer to the corporation tax regime means NRLs will need to consider a new set of tax rules, many for the first time. The significance of the administrative and electronic filing requirements should not be underestimated.

In addition, UK corporation tax legislation has many complexities, some of which are highlighted in this article, which may require further review and consideration before the submission of the first corporation tax return.

Peter Davis Tax Senior Manager at Deloitte (NI) Limited

Email: petedavis@deloitte.ie