Some offshore company landlords are now required to pay Corporation Tax, which has a significant change to the tax treatment of offshore companies, with tax and administrative consequences beyond the headline tax rates. Here are the key changes and implications to consider.

From 6 April 2020, offshore companies receiving rental income from UK property ceased to be charged Income Tax under the longstanding Non-Resident Landlord (NRL) Scheme. These offshore company landlords are now required to pay Corporation Tax (CT) and calculate profits in accordance with Corporation Tax principles under the Corporation Tax regime. Further guidance on the transition was published by HMRC in January 2020 and companies should subsequently have received letters from HMRC, notifying them of their new CT references.

Tax returns are likely to come under more scrutiny with the move to corporation tax, so non-resident landlords should look to review their structure in light of these changes.

Tax rates

In many ways the move to CT represents a significant change, which goes far beyond the reduction in the tax rate to 19% for CT, compared to the 20% previously charged for income tax.

In the 2021 Spring Budget, the Chancellor, Rishi Sunak, announced that the main rate of corporation tax will increase to 25% from 1 April 2023. This increase will affect companies with profits above £250,000 and those with profits between £50,000 and £250,000 will suffer a marginal tax rate of 26.5%, taking them from the small companies’ rate of 19% up to the new main rate.

Less widely advertised is that all close investment-holding companies (CICs), broadly a company is close if controlled by five or fewer participators, will be subject to the main rate, regardless of their profit level. A close company investing in land will not be a CIC, provided it lets the property commercially, or intends to do so.

In our experience, it’s likely that many non-resident landlord companies will be affected by this increased rate, even where profits are below £50,000 a year. Typically, this could be because they hold a property occupied by a member of the owner’s family, or by a beneficiary of a trust that owns the company, and any rent charged is not fully commercial.

Requirements and deadlines

For those previously within the NRL Scheme and preparing Non-Resident Company Income Tax Returns (SA700), your rental business was deemed to cease on 5 April 2020. A final SA700 Return should have been prepared and submitted on or before 31 January 2021 in the usual way and the final income tax payment made on the same date.

CT accounting periods are based on the company’s accounts, so your company should have notified HMRC by now if you draw up your accounts to a date other than 5 April, to enable HMRC to issue Returns for the correct first period. If you have not yet done so, you should do immediately.

A new CT business and tax accounting period was deemed to begin on 6 April 2020, from which point all companies concerned will be registered for CT. In practice, the first CT Return should be prepared within nine months following the end of the first accounting period, which 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. If your 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 (QIPs) were not required in the first year of CT but apply thereafter and many NRL companies should already be paying QIPS.

Submitting CT returns using iXBRL

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 with our experts for support with meeting this requirement.

Rental losses

Any rental losses that a company had 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, not any other trading or non-trading income.

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).

Financing costs

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 with finance costs 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, their UK tax burden is likely to increase due to the CIR.

Capital allowances

If your company claims capital allowances, pools of expenditure will have transferred 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.

Management expenses

Under the income tax regime, company management expenses, as included within the company accounts, were not deductible. Under the CT regime, the legislation confirms that non-UK companies will be able to claim a deduction for management expenses related to their property income.

It’s important to note that no deduction will be available for costs related to managing non-UK property or any group subsidiaries.

Personal tax implications

Another issue to consider is where structures are 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 Income Tax already paid by the company.

HMRC has still not officially commented on how the move to Corporation Tax will affect the tax affairs of such an individual. However, our view is that income previously assessable on individuals would continue to be assessable with a tax credit for the CT paid. If the credit usually available for the individual is to be claimed against their own income tax liability, the CT would have to be paid before the submission of the individual’s Tax Return. This point will undoubtedly be a focus for further discussion in the coming months leading up to the first self-assessment filing deadline affected, in January 2022.