For those currently within the NRL Scheme preparing Non-resident Company Income Tax Returns (SA700) the change will take place at the end of the current 2019/20 tax year, with the rental business deemed to cease on 5 April 2020. A final SA700 Return will need to be prepared and submitted on or before 31 January 2021 in the usual way, but no payments on account for 2020/21 will be payable.
As CT accounting periods are based on the company’s accounts, the transition is slightly more complex for companies that do not prepare accounts which are co-terminus with the UK tax year. A time apportionment of income and expenses will be required for accounting periods that straddle 5 April 2020, with both a CT return and an income tax return required. Companies must notify HMRC if they draw up their accounts to a date other than 5 April and this may be the opportunity to choose a more convenient accounting date.
A new CT business and tax accounting period is deemed to begin on 6 April 2020, where all companies concerned will be registered for CT separately. In practice, the first CT Return should be prepared within nine months following the end of the accounting period, as this is when tax is payable on both income and gains; although the return need not be submitted for a further three months. For companies with profits in excess of £1.5 million, CT is payable in quarterly instalments, with the last instalment due three months and 14 days after the end of the accounting period. Where the company is a member of a group, the £1.5 million threshold is divided by the number of companies in the group. As part of the transition, quarterly instalment payments will not be required in the first year of CT.
CT returns must be submitted online using third party software and be accompanied by the company’s accounts, in a special format, known as iXBRL. Many companies that up until now have prepared and submitted their own SA700 returns on paper, may find they are no longer able to deal with their UK tax reporting themselves. Get in touch to find out how we can help with this.
Any rental losses that a company has at 5 April 2020 will be carried forward into its new CT business. However, these will be ring-fenced and will only be available to offset future rental profits. Losses generated in periods after 5 April 2020 will be subject to CT loss relief rules. In general, these allow losses to be set against other profits of the same accounting period, with amounts unrelieved carried forward and used against any future company profits (including capital gains). If profits exceed £5 million, the amount of profits against which brought forward losses can be relieved is limited to an annual allowance of up to £5 million, plus 50% of profits above £5 million in a single given period. The £5 million annual allowance is shared among all companies subject to CT within the same group. In addition, post-5 April 2020 losses will be available for group relief (subject to certain conditions).
In recent years, the government has restricted the deductibility of finance costs against rental income when calculating the taxable profit for income tax purposes, but this has not affected the tax liabilities of non-resident companies. Finance costs are not fully deductible in calculating taxable property income under CT rules. Instead, they are included within the ‘Non-trading loan relationship regime’ and the corporate interest restriction (CIR) can limit the deductibility of interest for a group of companies in excess of £2 million to as little as 30%.
The rules surrounding CIR are complex and are likely to cause an additional administrative burden for companies. For those that are highly geared, even with the lower CT rates, their UK tax burden is likely to increase due to the CIR.
For companies claiming capital allowances, pools of expenditure will transfer directly into the CT business without any balancing allowances or charges. If the first CT period ends before 5 April 2021, the written down allowances for the year will be proportionately reduced to reflect a short CT accounting period.
Under the income tax regime company management expenses, as included within the company accounts, are not deductible. Under the CT regime, legislation confirms that non-UK companies will be able to claim a deduction for management expenses related to their property income. It is important to note that no deduction will be available for costs related to managing non-UK property or any subsidiaries.
Another issue to consider is where structures are currently caught by the “Transfer of Assets Abroad” rules, which broadly mean that a related individual is subject to UK tax on the rental income of the company as if it were their own, with a credit for IT already paid by the company. How these rules are affected by the changes to CT is still not clear, although some commentators believe that once the rental profits are subject to CT, this may prevent the Transfer of Assets Abroad rules applying to the income in future. This has yet to be confirmed.
This is a significant change to the tax treatment of offshore companies, which goes way beyond the headline tax rate being used. While the degree to which these changes will affect companies will vary, it is vital that directors seek professional advice sooner rather than later to ensure that they are ready for this new age.