The new tax year is upon us and with that comes a significant extension of the scope of UK corporation tax. As from 6 April 2020, a non-UK resident company in receipt of UK rental income is subject to UK corporation tax - prior to this date, a non-UK company was subject to UK income tax on such income. This is a significant change for these companies given the two regimes’ differing tax rates, computational rules, filing requirements and payment deadlines, albeit HMRC have introduced a number of transitional measures designed to smooth the process.
We have put together a brief checklist of issues that companies impacted by this change should now be considering, if they haven’t already.
- Registration with HMRC: This will include checking that a company has received their corporation tax reference number, that they (or their agent) have registered with HMRC for online access and checking/ amending the company’s accounting year end on HMRC’s records.
- Software: Corporation tax returns need to be submitted online and accompanied by iXBRL tagged accounts (iXBRL being an electronic tagging methodology which allows HMRC to automatically capture data from a company’s accounts) meaning that specific software is required to enable these filings to be made. It would appear that HMRC’s free tagging software for corporation tax does not support non-UK resident companies and therefore a different solution will need to be identified.
- Transitional measures: There are a number of transitional measures which may impact upon a company’s position, particularly in respect of the first period for which a corporation tax return is required. These rules deal with, inter alia, the use of brought forward capital allowance pools and losses from the 2019/20 income tax year as well as the switch to the corporation tax payment timetable.
- Cash flow: The standard corporation tax payment date is 9 months and 1 day after the end of an accounting period. Any cash flow forecasts should therefore be updated, bearing in mind that a company could be required to make quarterly instalment payments after their first accounting period within the corporation tax regime.
- Computational differences: There are a number of differences between the calculation of taxable profits for income tax and for corporation tax purposes. These include (but are not limited to) the tax treatment of interest as non-trade loan relationships for corporation tax purposes (i.e. rather than just as an expense of the rental trade as is the case for income tax purposes) and rules surrounding the tax treatment of derivative contracts. There are also a number of restrictions imposed by the corporation tax rules, most notably the corporate interest restriction, where tax relief for financing costs and related expenses may be limited to £2m per annum for a group, and restrictions on the use of losses brought forward in certain situations. The impact of these rules on tax liabilities/ cashflow should be considered to ensure that a company is well prepared for these changes.
HMRC have released a helpful guidance note on the transition from income tax to corporation tax for non-UK resident companies in receipt of rental income – a link to this guidance is available here.
If KPMG can be of any assistance in relation to either assessing the impact of the transition to corporation tax or filing corporation tax returns please do not hesitate to contact one of the team below.