Non-resident corporate landlords and corporation tax: requirements at a glance
As from April 2020, all non-UK resident companies are chargeable to corporation tax rather than to income tax on the profits of a UK property business. Here’s a closer look at the implications of this HMRC change, the complications that have arisen over the last couple of years, and at how landlords can stay on top of the new rules.
Taxing income on property: what has changed for non-resident companies?
Under the previous regime, all non-resident landlords (including non-resident companies) paid income tax on rental income from UK property. Non-resident corporate landlords (NRCLs) were required to file an income tax return by 31 January following the tax year end.
Effective from 6 April 2020, NRCLs have now been moved onto the corporation tax regime. Here’s what this means:
At first glance, the good news is that NRCLs are now charged corporation tax on profits at 19% (compared to 20% under the previous income tax regime). The bad news is that due to restrictions on deductibility of expenses, most NRCLs are likely to have a higher tax burden overall.
Tax relief on interest payments
The UK government has been gradually restricting the deductibility of property finance costs against rental income over the last few years. Shifting NRCLs over to corporation tax is part of this trend.
Under the old income tax rules, it was usually possible to treat interest on a loan taken out to finance a property as a tax-deductible expense. Under corporation tax, interest and finance charges are treated as non-trade deficits and can be offset against rental profits. However, the ‘Non-trading loan relationship regime’ and Corporate Interest Restriction (CIR) applies, which can significantly limit deductibility. Where a company’s finance costs exceed £2 million, expenses can be set off against taxable profits up to a maximum of 30%.
Expenses relating to the management of the NRCL’s UK properties are deductible against UK rental profits, and excess expenses can be carried forward. However, of course, expenses that relate to the running of non-UK businesses (e.g. managing overseas properties) are not deductible. Where applicable, you will need to clearly distinguish between expenses relating to the running of UK and non-UK businesses.
The following corporation tax rules also now apply to NRCLs:
Loss restriction. NRCLs are subject to a maximum loss utilisation threshold of £5 million, plus 50% of any profits exceeding £5 million. Losses brought forward can only be offset against future UK property income (i.e. not against other forms of UK profits).
Interest restriction. With very limited exceptions (e.g. public infrastructure projects), where interest expenses exceed £2 million, those expenses can be restricted up to 30% of taxable profits.
Hybrid restrictions. Certain payments involving hybrid entities may be disallowed under the Hybrid Mismatch Rules. You may require expert review of your MRL structures to consider if these restrictions apply.
HMRC advised initially that if they did not already have one, NRLCs would be issued with a corporate Unique Taxpayer Reference (UTR) number automatically. However, by the start of this year, many NRCLs had still not received their UTR. The ICAEW Tax Faculty advises that if a company has still not received it, the company’s tax agent should inform HMRC and include a fresh signed authorisation to act.
There have also been reported problems with HMRC failing to close down income tax accounts for NRCLs following the switchover to corporation tax. HMRC advises that if you have received a Notice to File for income tax and believe this to be incorrect, you should contact them to avoid a penalty for late receipt being automatically applied.
Ongoing filing requirements and matters to consider
Accounting date. Unless you use 5 April as your accounting date, you need to inform HMRC of your actual accounting date. (The date determines your deadline for filing corporation tax and payments.
Filing and payment dates. You have 12 months from the company’s accounting date to submit the corporation tax return, but 9 months and a day to actually pay the tax due. Best practice is therefore to ensure your return is prepared and submitted within 9 months to ensure the correct amount of tax is paid on time.
Instalments. Where a company’s taxable profits are in excess of £1.5 million, corporation tax liabilities for the second and subsequent years need to be paid in quarterly instalments. Bear in mind that if your accounting period falls within the first half of the tax year, your first quarterly payment may already be due at the time the return is filed.
Format. Your corporation tax return must be filed online in eXtensible Business Reporting Language (iXBRL) format and prepared in line with UK-IFRS or UK-GAAP or local accounting standards of the country of incorporation. If you do not already prepare accounts to this standard, you should look to do so now.
Combining expertise in corporation tax, business expenses, tax planning and services for non-UK residents, MJH Accountancy is ideally placed to help non-resident corporate landlords navigate the challenges of the new regime. For more information, speak to us today.