Policy paper

Corporation Tax: UK property income of non-UK resident companies

Published 29 October 2018

Who is likely to be affected

Non-UK resident companies that carry on a UK property business either directly or indirectly, for example through a partnership or a transparent collective investment vehicle.

General description of the measure

From 6 April 2020, non-UK resident companies that carry on a UK property business, or have other UK property income, will be charged to Corporation Tax, rather than being charged to Income Tax as at present. This change will align with the end of tax year 2019 to 2020 on 5 April 2020.

Policy objective

This measure will deliver more equal tax treatment for UK and non-UK resident companies in receipt of similar income, and take steps to prevent those that use this difference to reduce their tax bill on UK property through offshore ownership.

Background to the measure

Following announcement at Autumn Statement 2016, the government consulted in March 2017 on the case and options for bringing non-resident companies’ UK property income and gains (previously chargeable to Income Tax and non-resident Capital Gains Tax respectively) into Corporation Tax.

At Autumn Budget 2017, the government published a response document to the consultation and announced that it would make this change in April 2020. This measure focuses solely on UK property income.

Changes to the taxation of non-resident Capital Gains Tax gains are now included within the scope of the measure ‘Capital Gains Tax and Corporation Tax: taxing gains made by non-residents on UK immovable property’ with commencement from April 2019.

The draft legislation was published on 6 July 2018. The technical consultation concluded on 31 August 2018.

The issue of filing of tax returns by non-UK resident companies that invest in UK property only through large transparent collective investment funds and the reporting obligations of those funds remain under discussion.

This tax information and impact note updates the note published on 6 July 2018.

Detailed proposal

Operative date

The measure will apply to the UK property business income of a non-UK resident company that arises on and after 6 April 2020.

Current law

The current law that applies to the UK property business income of a non-UK resident company is set out at Part 3 of Income Tax (Trading and Other Income) Act (ITTOIA) 2005.

Proposed revisions

Legislation is introduced in Finance Bill 2018-19.

The main change is to amend section 5 of Corporation Tax Act (CTA) 2009 so that, from 6 April 2020, a non-UK resident company that carries on a UK property business will be brought within the scope of Corporation Tax.

Section 7 of Income Tax Act (ITA) 2007 will likewise be amended to exclude income chargeable to Corporation Tax from the provisions of Income Tax.

As a result of extending the scope of Corporation Tax to a non-UK resident company that carries on a UK property business, a number of supplementary and consequential amendments are made to the tax acts, including new section 55A in Finance Act 2004 and new section 793A in CTA 2009. As part of these changes, a non-UK resident company:

• will not have a disposal event for capital allowances purposes (which could, for example, apply on transition to the new regime) and its income is neither taxed twice nor falls out of account - its expenses are relieved only once
• will not need to notify its chargeability to Corporation Tax in cases where its only UK income source is its UK property business provided that UK tax deducted at source from its rental income fully satisfies its liability to Corporation Tax on the profits of that business

There are also a number of transitional provisions so that a non-UK resident company:

• can carry forward any existing Income Tax losses to be offset only against future UK property business profits chargeable to Corporation Tax
• cannot deduct amounts on derivative contracts that are referable to the period before commencement, and which would not have been relievable under the Income Tax rules (for example, because they are capital in nature)
• can apply the Disregard Regulations (Statutory Instrument 2004/3256) to hedging derivatives with certain modifications to ensure the rules apply appropriately.

Summary of impacts

Exchequer impact (£m)

2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023	2023 to 2024
-	-	+700	-300	-15	-20

These figures are set out in Table 2.2 of Budget 2018 as Corporation Tax: UK property income of non-UK resident companies and have been certified by the Office for Budget Responsibility.

More details can be found in the policy costings document published alongside Autumn Budget 2017.

Economic impact

This measure is not expected to have any significant macroeconomic impacts. A behavioural adjustment is made to account for affected companies restructuring their operations and financing in order to minimise any additional tax liabilities arising under the Corporation Tax rules.

Impact on individuals, households and families

This measure is expected to affect approximately 22,000 non-resident company landlords who will now need to complete and file online a Corporation Tax return CT600 instead of manually completing Form SA700.

Equalities impacts

It is not anticipated that there will be any impacts on groups sharing protected characteristics.

Impact on business including civil society organisations

This measure is expected to affect approximately 22,000 non-resident company landlords who will now need to complete and file online a Corporation Tax return CT600 instead of manually completing Form SA700.

HMRC will be writing to these customers during summer 2019 to tell them about the change of tax regime and to let them know their new reference number for Corporation Tax. These customers will be regarded as having notified HMRC of their chargeability to Corporation Tax.

Customers will still need to complete their SA700 for the tax year ending on 5 April 2020 for which a notice to file will be sent to them in April 2020. They will be sent a notice to file a Corporation Tax return after the end of their first Corporation Tax accounting period.

One-off costs will include familiarisation with the Corporation Tax regime and could also include introducing new processes, systems and software in order to correctly account for Corporation Tax.

Ongoing costs include preparing and filing Corporation Tax returns online. Corporation Tax returns are to be submitted online using the Inline eXtensible Business Reporting Language (iXBRL).

Companies will be required to add iXBRL tags to their Corporation Tax return, which can be achieved in a number of ways through commercial software, and to file online a copy of their accounts and computations (tagged as appropriate) with the return for that accounting period.

Overall, the ongoing costs of compliance are expected to reduce through the facility to file online, although this will vary for different businesses, and some may incur a cost, depending on their size and complexity.

Businesses already completing the SA700 will benefit from being able to use online filing instead of manually completing and filing a return under the Income Tax Self Assessment regime.

Guidance on the transition from Income Tax to Corporation Tax will be published during 2019 and before the change takes effect.

There is no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

There will be a cost to HMRC in transferring customer records from the existing database to the Corporation Tax database and writing to affected customers. This will be incurred during the financial year 2019 to 2020.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be kept under review through communication with affected taxpayer groups and monitored through information collected from tax returns.

Further advice

If you have any questions about this change, contact Susan Gardner on Telephone: 03000 563 815 or email: [email protected].