TW talks tax takes a look at the draft legislation on the extension of UK corporation tax to non-UK resident companies with UK property income
Who will be affected and when?
Non-UK resident companies carrying on a UK property rental business or otherwise receiving UK property income (Offshore Propcos).
The draft legislation is subject to consultation, but is expected to apply to UK property income of an Offshore Propco arising on or after 6 April 2020.
Background
Offshore Propcos are currently subject to UK income tax (at the basic rate of 20%) on their UK property income profits (eg rent).
In recent years, the UK government has made significant changes to the taxation of non-UK persons acquiring, holding and disposing of UK property. See for example our commentary on taxing gains made by non-residents on UK property.
In March 2017, the UK government consulted on bringing Offshore Propcos within the charge to UK corporation tax (rather than income tax) on their UK property income, with the policy objective of equal tax treatment between UK and non-UK companies holding UK property. Following the consultation, draft legislation was published on 6 July 2018.
Overview of draft legislation
From 6 April 2020, Offshore Propcos will be brought within the scope of corporation tax (and excluded from the charge to income tax) in respect of their UK property income profits.
UK property income profits will be calculated and charged in accordance with ordinary corporation tax rules (see our comment below for potential implications).
Transitional provisions will ensure that income is neither taxed twice (nor left out of account) as a result of the switch from income tax to corporation tax. Existing losses will be grandfathered and available to offset against future property income profits within the corporation tax regime.
Comment
These changes are, in a sense, the "final piece in the puzzle" for the UK government in bringing Offshore Propcos wholly within the scope of UK corporation tax in relation to UK land and properties (the rules taxing gains will be brought in from 6 April 2019, and the profits of non-UK companies developing or trading in UK land have already been brought within corporation tax).
On the face of it, the switch from UK income tax (at the basic rate of 20%) to UK corporation tax (currently 19%, but reducing to 17% from 1 April 2020) may be a tax cut for some Offshore Propcos.
However, the move from income tax to corporation tax will have a number of implications beyond just the rate of tax. For example:
- The UK has a new (complex) corporate interest restriction regime (implementing Action 4 of the OECD's BEPS project) which, to date, has not affected Offshore Propcos within the income tax regime. Very broadly, these rules can restrict tax deductions for interest and other financing costs. Offshore Propcos will need to understand and apply these rules once they are brought within the corporation tax regime.
- Offshore Propcos will become subject to the new rules on corporation tax loss relief.
- Offshore Propcos will also be subject to corporation tax in relation to their loan relationships and derivative contracts which they are party to for the purpose of their UK property business.
- Offshore Propcos will cease preparing paper income tax returns for each UK tax year (which runs from 6 April to 5 April the following year) and, instead, start filing online corporation tax returns in respect of their corporation tax accounting periods.
So, whilst the cut in tax rates will be welcome, taxpayers need to be aware of the potential increase in tax compliance costs.
Action points
Offshore Propcos should begin to consider and consult with their advisers on the potential implications arising out of the switch from income tax to corporation tax in respect of their UK property income.
For example, they may want to review financing arrangements and consider the impact of the corporate interest restrictions on calculating taxable profit.
