Guidance note
Published 17 February 2020
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Foreword
Finance Act 2019 enacted rules under which non-UK resident company landlords that carry on a UK property business, or have other UK property income, will be charged to Corporation Tax on their property income from 6 April 2020, rather than being charged to Income Tax as at present.
The Non-residents Landlord Scheme will continue to apply to non-UK resident company landlords. Any Income Tax deducted under the Non-residents Landlord Scheme can be offset against the Corporation Tax liability of the non-UK resident company landlord in respect of that rental income.
Under Corporation Tax, non-UK resident company landlords will be subject to the Corporate Interest Restriction at Part 10 of the Taxation (International and Other Provisions) Act 2010 (“TIOPA”) on the deductibility of financing costs. These rules also apply to those non-UK resident company landlords that have tax withheld from their rents under the Non-residents Landlord Scheme.
The Taxation of Income from Land (Non-residents) Regulations 1995 (S.I. 1995/2902, “the Non-residents Landlord Scheme Regulations”) are amended to:
(i) Update the definition of “deductible expense” to reflect the treatment of financing costs for Corporation Tax.
(ii) Insert Regulations to provide for an election to apply a simplified alternative rule to financing costs in place of Corporate Interest Restriction.
The rule involves the application of a simple formula, for the purpose of determining how much of the financing costs can be deducted from the rents collected when working out the amount to withhold under the Non-residents Landlord Scheme.
This guidance explains how the new rule works.
If you have any questions about this change, contact Susan Gardner on Telephone: 03000 563815 or email: [email protected].
Chapter 1: Background to the Non-residents Landlord Scheme
The Non-residents Landlord Scheme is a scheme for taxing the UK rental income of persons whose ‘usual place of abode’ is outside the UK. This guidance note concerns non-UK resident company landlords and their agents.
For the purposes of the Non-residents Landlord Scheme, the year runs from 1 April to the following 31 March (referred to as the ‘annual period’).
Agents of a non-UK resident landlord must deduct an amount on account of tax from the landlord’s UK rental income and pay this amount to HMRC each quarter. If an agent pays out expenses from the rents collected on behalf of the non-UK resident landlord (or directs another person to pay expenses) the agent may deduct those expenses from the rent collected when working out the amount on account of Income Tax to withhold.
The deduction of expenses is limited to those that the agent can reasonably be satisfied would be deductible from the profits of a UK property business, or from 6 April 2020 in regard to a non-UK resident company, from a company’s total profits chargeable to Corporation Tax.
The legislation can be found at sections 971 and 972 Income Tax Act 2007, which is supported by the Taxation of Income from Land (Non-residents) Regulations 1995.
Find out more information about the Non-residents Landlord Scheme.
Chapter 2: Changes for Non-UK resident Company Landlords from April 2020
From 6 April 2020, non-UK resident landlords that are companies will come within charge to Corporation Tax instead of Income Tax as was the case previously. Some non-UK resident company landlords are subject to the Non-residents Landlord Scheme. An amount on account of tax is withheld by the tenant or the agent of a non-UK resident company landlord from the rent paid and passed onto HMRC. The person withholding the amount on account of tax is known as a “prescribed person”.
If the non-UK resident company landlord uses an agent to collect its rental income, the amount of income from which an amount on account of tax is withheld can be reduced by expenses paid by the agent, including financing costs if the agent is reasonably satisfied those expenses are deductible or capable of being offset against profits.
Once non-UK resident company landlords become chargeable to Corporation Tax from 6 April 2020, Corporate Interest Restriction at Part 10 of TIOPA will apply to them. These rules apply a cap to the amount of financing costs that can be deducted from rental income. Detailed guidance on how these rules work can be found in the HMRC Corporate Finance Manual.
These rules also apply to those non-UK resident company landlords that have an amount withheld on account of tax from their rents under the Non-residents Landlord Scheme. Corporate Interest Restriction is complex and being reasonably satisfied about its application may require an agent to obtain information about the non-UK resident company landlord and its funding arrangements.
Some agents would be able to apply Corporate Interest Restriction but many others may not. For those agents that have difficulties in applying Corporate Interest Restriction, the existing Regulations would typically prevent a deduction for financing costs paid by the agent which would increase the amount to be withheld on account of tax.
Consequently, the non-UK resident company landlord would file a company tax return to directly claim a deduction for its financing costs, resulting in a refund of tax, and increasing the administrative burden on both HMRC and non-UK resident company landlords.
To avoid this, a simpler alternative to Corporate Interest Restriction is provided to enable the agent to calculate the financing cost deduction which is limited to a fixed allowance (30%) of the UK rental income, net of deductible expenses other than financing costs.
Any unused allowance may be carried forward from one quarter period to the next. Any unused financing costs above the allowance may also be carried forward. It is to be subject to an irrevocable election which is made by the agent.
The rule does not apply to rental income paid by a tenant who is a prescribed person to non-UK resident company landlords since tenants are in a different position under the Regulations.
The non-UK resident company landlord must check whether the amount withheld on account of tax under the Non-residents Landlord Scheme Regulations actually meets its underlying Corporation Tax liability in respect of its UK property income.
Chapter 3: How the alternative Corporate Interest Restriction rule works
3.1 Being reasonably satisfied and Corporate Interest Restriction
The financing costs of a non-UK resident company landlord will be subject to the corporation tax rules on deductibility of financing costs. In particular, the Corporate Interest Restriction rules may give agents who are prescribed persons reason to be uncertain as to whether financing costs (as a non-trade loan relationship deficit) can be set against the profits of the UK property business of the non-UK resident company landlord, and, therefore, whether they may be deducted in determining the amount to withhold under the Non-residents Landlord Scheme.
It is recognised that Corporate Interest Restriction can be complex and further that it may require agents to obtain information from non-UK resident company landlords to be reasonably satisfied that financing costs are not restricted by Corporate Interest Restriction, or if restricted, by what amount. The test that is applied here is one of reasonable satisfaction.
This guidance does not seek to be prescriptive in what constitutes reasonable satisfaction. However, in getting to a position of reasonable satisfaction an agent may make judgements as to the likely position of a non-UK resident company landlord provided that the agent takes reasonable steps to test such judgements, and that the agent does not have knowledge to the contrary.
For instance, agents may make judgements as to the likely application of the de minimis limit in the Corporate Interest Restriction rules taking into account the amount of rental income, the nature of the investment in UK property by, and the investment profile of, the non-UK resident company landlord.
Where agents do not have enough information to be reasonably satisfied that there will not be a restriction under Corporate Interest Restriction, or cannot determine the amount of the restriction, they cannot be reasonably satisfied that the expense is a “deductible expense” and no deduction of the financing costs is permitted.
Agents may choose, instead, to make an irrevocable election to use the alternative rule for Corporate Interest Restriction for the purpose of the Non-residents Landlord Scheme.
When bringing financing costs into account under the alternative rule agents must still be reasonably satisfied that the costs would be deductible for the non-UK resident company landlord if Corporate Interest Restriction were to be disregarded.
3.2 How to make an election
The election can only be made by the prescribed person who:
- is an agent of the non-UK resident company landlord, where either:
- the agent has paid financing costs in the quarter, or
- financing costs have been paid in the quarter by another person at the direction of the agent
The election is irrevocable. It must be notified to HMRC with the annual return that the agent sends to HMRC for the annual period which relates to the first quarter to which the election applies.
3.3 How the alternative to Corporate Interest Restriction works
In all of the following, it is assumed that the agent is reasonably satisfied that the financing costs are tax-deductible, ignoring the effect of Corporate Interest Restriction.
The maximum amount of financing costs that can be deducted (“the financing costs allowance”) when calculating the amount to withhold for a particular quarter is calculated as follows:
Step 1:
Apply the following calculation:
30% x (I - OE)
where:
‘I’ is rental income in that quarter, and ‘OE’ is total of all deductible expenses for that quarter, other than financing costs.
Step 2:
Add the amount of any unused allowance brought forward from the last quarter to the sum of the above calculation. The result is the financing costs allowance for the quarter.
If the financing costs paid out in a quarter are less than the financing costs allowance, then the full amount of the financing costs can be deducted in that quarter. If there are restricted financing costs that have been carried forward to the quarter, these are added to the financing costs of this quarter when working out the amount of financing costs to deduct and any amount which may be restricted.
If the total financing costs exceed the financing costs allowance, the amount to be deducted in that quarter is capped at the maximum of the financing costs allowance.
3.4 Unused financing costs allowance
Where the financing costs allowance for a quarter is greater than the amount of the financing costs in that quarter, the difference between the two, the unused allowance, is carried forward to the next quarter and added at Step 2 of the calculation to give the financing costs allowance for that next quarter.
3.5 What happens to excess financing costs
To the extent that the amount of financing costs in a quarter is more than the financing costs allowance for that quarter, the excess amount, that is the amount restricted which the agent cannot take into account, is carried forward to the next quarter and added to the financing costs paid out in that quarter.
The calculation shown above at 3.3 is then applied to this total amount to work out the amount of financing costs that can be deducted from the rents in that quarter.
The restricted amount of financing costs cannot be carried back to earlier quarters.
To the extent that the amount of financing costs in a quarter falls within the financing costs allowance, but the agent cannot take them into account against the rental income of that quarter, the agent can take them into account under regulation 9(5).
3.6 Example:
John, an agent, acts for a non-UK resident company landlord, ABC Ltd, and elects to apply the alternative financing costs rule.
- in the quarter to 30 June 2020, John collects rental income of £2,000 and pays financing costs of £600 and other expenses of £500 out of those rents.
- in the quarter to 30 September 2020, John receives rental income of £2,000 and pays financing costs of £400 and other expenses of £100.
- in the quarter to 31 December 2020, John receives rental income of £3,000 and pays financing costs £100 and other expenses of £100.
- in the quarter to 31 March 2021, John receives rental income of £500 and pays financing costs £600 and other expenses of £500.
John is reasonably satisfied that all expenses are tax-deductible, ignoring the effect of Corporate Interest Restriction. It is also assumed that there are no financing costs attributable to any time before 6 April 2020.
Quarter to 30 June 2020
The amount of financing costs that can be deducted by John in the quarter to 30 June 2020 is as follows:
| Restricted financing costs brought forward (N/A) | £0 |
| Financing costs paid out | £600 |
| Total financing costs for the quarter | £600 |
| Rental income received (I) | £2,000 |
| Less deductible expenses paid, other than financing costs (OE) | (£500) |
| Net amount of income (I-OE) | £1,500 |
| Initial financing costs allowance calculation (30% x £1,500) | £450 |
| Unused financing costs allowance brought forward | £0 |
| Financing costs allowance for the quarter | £450 |
| Financing costs allowance used for the quarter | £450 |
| Unused financing costs allowance carried forward | £0 |
The maximum amount of financing costs that can be deducted in the quarter to 30 June 2020 is £450. The remaining £150 of the financing costs that were paid out will be carried forward to the next quarter and added to the financing costs for that quarter.
John’s calculation of the amount to withhold for the quarter to 30 June 2020 is as follows:
| Rental income received | £2,000 |
| Less deductible expenses (other than financing costs) | (£500) |
| Total chargeable profits for the quarter | £1,500 |
| Less financing costs | (£450) |
| Net amount on which basic rate tax is applied | £1,050 |
| Tax withheld £1,050 x 20% | £210 |
| Restricted financing costs carried forward to the next quarter (£600 - £450) | £150 |
| Unused financing costs allowance carried forward | £0 |
Quarter to 30 September 2020
The amount of financing costs that can be deducted by John in the quarter to 30 September 2020 is as follows:
| Restricted financing costs brought forward | £150 |
| Financing costs paid out | £400 |
| Total financing costs for the quarter | £550 |
| Rental income received (I) | £2,000 |
| Less deductible expenses paid, other than financing costs (OE) | (£100) |
| Net amount of income (I-OE) | £1,900 |
| Initial financing costs allowance calculation (30% x £1,900) | £570 |
| Unused financing costs allowance brought forward | £0 |
| Financing costs allowance for the quarter | £570 |
| Financing costs allowance used for the quarter | £550 |
| Unused financing costs allowance carried forward | £20 |
Since the financing costs allowance is more than the sum of the financing costs for the quarter, the deduction is allowed for the full amount of financing costs (£550). The unused financing costs allowance £20 (£570 less £550) is carried forward to the next quarter.
John’s calculation of the amount to withhold for the quarter to 30 September 2010 is as follows:
| Rental income received | £2,000 |
| Less deductible expenses (other than financing costs) | (£100) |
| Total chargeable profits for the quarter | £1,900 |
| Less financing costs | (£550) |
| Net amount on which basic rate tax is applied | £1,350 |
| Tax withheld £1,350 x 20% | £270 |
| Restricted financing costs carried forward to the next quarter | £0 |
| Unused financing costs allowance carried forward | £20 |
Quarter to 31 December 2020
The amount of financing costs that can be deducted by John in the quarter to 31 December 2020 is as follows:
| Restricted financing costs brought forward | £0 |
| Financing costs paid out | £100 |
| Total financing costs for the quarter | £100 |
| Rental income received (I) | £3,000 |
| Less deductible expenses paid, other than financing costs (OE) | (£100) |
| Net amount of income (I-OE) | £2,900 |
| Initial financing costs allowance calculation (30% x £2,900) | £870 |
| Unused financing costs allowance brought forward | £20 |
| Total financing costs allowance for the quarter | £890 |
| Financing costs allowance used for the quarter | £100 |
| Unused financing costs allowance carried forward | £790 |
Since the total financing costs allowance available for the quarter is more than the sum of the financing costs for the quarter, the deduction is allowed for the full amount of financing costs (£100). The unused financing costs allowance of £790 is carried forward to the next quarter.
John’s calculation of the amount to withhold for the quarter to 31 December 2020 is as follows:
| Rental income received | £3,000 |
| Less deductible expenses (other than financing costs) | (£100) |
| Total chargeable profits for the quarter | £2,900 |
| Less financing costs | (£100) |
| Net amount on which basic rate tax is applied | £2,800 |
| Amount withheld £2,800 x 20% | £560 |
| Restricted financing costs carried forward to the next quarter | £0 |
| Unused financing costs allowance carried forward | £790 |
Quarter to 31 March 2021
The amount of financing costs that can be deducted by John in the quarter to 31 March 2021 is as follows:
| Restricted financing costs brought forward | £0 |
| Financing costs paid out | £600 |
| Total financing costs for the quarter | £600 |
| Rental income received (I) | £500 |
| Less deductible expenses paid, other than financing costs (OE) | (£500) |
| Net amount of income (I-OE) | £0 |
| Initial financing costs allowance calculation for the quarter (30% x £0) | £0 |
| Unused financing costs allowance brought forward | £790 |
| Total financing costs allowance for the quarter | £790 |
Since the rental income for this period is reduced to zero by the other specified expenses, there is no amount on account of tax to withhold and the initial calculation of the amount of financing costs allowance for this quarter is nil.
However, because it is possible to carry forward unused financing costs allowance, the financing costs allowance for the quarter is £790. John can apply the financing costs allowance brought forward to the amount of financing costs paid in the quarter so that the financing costs become specified expenses for the purposes of regulation 9(4) of the Non-residents Landlord Scheme Regulations.
| Financing costs allowance for the quarter | £790 |
| Financing costs allowance used for the quarter | £600 |
| Unused financing costs allowance carried forward | £190 |
Because there is now an excess of specified expenses above the specified income for this quarter, John can deduct this excess from the income of the previous quarter under regulation 9(5) and claim a repayment when he sends in his quarterly return. The amount of unused financing costs allowance to carry forward to the quarter to 30 June 2021 is reduced to £190.
The revised figures for the quarter to 31 December 2020 become:
| Rental income received | £3,000 |
| Less deductible expenses (other than financing costs) | (£100) |
| Total chargeable profits for the quarter | £2,900 |
| Less unrestricted financing costs as before | (£100) |
| Net amount on which basic rate tax is applied | £2,800 |
| Less excess specified expenses carried back | £600 |
| Updated net amount on which basic rate tax is applied | £2,200 |
| Amount withheld £2,200 x 20% | £440 |
| Amount previously withheld | £560 |
| Repayment due | £120 |
Note that the costs carried back under regulation 9(5) are simply deducted against the rental income for the period. There is no need to recalculate the financing costs allowance for the quarter to 31 December 2020. Nor is there any need to include the costs carried back to 31 December 2020 in the tested amount of financing costs for the quarter ended 31 December 2020.
If these circumstances had arisen in the following quarter (quarter to 30 June 2021), any excess of specified expenses could only be carried forward to the next quarter because the quarter ended 31 March 2021 is in a different annual period to the annual period in which the quarter to 30 June 2021 falls. Under regulation 9(5) it is not possible to carry back an amount of specified expense to a quarter period of a different annual period.
When John sends the annual return to HMRC for the annual period ended on 31 March 2021, he must tell HMRC that he has made the election under regulation 9A to use the alternative financing costs rule. He must continue to use the alternative financing costs rule in the next annual period and so on.
Chapter 4: Obligations of Non-UK resident Company Landlords
4.1 Obligations of the Non-UK resident Company Landlord
The non-UK resident company landlord remains subject to the normal Corporation Tax rules, including Corporate Interest Restriction set out at Part 10 of the TIOPA, and remains liable to pay any net Corporation Tax due once the amounts deducted at source are taken into account.
If the tax withheld under the Non-residents Landlord Scheme does not meet the Corporation Tax liability for the accounting period of the non-UK resident company landlord, as calculated under the Corporation Tax rules, the company must register for Corporation Tax and file a Company Tax Return to pay the shortfall.
4.2 Notification of chargeability
Subject to the exception set out at paragraph 4.3 below, a company must give notice to HMRC that it is chargeable to Corporation Tax for an accounting period if it has not received a notice from HMRC requiring a company tax return. That notice must be given within twelve months from the end of its accounting period.
Subject to the exception set out at paragraph 4.3 below, a company also has a duty to notify HMRC within three months of the beginning of its first accounting period that it has come within the charge to Corporation Tax. However, a company is not regarded as having failed to comply with this obligation where it has a reasonable excuse, so long as notice is given as soon as the excuse has been resolved.
HMRC would regard as a reasonable excuse for not notifying HMRC within this three month time period the need for any true-up of the amount withheld on account of tax under the Non-residents Landlord Scheme at the end of the annual period, and its comparison with the calculation of non-UK resident company landlord’s Corporation Tax liability for the accounting period which relates to the annual period in order to establish any shortfall.
However, HMRC would consider that this reasonable excuse is one which is capable of being resolved with twelve months from the end of the company’s accounting period. This means that HMRC would expect a company that has a shortfall of Corporation Tax after taking into account the amount on account of tax withheld to give notice of its chargeability within twelve months from the end of its accounting period.
4.3 Exception to duty to give notice
A non-UK resident company landlord will not be required to give notice of its coming within the charge to Corporation Tax or to notify its chargeability to Corporation Tax if:
- it has not been given a notice to file a tax return,
- it has borne (or it will bear) Income Tax by deduction on all the income on which it is chargeable to Corporation Tax for the accounting period,
- its liability to Corporation Tax for the accounting period will be fully offset, for instance by the amounts withheld under the Non-residents Landlord Scheme, and
- it has no chargeable gains for that period.
4.4 Example
In the example at Chapter 3, ABC Ltd has the following items to consider when determining its liability to Corporation Tax for the accounting period which includes the four quarters to 31 March 2021:
| Rental income | £7,500 |
| Deductible expenses other than financing costs | £1,200 |
| Financing costs | £1,700 |
| Income Tax deducted at source | £920 |
If the annual period straddles two of ABC Ltd’s accounting periods because the date to which it makes up is financial statements ends on a date other than 31 March, the amounts should be apportioned between the accounting periods on a just and reasonable basis.
The amount of financing costs that can be included in determining the Corporation Tax liability of ABC Ltd for an accounting period depends on the application of the TIOPA Corporate Interest Restriction rules according to the specific circumstances of the company.
If ABC Ltd is a singleton company, the amount of financing costs would be below the de minimis exemption available under the Corporate Interest Restriction rules and none of the financing costs would be capped.
In these circumstances it is likely that the amounts withheld at source under the Non-residents Landlord Scheme has met ABC Ltd’s Corporation Tax liability (assuming it has no further chargeable income and it has no chargeable gains).
In this situation, if ABC Ltd has not already registered for Corporation Tax, it is not required to notify HMRC that it has come within the charge for Corporation Tax for an accounting period provided that it has no chargeable gains in that period and has not already received a notice to file a tax return.
If ABC Ltd considers that its Corporation Tax liability for the relevant accounting period is less than the Income Tax deducted at source under the Non-residents Landlord Scheme, it can choose to register and file a Company Tax Return in order to claim a repayment of the difference.
If ABC Ltd considers that its Corporation Tax liability for the relevant accounting period is more than the Income Tax deducted at source under the Non-residents Landlord Scheme, it must register and file a Company Tax Return in order to pay the balance due. It must do this within twelve months from the end of the relevant accounting period.
Once registered for Corporation Tax, HMRC will send ABC Ltd a notice to file a Company Tax Return for each subsequent accounting period.