IFM27010 - Real Estate Investment Trust : Breaches of conditions: information requirements: CTA2010/S561 and 578(3); SI 2006/2864/Reg 11
Where a company or group fails to satisfy one or more of the regime conditions, it (the principal company in the case of a Group REIT) must inform HMRC as soon as reasonably practicable after it becomes aware of the failure.
For Company Conditions A (UK residence), B (not an open-ended investment company), E (restrictions on classes of share in issue) and F (prohibition of loans linked e.g. to business results), the obligation is simply to inform HMRC as soon as is reasonably practicable (CTA2010/S578(3)).
For breaches of Company Conditions C or D (shares listed on a recognised stock exchange and not close), and breaches of any of the Property rental business Conditions, the distribution requirement and either of the Balance of business Conditions, the company (principal company in the case of a Group REIT) must additionally provide information about the breach at the same time as they notify it has occurred (CTA2010/S561). The information required is:
- the date on which the condition first ceased to be met and the date (if any) on which it was satisfied again
- details of which condition was breached
- the nature of the breach, and
- what (if anything) the company has done to avoid the breach recurring.
Although it may be some time before the company is aware that a breach has occurred (for instance, becoming close because of the actions of shareholders), the company must inform HMRC as soon as they do become aware. For the purposes of counting up repeat breaches, either of one particular condition or multiple breaches of two or more different conditions, within the relevant time limits, the clock starts when the breach occurs, and not when the company becomes aware of it or when it notifies HMRC.
Notification of a breach of condition D in the first 3 year period is not required (CTA2010/S561(6))
Interest cover test (Profit financing costs ratio) CTA2010/S543
For breach of the profit financing costs ratio test, there are no special notification or information requirements. The company (principal company in the case of a Group REIT) will notify the failure as part of the CTSA return for the accounting period in respect of which the failure occurs. Information concerning the extent of the breach is contained in the financial statements for the relevant accounting period that accompany the return.
HMRC may waive the charge to tax if the profit financing cost ratio is breached. For details see IFM22200, it is recommended that REITs contact their CRM in the first instance if the circumstances in IFM22200 apply.
Maximum shareholding (Holder of Excessive rights) CTA2010/S551-554
For the Maximum Shareholding rule, a breach occurs when the company (principal company in the case of a Group REIT) pays a property income distribution in one of the circumstances listed in CTA2010/S551 – broadly, in respect of a shareholding that is greater than or equal to 10% of the company’s share capital where the shareholder is a corporate entity. The company must provide details of the amount paid, to whom the payment was made, the circumstances that gave rise to the payment and what steps, if any, the company took to avoid making the payment (SI 2006/2864/Reg 11).
The information has to be supplied at the same time as the quarterly return showing payments of distributions and the amount of income tax deducted in respect of them. This return has to be submitted within 14 days of the end of the period covered by the return (see IFM28115).