Corporation Tax Returns for Non-Resident Company Landlords (NRL)
From 6 April 2020, non-UK resident companies that carry on a UK property business or have other UK property income will be subject to UK corporation tax on their rental income from UK properties, rather than the current UK income tax. The change in legislation also applies to those who invest in UK property through collective investment vehicles.
The move to corporation tax will have a significant impact on the way non-UK resident companies calculate their taxable rental profits, compliance processes and the timing of when tax payments will become due.
What has changed?
Prior to April 2020, non-UK resident companies operating a UK property rental business were subject to UK income tax, at a rate of 20%, on profits of that business. The tenants or letting agents are also required to withhold tax from rent paid to their non-resident landlords unless the landlord registers for the non-resident landlord scheme (“NRLS”) which will allow the rent to be received gross. Consequently, the landlord pays UK income tax via self-assessment and completes annual tax returns.
For the 2020/21 tax year and onwards, non-UK resident companies operating a UK rental business (whether residential or commercial) will come within the scope of UK corporation tax at a rate of 19% on the profits.
Non-resident landlord companies must report their UK income by way of a CT600 return under the corporation tax system. The major difference to the old system is that accounts will need to be prepared as well as a corporation tax return (CT600), the return and accounts will need to be filed electronically using a commercial iXBRL filing software system. Unfortunately, HMRC does not provide a free HMRC corporation tax filing software.
From when do these changes come into effect?
The new rules apply from 6 April 2020. Where a company's accounting period straddles this date, profits for the pre- and post-6 April 2020 periods will be apportioned and will be subject to income tax and corporation tax respectively.
Who are impacted by this change?
If the company has previously registered for the Non-Resident Landlord Scheme (NRL) HMRC will automatically register them for a Corporation Tax UTR (Unique Taxpayer Reference) and issue a letter directly to the company outlining the transition arrangements. HMRC started issuing the letters to existing NRL scheme companies from 18th January 2020.
NRLs do not need to register with Companies House unless they have a permanent establishment in the UK
The guidance issued by HMRC states that the new rules will not affect those companies that:
Have all their tax deducted under the non-resident landlord scheme and not required to file a tax return.
File an income tax return that is not a Non-Resident Company Income Tax Return (SA700).
Where non-resident companies continue to have other income apart from property income, this will still be subject to income tax and will be required to be reported on a Non-Resident Company Income Tax Return (SA700) for the tax year 2020/21 and following years. Certain companies may therefore be required to file both a CT600 and a SA700 from 2020/21. The following sources of income would continue to be included in SA700:
Income from trading in the UK – other than through a permanent establishment.
Offshore receipts in respect of intangible property.
Other UK income, including royalties or income from trusts.
What is the accounting period?
As per the HMRC guidance, the first accounting period for corporation tax will start on 6 April 2020 and end on 5 April 2021.
If your company’s annual accounts are not prepared to 5 April, your accounting period for corporation tax will:
Begin on 6 April 2020 and end on the same date as your company accounts for the first accounting period
Begin and end on the same date as your company accounts for the second and next accounting periods.
HMRC should be notified in writing if accounts are prepared to a date different to 5 April so they can update their records.
What are the important differences between filing income tax returns and corporation tax returns?
Corporation tax returns are required to be filed within 12 months after the end of the accounting period.
Unlike income tax, where taxable profits are calculated by reference to the tax year (i.e., from 6 April till 5 April), corporation tax is calculated by reference to accounting period. The first tax return submission under corporation tax principles will be from the period 6 April 2020 to the date the company prepares its annual accounts, therefore it may be necessary to notify HMRC of the company’s correct accounting date in advance to avoid late filing penalties.
A significant change between income tax and corporation tax is that now, tax returns must be filed electronically no later than 12 months after the end of the accounting period. The corporation tax due is generally paid no later than nine months and one day after the end of a company’s accounting period.
What should be included in the company tax returns?
NRLs reporting to HMRC must include:
Form CT600, including self-assessment of corporation tax due and relevant supplementary return pages;
Copy of accounts in iXBRL electronic format, prepared in accordance with UK GAAP, UK IRFS/FRS, or the ‘local’ accounting standards of the country of incorporation (and converted to UK standards for the purposes of the corporation tax return).
This is a noticeable change to pre-April 2020 tax years when no accounting reports were required to accompany the filing of a non-resident company's tax return.
The corporation tax return must be filed online along with company accounts and tax computations. Where accounts are filed under UK GAAP, US GAAP or EU IFRS it will be necessary to file iXBRL accounts. However, where accounts are prepared using local accounting standards, PDF accounts of the worldwide full accounts can be filed.
In cases where a UK property business does not prepare accounts, or accounts are prepared not under any local accounting standards, we recommend that an all-inclusive balance sheet and P&L account be included as a PDF file.
Transitional rules for calculating Corporation Tax
There are transitional rules that need to be considered when calculating corporation tax. There are several differences as to how taxable rental profits are calculated under the income tax vs corporation tax regime. For a summary of the most common changes please note the comments below:
Management expenses – These will be deductible against net UK rental income in the year and any excess will be carried forward to be offset in future years.
Loss restriction - Existing unutilised income tax losses will be carried forward to the corporation tax regime. However, these will not be able to be offset against other types of income or gains or be surrendered as group relief. Losses generated whilst in the corporation tax regime will be subject to special rules.
Relief for finance expenses - Mortgage interest and other finance costs are calculated separately under the loan relationship rules; hence they are not included in the calculation of net taxable profits or losses from UK property.
Interest restriction - When calculating how much UK corporation tax is due, there is a limit to the amount that a company or group can deduct for interest and other financing costs. This is known as a Corporate Interest Restriction (CIR). These are complex rules but in summary where the NRL’s net interest expense is in excess of £2million, the expenses will be restricted to up to 30% of the NRL’s tax adjusted profits before interest and capital allowances. CIR can be complex; hence advice should be sought for highly leveraged entities
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