Non-resident landlords move to corporation tax
HMRC has published guidance on changes to the rules from April 2020. According to the guidance, non-UK resident landlord companies (NRL) including those who invest in UK property through collective investment vehicles will need to pay Corporation Tax instead of Income Tax on profits from UK property from 6 April 2020. The tax year 2019/20 is also the final year in which the company tax return form SA700 is required to be submitted by the subsequent 31 January.
While this brings a reduction in the current applicable tax rate from 20% to 19%, the changing landscape means that NRLs now face heavier compliance burdens and a raft of more-complex rules, which can significantly impact the overall effective tax.
NRLs will not be required to register for corporation tax and file a company tax returns for an accounting period if they:
- have tax deducted under the Non-resident Landlord Scheme and are not required to notify chargeability to Corporation Tax and have not received a notice to deliver a tax return
- file an income tax return that is not a Non-resident Company Income Tax Return (SA700)
Any NRLs commencing a UK property business after 6 April 2020 must notify HMRC within three months of commencement, normally through completion of Form NRL2 which allows rental income to be received gross with HMRC approval.
According to HMRC, interest and other finance costs will no longer be deductible as a property expense when calculating net taxable profit or loss on rental property but will instead be treated under the more complex loan relationship rules.
Additionally, NRLs will have to consider provisions that seek to restrict the deductibility of interest known as the corporate interest restriction (CIR).
Property losses from non-resident landlord’s regime can be offset against post April 2020 property business profits, subject to certain restrictions.
Specific provisions have been made to allow unrelieved income tax losses to be carried forward to the corporation tax regime and offset against future UK property business profits for so long as the company continues to carry on the UK property business.
The Income Tax loss cannot be relieved against Capital Gains where the company may be chargeable to Corporation Tax.
Income tax losses must be used in priority to losses incurred on or after 6 April 2020 and cannot be group relieved or used to offset chargeable gains. While in theory the transition to corporation tax should allow for more flexibility in the use of losses arising post 6 April 2020, restrictions apply where losses exceed £5 million. There will also be a requirement to analyse expenses and split them between rental, management, and non-trade expenses.
Additionally, NRLs will have to consider provisions that seek to restrict the deductibility of interest known as the corporate interest restriction (CIR) for the first time.
Care will need to be taken to ensure these items are treated correctly in the corporation tax return.
There are transitional rules applicable for all NRLs starting from April 6, 2020, and from April 2019 for gains from UK property or land disposals.
HMRC will automatically register affected companies for corporation tax and will send them a company Unique Taxpayer Reference (UTR). And NRLs do not need to register with Companies House unless they have a permanent establishment in the UK.
However, it will not copy this correspondence to existing agents (so as not to breach taxpayer confidentiality, as it would involve copying income tax correspondence to agents on matters relating to corporation tax, for which they are not the registered agents). Agents should therefore ask clients to forward correspondence from HMRC, including the UTR, to enable them to file a new 64-8 form.
Unlike income tax, where taxable profits are calculated by reference to the tax year (i.e., from 6 April till 5 April), corporation tax is calculated by reference to accounting period. The first tax return submission under corporation tax principles will be from the period 6 April 2020 to the date the company prepares its annual accounts, therefore it may be necessary to notify HMRC of the company’s correct accounting date in advance to avoid late filing penalties.
A significant change between income tax and corporation tax is that now, tax returns must be filed electronically no later than 12 months after the end of the accounting period. The corporation tax due is generally paid no later than nine months and one day after the end of a company’s accounting period.
NRLs reporting to HMRC must include:
- Form CT600, including a self-assessment of corporation tax due and any relevant supplementary return pages,
- Copy of accounts in iXBRL electronic format, prepared in accordance with UK GAAP, UK IRFS/FRS, or the ‘local’ accounting standards of the country of incorporation (and converted to UK standards for the purposes of the corporation tax return).
This is a noticeable change to pre-April 2020 tax years when no accounting reports were required to accompany the filing of a non-resident company's tax return.
What steps should be taken now?
These changes mean that NRLs, investors and fund managers are likely to have questions on the new changes, particularly around the deductibility of interest and utilisation of any brought forward losses and therefore they should seek professional help on the application of these complex rules to ensure their related tax filing obligations are met.
Advice should be sought early, as penalties and interest can apply for non-compliance and inaccurate tax return submissions.
Our professional team has significant experience in these areas and can help with your specific requirements. We are eager to provide you with an individual package of tax and legal services suitable for the specific needs of your business.
Posted on Oct 12, 2020.