Clare Fitzgerald examines the changes to the tax treatment of non-resident corporate landlords from April 2020.

The non-resident landlord (NRL) scheme is a scheme for taxing UK property income of persons whose usual place of abode is outside the UK or companies whose registered office or main place of business is outside the UK. Having a PO box or ‘care of’ address in the UK is not enough for a landlord to claim a usual place of abode or business in the UK. Such landlords must ensure that they, their tenants, letting agent or tenant finders join the NRL scheme and apply the rules.

Broadly, the rules requires the letting agent or tenant to:-

• deduct basic rate income tax from rents (after allowing for any expenses they’ve paid); and
• give the landlord a certificate at the end of the tax year saying how much tax they’ve deducted.

Prior to 6 April 2020, the NRL applied equally to companies and individuals.

Changes to the taxation of non-resident corporate landlords

With effect from 6 April 2020, non-resident corporate landlords are taxed under corporation tax instead of income tax. The full effect of these changes is being felt now in practice, as the new scheme return deadlines begin falling due for the first time.

For companies the changes bring a new initial lower tax rate of 19 percent for the time being, as opposed to 20 percent under income tax rules. However, the announcement of the increase in the rate of corporation tax from 1 April 2023 to 25 percent for companies with taxable profits of £250,000 or more, contained in Finance Act 2021, means a potential increase in the tax paid by non-resident company landlords, depending on their profits. The changes to the rules also place a heavier compliance burden and more complex tax rules on non-resident corporate landlords when compared to the income tax rules.

Property investors and property fund managers should have assessed the impact of the changes in detail, to determine if the changeover to corporation tax impacts on the tax efficiency and financing structures of their current companies and groups.

As a result of the changes, the non-resident corporate landlord has a cessation of their property business for income tax purposes on 5 April 2020. There is also a deemed commencement of a property business for corporation tax on 6 April 2020.

HMRC does automatically register affected companies for corporation tax and de-register the company for income tax and a new company Unique Taxpayer Reference (UTR) should have been sent to the companies registered address. However, HMRC will not send a copy of the new UTR to the company’s existing agents appointed to represent them under the NRL income tax rules. Agents, therefore, need to ask clients to forward correspondence from HMRC, including the UTR, to enable them to file a new 64-8 form for authorisation to act as their agent under the corporation tax rules.

Accounting periods for Corporation Tax

Under the corporation tax rules, a company’s profits from a UK property business are calculated by reference to accounting periods. These are aligned to the period for which the company prepares its annual accounts. The first accounting period for corporation tax begins on 6 April 2020 and ends on 5 April 2021.

Companies that do not prepare accounts in line with the tax year are therefore required to apportion income and expenses between the two schemes where their accounting period straddles the commencement date. Companies should have now informed HMRC of the date to which they intend to make up company accounts and therefore file the NRL CT return.

Example

Company A normally makes up its accounts to 31 December each year. The company’s first Company Tax Return should include the profits from the UK property business for the period from 6 April 2020 to 31 December 2020.

Filing deadlines for corporation tax

Under the income tax scheme, a NRL return (SA700) was due to be filed with HMRC by 31 January following the tax year. The return could be made on paper and there were no supporting documents required.

The new corporate tax scheme requires companies to file their return (CT600) to HMRC within 12 months of the end of their accounting period. This must be accompanied by financial statements in iXBRL format to support the corporate tax return, which places an additional compliance burden and cost on the company. There are some exceptions to this rule depending on whether there is a relevant eXtensible Business Reporting Language (XBRL) taxonomy for the accounting standard. If there is no taxonomy, then a PDF of these accounts may be acceptable.

HMRC has compiled a document to guide taxpayers on when iXBRL accounts will be required. “Company Tax Returns: format for accounts forming part of an online return” available on Gov.uk

Payment dates for corporation tax

The payment dates for the income tax scheme were 31 January with a further payment on account required by 31 July. Under the corporation tax rules, corporation tax is required to be paid on or before 9 months and 1 day following the accounting period end or via quarterly instalments.

Utilisation of losses

If the UK property business has income tax losses, these are carried forward into the corporation tax return. This only applies if the company’s UK property business is still continuing at 5 April 2020. The company can offset this loss against future profits from the same UK property business or any non-trade loan relationship profits relating to that UK property business. However, the income tax loss cannot be relieved against capital gains that the company may incur on any capital disposals.

This type of loss must be used in priority to any losses made on or after 6 April 2020 under corporation tax and is not affected by the restriction to relief for corporation tax losses that arise on or after 1 April 2017 via the loss restriction rules.

However, any losses generated by a company within the corporation tax scheme will be subject to the corporation tax loss restriction rules. This limits the amount of brought forward losses that can be relieved in a future accounting period to £5 million, plus 50 percent of the profits in excess of £5 million.

Losses incurred post April 2020 may also be group relieved to other group companies who are in a taxable profit position.

Transfer of assets

If the company has claimed capital allowances under income rax, the capital allowances tax written down value pools as at 5 April 2020 transfer automatically to corporation tax without giving rise to a balancing allowance or a balancing charge.

Corporation tax instalment payments for large or very large companies

Where a company (or group) has taxable profits of more than £1.5 million it is required to make estimated tax payments on a quarterly basis throughout the year. Interest is charged where the instalment payments are underpaid.

A one-off transitional rule applies so that any company due to pay their tax liability via instalments for large companies or very large companies will not start until the second corporation tax accounting period.

Interest and other finance costs

When working out the net taxable profit or loss from UK property, interest and other finance costs are not taken into account for corporation tax. They are worked out separately under loan relationship rules where they will normally be brought into account as a non-trading loan relationship deficit for the period.

Corporate Interest Restriction

When the company calculates how much UK corporation tax is to be paid, there is a limit to the amount that the company or group can deduct for interest and other financing costs. This is known as a Corporate Interest Restriction (CIR). The CIR only applies to companies or groups who have net deductible interest and other financing costs of more than £2 million per annum. In these circumstances the interest deduction could be limited to the lower of 30 percent of taxable profits (EBITDA) or the £2 million de minimis limit. There are other alternative measures that may be adopted to maximise tax efficiency.

Anti-hybrid rules

The UK has widely drawn anti-hybrid rules which can deny a deduction for expenses where it is made to or from a hybrid entity or relates to a hybrid instrument. This is to avoid circumstances where cross- border arrangements can involve either a double deduction for a single expense or a deduction for an expense without any corresponding taxable income.

Derivative contracts

Profits and losses from derivative contracts used as part of the UK property business are treated in a similar way to loan relationships. The credit and debit amounts of a derivative contract that have been entered into for the purposes of the UK property business are included in the calculation of the non-trading loan relationship profit or deficit for the period.

There are special rules called the Disregard Regulations that a company can opt into which enable you to ‘disregard’ fair value movements that arise from the accounting of derivatives. Instead, the amounts from the derivative are brought into account in line with the hedged item.

Conclusion

The effect of these changes is only now coming into full effect. Many companies may need to complete more than one NRL return for the 2020/21 period depending on the normal date they prepare their accounts to. Some companies have experienced difficulty with receiving their new UTR and others are somewhat confused by the transitional rules and the more complex corporation tax rules and what they mean in practice.

There is no doubt that some of these ‘teething’ problems will be corrected by the second year of the new scheme for corporates, however, delays and problems are apparent in practical terms at present.

The changes introduced, will go some way to aid the Government’s continuing efforts to level the playing field between UK and offshore property investors.