Policy paper

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

Published 6 July 2018

Who is likely to be affected

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

The proposed changes to the taxation of Non-Resident Capital Gains Tax announced at Autumn Budget 2017 are now included within the ambit of the measure ‘Taxing gains made by non-residents on UK immovable property’.

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 the tax year 2019-20 which ends 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 ambit of the measure ‘Taxing gains made by non-residents on UK immovable property’ with commencement from April 2019.

The draft legislation was published on 6 July 2018. This will be followed by a period of technical consultation before the legislation is finalised.

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 2005 (ITTOIA 2005).

Proposed revisions

Legislation will be introduced in Finance Bill 2018-19.

The main change will be to amend section 5 of Corporation Tax Act 2009 (CTA 2009) so that, from 6 April 2020, a non-UK resident company which carries on a UK property business will be brought within the scope of Corporation Tax. Section 7 of Income Tax Act 2007 (ITA 2007) will likewise be amended to exclude income chargeable to Corporation Tax from the provisions of Income Tax.

This will mean that the UK property income profits chargeable to Corporation Tax will be calculated in accordance with ordinary Corporation Tax principles as set out in CTA 2009 and Corporation Tax Act 2010 (CTA 2010). The existing detailed rules for the computation of the profits of a UK property business under Corporation Tax are contained within Part 4 of CTA 2009.

A non-UK resident company which carries on a UK property business is also chargeable to Corporation Tax in respect of its profits that arise from loan relationships or derivative contracts that the company is a party to for the purpose of that business. The existing rules for the computation of loan relationship or derivative contracts debits and credits at Parts 5 - 7 CTA 2009 will apply.

As a result of extending the scope of Corporation Tax to a non-UK resident company which carries on a UK property business, a number of consequential amendments are to be made to CTA 2009 and CTA 2010, including new section 793A in CTA 2009, so that the Corporation Tax rules apply equally to all non-UK resident companies within the charge to Corporation Tax as they do to UK resident companies.

Transitional provisions will also be made in respect of existing UK property businesses carried on by a non-UK resident company so that the change from Income Tax to Corporation Tax will not create a disposal event for the purposes of the Capital Allowances Act 2001 and to ensure that income is neither taxed twice nor falls out of account, and that an expense is only relieved once.

In particular, provision has been made for the grandfathering of existing Income Tax losses so that it will be possible to carry them forward to the Corporation Tax regime. They can be offset against future UK property business profits that are chargeable to Corporation Tax but they will not be available for offset against other types of income receivable by the non-UK resident company that are also within the charge to Corporation Tax. It will not be possible to surrender these losses as group relief.

A loss on a derivative contract which is wholly or partly referable to a time before commencement will not be deductible for Corporation Tax purposes to the extent the loss is attributable to the pre-commencement period.

There will be a requirement for a just and reasonable adjustment to be made if fair value movements arising from a derivative contract which have been brought into account for Income Tax but which would not have been similarly brought into account under Corporation Tax because of an election into the Disregards Regulations (S.I. 2004/3256). This ensures that the correct amounts are brought into account over the term of the derivative contract.

Provision is also made in the scenario whereby fair value movements from a derivative have not been brought into account under Income Tax because they are capital in nature, but which would have been brought into account under Corporation Tax. Where this is the case, an election under regulation 6A of the Disregard Regulations is treated as having been made in relation to that derivative contact in order to ensure that the correct amounts are brought into account over the term of the derivative contract.

Transitional provision is made so that relief for past capital expenditure on contaminated or derelict land of an existing UK property business incurred before the commencement date is not available for relief under section 1147 of CTA 2009.

Relief for later capital expenditure will be available for the Corporation Tax accounting period in which the expenditure is incurred subject to the required election being made.

These changes also apply to a non-UK resident company which has other UK property income as dealt with by Chapters 7, 8 and 9 of Part 4 of CTA 2009.

Summary of impacts

Exchequer impact (£m)

2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023
nil	+690	-310	-25	+/-

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 Corporation Tax rules.

Impact on individuals, households and families

This measure has no direct impact on individuals as it only affects companies. The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

It is not anticipated that there will be any particular 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 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 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.

On-going costs include preparing and filing Corporation Tax returns online. Corporation Tax returns are to be submitted online using the Inline eXtensible Business Reporting Language (known as 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 with the return for that accounting period.

Overall, the on-going 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. The filing obligations of non-UK resident corporate investors in UK property through widely held tax transparent funds remain under consideration.

There is no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

The cost of transferring customer records from the existing database to the Corporation Tax database and writing to affected customers has been estimated at circa £160,000 and 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 by:

• telephone: 03000 563815
• email: susan.m.gardner@hmrc.gsi.gov.uk