From 6 April 2020 non-UK companies owning UK property became subject to UK corporation tax (CT) rather than income tax regime. This has several technical and tax consequences for Non Resident Landlords (NRL) which I will address in today’s blog.
Practical changes in filing requirements
One big practical change is that unlike income tax, CT returns must be submitted electronically together with all supporting information including financial statements which need to be UK GAAP/IFRS/FRS compliant. The deadline for submission of returns and payment of taxes will now be dependent on the accounting year end of the NRL. CT returns should be filed within 12 months from the end of the accounting period rather than as currently on a tax year basis.
Each NRL’s first CT return will be automatically for the period 6 April 2020 to the year-end date of the company. Companies were invited to notify HMRC of the date to which they will be preparing corporation tax returns, if not 5 April. Tax is ordinarily payable 9 months and 1 day from the end of the accounting period.
If you currently pay your income tax liability under the payment on account regime and the only income that the NRL generates is from its UK property rental business the last payment on account for income tax purposes was due on 31 July 2020 with the final balancing payment due on 31 January 2021.
HMRC will automatically register all NRLs currently subject to UK income tax for CT and notify them of their CT Unique Taxpayer Reference (‘UTR’). NRLs that have not heard from HMRC by 30 June 2020 should contact HMRC directly to follow this up as it will not be possible to submit a CT return without this.
Impact to NRL’s annual tax liability
Before the change NRL were subject to an income tax rate of 20% for basic rate, 40% for higher rate and 45% for additional rate payers. For profits earned on or after 6 April 2020 the rate will change to the applicable CT rate, which is currently 19% flat on any level of taxable income which means potential tax savings could be realised being now taxed under the CT rate.
A big change for NRLs will be the application of the UK Corporate Interest Restriction (CIR) rules. The CIR rules restrict a company’s interest expense deductions to the lower of 30% of a company’s EBITDA or a de minimis of £2 million. The CIR rules are likely to create interest expense disallowances for highly leveraged structures, where interest expenses may have been fully deductible historically under income tax rules.
Income tax losses carried forward can be used to offset against CT profits on property business however these losses are less flexible than new losses generated post 6 April 2020. Capital allowances written down value pools as at 5 April 2020 will transfer to corporation tax without giving rise to a balancing allowance or a balancing charge.
If a credit balance remains in a company’s income tax account after all income tax liabilities for 2019/2020 and earlier years have been settled, this will be repaid to the company if its only source of UK income from 6 April 2020 is income from UK property. The company’s UK bank details will need to be provided, and the box on the 2019/2020 Non-resident Company Income Tax Return ticked, to enable a repayment to be made.