Corporation tax on non-resident companies’ UK income

Non-UK resident companies to be brought within scope of UK corporation tax?

The UK Autumn statement took place on 23 November. Perhaps the most unexpected announcement by the Government was a proposal to review how non-UK resident companies are taxed on UK source income.

Currently, non-resident companies with a trading business in the UK pay UK corporation tax on their profits. However, companies which do not have a UK trade may instead be subject to UK income tax on their UK source income. The most common scenarios where non-UK companies pay UK income tax are on UK rental income (typically under the non-resident landlord scheme) and on payments of interest or royalties.

What is likely to change?

No details have been announced as yet and the Government has stated that it will consult at Budget 2017. The consultation will consider how to apply corporation tax rules, in particular rules which restrict the deductibility of interest expense and restrictions on the use of losses.

Abacus comment

On the face of it, bringing non-resident companies within scope of UK corporation tax is a positive proposal as the rate of corporation tax is set to fall from April 2017 (eventually down to 17% by April 2020). Currently, such companies pay the basic rate of income tax which is 20%. However, the benefit of the falling tax rate may, depending on the circumstances of a particular company, be more than offset by restrictions on interest deductibility and relief for tax losses.

The proposed restriction on interest relief is likely to have a significant impact on non-UK companies which receive UK rental income. Often foreign companies finance the purchase of UK rental properties by a combination of third party and connected party (ie shareholder) debt, potentially resulting in a high loan-to-value ratio. If all of the debt is interest bearing and the interest treated as tax deductible, the new proposals, if they are eventually enacted, could have a big impact on such companies as they may be facing an unexpected tax cost in the near future. Arguably, the UK transfer pricing rules should already be restricting the deductibility of interest in many such company’s tax returns.

Interested parties should monitor this situation closely. Directors of companies holding UK property which are highly geared should consider how these proposals will impact on the company as further action may be required, for example to restructure how a company is financed.

Written by Kevin Loundes, Associate Director