CFM32110 - Loan relationships: Non-UK resident companies starting to carry on a UK property business

CTA09/S330ZA

Relief for pre-commencement financing costs

From 6 April 2020, a non-resident company which carries on a UK property business, or which has other UK property income, is brought into the scope of UK Corporation Tax. Prior to that date the profits of its UK property business would have been subject to Income Tax.

A non-UK resident company, if it is not carrying on a trade in the UK through a UK permanent establishment or carrying on a trade of developing or dealing in UK land will not have an accounting period until it starts to carry on a UK property business (see PIM2505 for guidance on when a company starts to carry on a UK property business).

S330ZA was therefore introduced in FA20 to allow such companies relief for financing costs incurred prior to the commencement of their UK property business that would not otherwise be relievable under the loan relationship provisions or the general rule for expenses incurred before the commencement of a trade (CTA09/S61 – see BIM46351).

Conditions

Relief under S330ZA is available where:

a) a non-UK resident company has debits in respect of a loan relationship held for the purposes of its UK property business,

b) the debits relate to times before (but not more than seven years before) the date on which it starts to carry on the property business, and

c) the debits are not otherwise brought into account for tax purposes.

Effect

The non-resident company will be able to obtain relief for its pre-commencement net financing costs at the point at which it starts to carry on the relevant UK property business.

The amount to be brought into account is limited to the loan relationship debits which:

  • would have been recognised in the income statement (as items of profit or loss), and
  • would have been brought into account under the loan relationship rules.

In determining the amount to be brought into account the legislation assumes that, at the time the expense was incurred, the company had been carrying on the UK property business (and so, on that basis, would have had an accounting period for Corporation Tax purposes). In addition, where the expense was incurred by the non-resident company before 6 April 2020, HMRC takes it to mean that this assumed UK property business would also be treated as being within the scope of Corporation Tax at that time.

Relief for any such loan relationship debits will be net of any equivalent credits that arise in the same pre-commencement period. No relief is available for loan relationship debits that have been relieved for UK tax purposes under any provision (whether under Corporation Tax or Income Tax).

Capitalised interest

In cases where interest is capitalised in a company’s financial statements and therefore does not immediately give rise to amounts recognised as items of profit or loss in a company’s income statement, CTA09/S320 may in certain circumstances apply (see CFM33160). Where CTA09/S320 does apply, the amounts capitalised are treated in the same way as an amount that was brought into account as an amount in determining the company’s profit or loss for that period in accordance with GAAP.

S330ZA(2) requires that the company would, on the assumption that it had been carrying on a UK property business at the time, have recognised amounts in profit or loss. As a result, if CTA09/S320 would have applied to the capitalised amounts (i.e. on the assumption that the company had been carrying on a UK property business) then it would follow that these amounts will satisfy the test in S330ZA(2).

Derivative contracts

A similar provision for debits in respect of derivative contracts is made. See CFM 51095 for further details.