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HMRC Issues Consultation On Non Resident Companies Chargeable To Income Tax And Non Resident CGT

Monday 17th April 2017

HMRC has recently published a consultation document on non resident companies who are chargeable to income tax on UK source income and/or non resident CGT on the disposal of certain UK residential property interests within the corporation tax regime.

Corporation tax was introduced in the UK in 1965 and non resident companies were brought within its scope in respect of their income and gains attributable to trading activities in the UK carried on through a permanent establishment in the UK. Other UK source taxable income remained subject to income tax.

The UK taxation of non resident companies in respect of UK real property has changed significantly over recent years. In particular, a non resident company was not liable to UK tax on non trade gains until the introduction in April 2013 of the Annual Tax on Enveloped Dwellings related capital gains (“ATED-related gains”).

In April 2015, gains in respect of the disposal of UK residential property interests by certain non residents, including closely held non resident companies, became chargeable to non resident CGT (“NRCGT”). More recently, FA2016 introduced legislation to bring non resident companies, which carry on a trade of dealing in or developing UK land, into the CT regime.

 Legislation has been introduced in the 2017 Finance Bill which may limit a company’s interest expense if it is chargeable to corporation tax. In addition, the CT loss relief rules are also being fundamentally reformed to increase the flexibility of the regime whilst ensuring firms making substantial profits pay tax.

In the Autumn Statement 2016, the government announced that it would explore the case for moving non resident companies from the income tax regime to the CT regime in order to achieve consistency of treatment, in particular when applying the corporate interest restriction and loss reform rules.

Introducing interest restriction and loss reform for non resident companies by amending the income tax rules would involve significant changes and the use of concepts and approaches which, while established in the CT code, are not mirrored in the income tax regime. In particular, responses to the consultation on the proposed corporate interest restriction suggested that applying the corporate interest restriction rules to non resident corporate landlords within the income tax regime would require careful consideration because different rules apply when calculating interest expense and other financing costs for the purposes of each tax.

For these reasons, the government has said that the better option for this category of income is to consider the case for moving income from UK real property into the CT regime. This would be a fundamental change to the taxation of the majority of non resident companies who currently file self-assessment returns. However, this change would ensure that the taxation of income from UK real property is consistent.

The same issues could apply to income arising from a trade carried on in the UK otherwise than through a permanent establishment which, technically, remains within the charge to UK income tax though in practice only a very small number of companies may be affected because of the UK’s tax treaty network.

Bringing any remaining UK source trading income within the charge to corporation tax would introduce considerable uncertainty for little practical benefit especially since virtually all of the UK’s double taxation treaties contain a business profits article which hinges on the presence of a permanent establishment. The government therefore does not propose to bring the residual income tax charge on trading profits realised by non resident companies within the corporation tax code. However, the government has said it will keep this under review and act if necessary.

The focus of the consultation concerns income from UK real property and whether and how this income is to be brought into CT. If this category of income is to be brought into CT, the policy will include bringing NRCGT gains within the CT regime at the same time.

The government has indicated that it has no plans to alter the status quo of the withholding regime for the deduction of tax at source within income tax which has been established for many years and is known and understood by taxpayers and market participants. The government does not consider that there is a requirement for a separate corporate rate given the UK’s extensive treaty network which generally provides for an effective rate lower than the headline withholding rate.

HMRC has asked for responses on eight specific issues included in the condoc to be submitted by 9 June 2017.

If you would like further information on the consultation, please contact Keith Rushen on 0207 486 2378.

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