Switch to corporation tax puts pressure on tax agents
Tax agents will be in the firing line from April 2020 when non-resident corporate landlords must switch from paying income tax on UK profits to paying UK corporation tax.
Rebecca Cave talks to Rob Durrant-Walker, the business tax technical director at Garbutt & Elliott, about why this change is happening in April 2020 and what tax agents need to do for their clients.
Why is so much UK property held by non-resident companies?
HMRC estimate there are around 22,000 non-resident corporate landlords (NRCL), which vary from companies holding a single residential property, to those holding large portfolios of commercial property.
There are historical tax reasons why UK property may be held by a company which is not registered in the UK. For example, before April 2017 a UK non-domicile individual would want to hold their UK property in an offshore company (and often an excluded property trust), to keep it out of the IHT net. From April 2017, the scope of IHT was extended to catch the shares of the offshore property-owning company, but the structures remain in place.
Holding commercial property in offshore entities has long been a way of removing any gains made on the properties in the future from the UK tax net. The buildings would often be leased back to the organisations that occupied them. This was how the offices used by the Inland Revenue embarrassingly came to be owned by a company based in Bermuda in 2002.
The tax advantages of such offshore structures were removed from April 2019 as all gains arising from UK properties are now taxed in the UK, irrespective of where the holding company is resident.
Why is the tax treatment changing now?
It’s all part of the government’s plan to level the playing field between non-UK and UK based property owners. The capital gains and IHT issues have been tackled, now it’s the turn of income tax.
Does this make the offshore property holding company resident in the UK for tax purposes?
No, the company will remain non-resident, and it will have to register with HMRC as a non-resident landlord to avoid any UK tenants having to deduct tax at source from the rents paid to the landlord.
However, the NRCL will not pay UK tax on its non-UK income. Although, where the central management and control of the company is in the UK, the non-resident company will already be taxed on its worldwide income in the UK.
What is HMRC doing now?
HMRC is currently writing to all NRCLs to inform them of their new corporation tax UTR numbers. The first corporation tax period for each company has been set by default to end on 5 April 2021.
What if the company doesn’t want to draw up its accounts to 5 April?
The company must inform HMRC in writing if it wants to draw up accounts to a different date. It should also tell HMRC if it already has a CT UTR number.
The tax agent can do both of these tasks on behalf of the NRCL, but it will first have to submit a fresh authorisation to act (using form 64-8), as the existing authorisation for income tax won’t be valid for corporation tax.
How will switch between income tax and corporation tax work?
The profits made up to and including 5 April 2020 will be subject to income tax, and profits arising from 6 April 2020 onwards will be subject to corporation tax. Where the company’s accounting period straddles this date the period will be notionally split into separate periods with an apportionment of income and expenses.
Where the NRCL has income other than UK rents it will have to decide how its general management expenses are split.
Will the company end up paying both income tax and corporation tax in the same year?
The tax agent needs to watch out for this as income tax payments will be due on:
- 31 January 2020 – POA for 2019/20
- 31 July 2020 – POA for 2019/20
- 31 January 2021 – balancing payment 2019/20
The self-assessment system will also automatically request POA for 2020/21 on 31 January 2021 and 31 July 2021. The tax agent needs to reduce those POAs for 2020/21 to nil.
Where the corporation tax period ends on 5 April 2021 the first corporation tax payment will be due on 6 January 2022.
How will non-resident companies benefit from the switch to corporation tax?
Corporation tax is currently payable at 19%, and income tax is payable on rents at 20% so there is an obvious rate advantage, especially if the cut to 17% corporation tax is re-introduced. However, that reduction won’t make up for the increased costs of complying with the corporation tax regime.
The NRCL will have to use commercial software to submit the corporation tax return online together with accounts that in many cases have been tagged to be read by iXBRL. The free HMRC corporation tax filing system is not available for NRCLs.
Other corporation tax reliefs become available to NRCL’s, such as land remediation relief for expenditure on UK property after 5 April 2020.
Will the NRCL have to register at Companies House and follow UK company law?
No, an NRCL won’t have to register at Companies House (CH), so there is no dual filing of annual accounts to CH and HMRC as applies for UK registered companies. There is also no new requirement for the NRLC to be compliant with the Companies Act 2006 when drawing up its accounts.
Is there anything else the tax adviser should look out for?
Yes, advisors will need to remember all the tricky rules for corporation tax, such as corporate loss restrictions which apply where the losses brought forward are more than £5m.
Also where the interest expenses within the worldwide group are more than £2m per year there may be restrictions on how that interest can be off-set.