Changes to corporation tax for non-UK resident companies with UK property income

Who is likely to be affected

Non-UK resident companies with UK property income may be affected by this measure.

General description of the measure

The changes introduced by this measure are intended to ensure that the rules of the Finance Act 2019, enacted to bring non-UK resident companies which carry on a property business in the UK or have other property income in the UK Kingdom within the scope of corporation tax from 6 April 2020, operate as intended.

Political objective

This measure is designed to ensure a smooth transition from the taxation of UK property profits of non-UK resident companies from income tax to corporation tax.

Context of the measure

Following the announcement made in the 2016 Autumn Statement, the Government consulted in March 2017 on options to incorporate the income and property gains of non-UK resident companies (previously chargeable respectively to income tax and tax on capital gains of non-residents) in corporation tax.

In the 2017 Autumn Budget, the government published a consultation response document and announced that it would make this change to UK property income in April 2020.

Changes to the taxation of non-resident capital gains were enacted in Article 13 and Annex 1 of the Finance Law 2019 and entered into force on April 1, 2019.

Changes to the taxation of UK property business or other UK property income of a non-UK resident company have been enacted in Section 17 and Schedule 5 of the Finance Act 2019 and come into force on April 6, 2020.

Detailed proposal

Effective date

The measure will apply to non-UK resident companies from 6 April 2020 to align with the effective date of Section 17 and Schedule 5 of the Finance Act 2019.

Current law

The current law on the taxation of non-commercial lending relationship credits is found in Section 301(1A) and Section 574(2A) of the Corporations Tax Act 2009 introduced by paragraphs 15 and 18 respectively of annex 5 of the 2019 finance law.

Sections 57 and 272 of the Income Tax (Trading and Other Income) Act 2005 provide relief for expenses incurred before the date of establishment of the business. There is no direct equivalent for the costs of financing a non-UK resident company carrying on business in the UK under corporation tax.

Regulations 6 to 10 of the Loan Relationships and Derivative Contracts (Ignorance and Recognition of Profit and Loss) Regulations 2004 (SI 2004/3256) (“the Ignorance Regulations”) provide rules for ignoring variations in fair value on certain derivatives which hedge the risks of the business, and instead take into account the profits and losses according to the hedged risk.

Paragraph 44 of Schedule 5 of the Finance Act 2019 confirms how the non-compliance regulations will apply when corporations enter corporation tax on April 6, 2020.

The current law on the requirement and obligation to notify corporate tax liability where all of a company’s income consists of payments on which the company bears income tax by deduction can be found in paragraph 2(1A) of Schedule 18 of the Finance Act 1998 as inserted by paragraph 6 of Schedule 5 to the Finance Act 2019 and in the new Article 55A of the Finance Act 2004 inserted by the paragraph 7 of appendix 5 to the 2019 finance law.

Proposed revisions

Legislation will be introduced in the 2020 finance bill to address the following specific points:

• Section 301(1A) CTA 2009 and Section 574(2A) CTA 2009 should be replaced with new wording to ensure that these subsections do not limit the taxation of income from non-commercial loans and derivatives held for a permanent establishment in the UK
• the new Section 330ZA will be inserted into Part 5 of the Corporations Tax Act 2009. It will take into account, in the first accounting period of the company, a net amount of the financing costs incurred by a non-resident company related to the UK property held before it began to relate to its real estate activity in the UK. The amount to be contributed is limited to debits incurred during a 7 year period prior to the date on which the UK property business commences and will be net of any relevant credits which arise during that same pre- startup. New Section 607ZA to be inserted into Part 7 of the Corporations Tax Act 2009 provides a similar provision for derivative contracts
• the deadlines for opting for the Disregard Regulations are not accelerated solely because the company has an asset the gain of which is subject to corporation tax. This will be relevant where the disposal takes place before the company becomes liable to corporation tax on its UK property income.
• paragraph 2(1A) of Schedule 18 to the Finance Act 1998 (as inserted by paragraph 6 of Schedule 5 to the Finance Act 2019) will be amended so that the notification exception of liability is conditional on the withholding tax having met the requirements of the business tax liability for that accounting period
• Article 55A of the Finance Act 2004 (as inserted by paragraph 7 of Schedule 5 to the Finance Act 2019) will be amended so that the exception to the obligation to notify the payment due in the three months after the start of an accounting period is subject to the condition that the company has a reasonable expectation that the tax deducted from its income will cover its potential tax liability on that income

Summary of impacts

Impact on Treasury

The revisions proposed in this measure are not expected to have an impact on the Treasury. The impact figures of the initial measure are presented in table 2.2 of the 2020 budget under the heading “Property income of non-residents: transition from income tax to corporate tax” and have been certified by the Office for Budget Responsibility.

More details can be found in the policy costing document released with the 2017 fall budget.

Economic impact

This measure should not have significant economic impacts.

Impact on individuals, households and families

This measure should have no impact on individuals as it only concerns non-UK resident companies with property income in the UK. This measure should not have an impact on the formation, stability or breakdown of the family.

Equalities impacts

We do not expect this measure to impact groups that share protected characteristics.

Impact on businesses, including civil society organizations

The changes proposed under this measure, which are explained above, make additional provisions to ensure that non-UK resident company owners, when transitioning from corporation tax to companies, be entitled to the same relief for pre-trade funding costs and the same time limits for making elections as are available to UK resident companies. All companies, regardless of their size, are clarified on the conditions for notification of tax liability when they have been withheld at source on their income.

We do not expect this measure to add to the existing administrative burden for non-UK resident company owners who need to switch from income tax to corporation tax from 6 April 2020. The customer experience should therefore remain essentially the same.

There should be no impact on civil society organizations.

Operational impact (£m) (HMRC or other)

This measure has no operational impact.

Other impacts

Other impacts were taken into account and none were identified.

Monitoring and evaluation

The measure will be reviewed by contacting the taxpayer groups concerned.

Additional tips

If you have any questions about this change, contact Susan Gardner by phone: 03000 563 815 or email: susan.m.gardner@hmrc.gov.uk.