HMRC announced last year it was considering bringing all non-UK companies receiving taxable income from the UK within scope of UK corporation tax. HMRC has now published a consultation document setting out its proposals on how this may be achieved. This is of particular interest to non-UK companies in receipt of UK rental income.
At present, non-UK companies pay basic rate income tax on their annual net rental profits (the rate of tax payable is 20%). In calculating the net rental profits, a tax deduction is generally allowed for interest paid by the company on loans relating to the rental business, assuming the interest is representative of arm’s length terms. Also, brought forward tax losses of the UK rental business can be offset against current year rental profits without restriction.
Key points from the consultation document
The intention is to ensure that the profits of a UK property business of a non-UK company are brought within the scope of UK corporation tax. This will align the computation of rental profits of non-UK companies with those of UK companies. In particular, it would ensure that the interest restriction rules to be introduced in Finance Act 2017 and the restrictions on carry-forward loss relief apply to both UK and non-UK companies owning UK real estate.
In addition, HMRC propose bringing capital gains on disposals of UK residential property by non-UK companies within scope of corporation tax. This could potentially simplify the tax position of effected companies as currently there are two capital gains regimes which apply (ie non-resident capital gains tax and ATED related capital gains tax).
The consultation document highlights a number of issues that will need to be addressed, for example the timing of the introduction of the new regime. Furthermore, there will need to be transitional provisions dealing with the move from income tax to corporation tax for affected companies including rules for brought forward tax losses. HMRC have suggested grandfathering in brought forward tax losses from the current income tax regime allowing the losses to be carried forward for use against the profits of the UK property business under the new corporation tax regime.
The consultation document addresses ambiguous comments made in the recent Spring 2017 Budget that HMRC may use these new measures to bring profits on sale of UK commercial property by non-UK companies within scope of UK tax. However, the consultation document makes it clear the proposal is aimed specifically at bringing UK property income within the corporation tax net (at the same time applying recently introduced restrictions on the use of tax losses and deductibility of interest). Non-resident investors in UK commercial property will welcome the clarity provided by HMRC in this regard.
Written by Kevin Loundes, Associate Director