Non-resident companies chargeable to Income Tax and non-resident CGT Response by the Chartered Institute of Taxation

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Angelina Gwendoline Brown
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1 Non-resident companies chargeable to Income Tax and non-resident CGT Response by the Chartered Institute of Taxation 1 Introduction 1.1 The CIOT responds to this Stage 1 1 consultation exploring the case for bringing certain non-resident companies with UK sourced rental income and/or gains arising from the disposal of certain UK residential property interests within the corporation tax regime. 1.2 It is noted that in the introduction to the consultation under the side heading Additional ways to be involved, it is stated that : As this consultation largely concerns complex technical issues; the government is keen to arrange meetings with external bodies but equally welcomes written technical responses. It is envisaged that meetings with those with specialist interests will be held both during the consultation and after all responses have been evaluated As part of the consultative period has fallen within the pre-election purdah (21 April - 8 June) it may not have been possible to hold meetings as intended. We hope that there will be an opportunity for meetings post-election to discuss the complex technical issues as the proposals develop, particularly in relation to the consultation questions 4, 5 and As an educational charity, our primary purpose is to promote education in taxation. One of the key aims of the CIOT is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. Our comments and recommendations on tax issues are made solely in order to achieve this aim; we are a non-party-political organisation. 1.4 The CIOT s objectives for the tax system that are of particular relevance to this consultation are a legislative process that translates intentions into statute accurately and effectively without unintended consequences, and a responsive, competent tax administration with a minimum amount of bureaucracy. 1 Stage 1 of the Tax Consultation Framework is Setting out objectives and identifying options

2 2 A strategic approach to property taxation 2.1 We note that the current proposals are largely driven by the aim of achieving consistency of treatment with regard to income from UK real property between UK resident companies (already within the charge to corporation tax) and non-resident companies, particularly with regard to the corporate interest restriction and reform to the CT loss relief rules 2. We recognise that a level playing field is an important consideration, assuming these rules are enacted, to ensure that UK resident companies which are investing in UK real property are not at a disadvantage from a tax perspective or that there is a tax incentive to invest in UK real property using a non-resident company. 2.2 However, this reasoning should be considered alongside paragraph 1.2 of the introduction to the consultation, which points to the recent piecemeal changes since from While individual changes may be introduced for cogent policy reasons, such fragmented change tends to increase complexity and to add to the costs and compliance burdens for taxpayers. The CIOT has long held the view that property taxation needs a wider strategic review rather than this disjointed approach. 2.3 Our responses to the question below are therefore made subject to our view that a strategic review of the taxation of UK real property is long overdue. 3 Question 1: Do you agree that it is more appropriate to apply interest restriction and loss reform to UK real property income within the CT regime rather than the income tax regime? If you consider that they could be applied within income tax, how would the interest restriction and loss reforms be applied in a consistent manner to companies within CT? 3.1 We agree that, if the intention is that the interest restriction rules and loss reform rules should apply to income arising from UK real property for non-resident companies, it is preferable to bring UK real property income within the CT regime (at least for those companies potentially affected by those rules), rather than seek to apply these new rules through the income tax regime. 3.2 However, in our view, before any final decision is taken as to whether or not to bring income from UK real property into the CT regime, we suggest that further work should be undertaken in relation to the assessment of impacts for both the Exchequer and the taxpayer. The consultation document says that the purpose of these proposals is to ensure consistency in the taxation of income from UK real property as between resident and non-resident companies. But a fundamental change in the basis of taxation such as this will inevitably lead to a compliance burden for taxpayers (even if it is only cost of taking advice on how the new regime works) and costs for HMRC in policing the regime. If there will be little or no Exchequer benefit from the proposals then we suggest it should be carefully considered whether achieving greater consistency in the area of UK real property taxation is worth the cost and effort the change will entail.. 2 These changes to the CT regime were included in the Finance Bill 2017 published in March 2017, but were dropped following the announcement of the general election. It is expected that they will be re-introduced in a Summer Finance Bill. P/tech/subsfinal/CT/2017 2

3 3.3 We are particularly concerned that the impact of the change will be most difficult for smaller non-resident corporate landlords, and this should be properly evaluated. 3.4 These points are discussed further in response to Question 8 below. 4 Question 2: If non-resident companies liable to NRCGT are brought within CT, what features of the NRCGT provisions do you think may give rise to difficulties if adapted for CT? 4.1 The consultation indicates (at paragraph 2.8) that it intends that the existing computational rules for NRCGT will remain broadly the same with some adaptation for group companies. We have assumed that the scope of the charge to non-resident CGT will also remain unchanged and therefore persons specified as not chargeable under TCGA 1992 section 14F if a claim is made will remain outside the scope of CT in respect of a non-resident CGT disposal. If this assumption is incorrect, please clarify. 5 Question 3: Is there an alternative approach that could be taken in calculating the taxable profits or losses of a UK property business carried on by a nonresident company? If they differ to those applied to a UK resident company carrying on a similar property business, please explain why different rules should apply. 5.1 The consultation document (paragraph ) notes that a key difference between the income tax and CT regimes is the treatment of financing, debts and derivative contracts regime. The differences arise not only as a result of the fact that for CT credits or debits are dealt with separately under the loan relationship and derivative contracts regime from the calculation of the profits of the property business; in addition, the rules themselves have significant differences in the treatment of some items and transactions, for example in relation to the treatment of bad debts. The detail of these differences and the impact of transitioning from one regime to the other should be considered as these proposals are developed. 5.2 It will also be necessary to consider how to identify those loan relationships and derivative contracts of the non-resident company which should be brought within the charge to CT; principally those relating to the UK property business. The non-resident company is likely to have other loan relationships and derivative contracts which would not be taxable and/ or deductible under the income tax regime (for example interest earned on offshore deposits or loans not otherwise used in the UK property business). These loans should not be brought within the non-trade loan relationship rules. 6 Question 6: Do you think that the suggested treatment of the unused income tax losses carried forward is reasonable? If you consider that there is an alternative approach, please explain what that would encompass. 6.1 We understand that the proposals with regard to losses are that losses arising from the UK property business, income tax property losses will be ring-fenced and available only to set against future UK property income. This seems reasonable. P/tech/subsfinal/CT/2017 3

4 6.2 However, we would like further clarity around the ongoing UK property business activity against which these losses can be set. We assume, but would be grateful if you could confirm, that if properties that were owned while the non-resident company was within the charge to income tax are sold, and other properties are acquired, this will continue to be a UK property business; and the income tax property losses can be set against the income arising from the new properties acquired while within the charge to CT. 7 Question 7: Are there other CT principles that you think would require transitional arrangements to be provided for? 7.1 It is unclear whether the intention is to continue the Non-Resident Landlord Scheme. However, it is noted that the withholding regime for the deduction of tax at source will be unaffected. If the Non-Resident Landlord Scheme is to stay in place, transitional provisions should be considered to adjust the Scheme rules for the changes. 7.2 We agree with the proposal set out in paragraph 3.2 that the treatment of assets which qualify for capital allowances should be such as to ensure that no balancing charges or allowances arise on the transition. 8 Question 8: Do you have any comments on the assessment of equality and the impact on business as a result of this potential change in tax regimes? 8.1 As noted in response to Question 1 above, the consultation document says that an assessment of the Exchequer impact and the economic impact of these proposals has not been undertaken yet. In terms of impact on business, it also notes that no firm estimate of the impact on business is available at this time but the Government hopes to gather more information through the consultation process. 8.2 In addition, we suggest that HMRC should conduct a full assessment as soon as possible of the impact on the Exchequer of these proposals and, in particular, how many non-resident companies which invest in UK real property will be affected by the corporate interest restriction and loss relief reform rules and, thus, what revenue, if any, will be raised by these proposals. 8.3 While we recognise the consistency of treatment argument being made for these proposals, and also the lower CT rate which will be applicable to profits of non-resident companies, it should be made clear whether there are positive as well as negative impacts on the Exchequer, HMRC and/or taxpayers before any final decision is taken. 8.4 One of the economic impacts will be the change to the dates for payments of UK tax: from January and July payments for income tax to a single payment of nine months after the end of the accounting period, unless the non-resident company is within the quarterly instalment payment regime. This change will have cash flow implications for both the non-resident companies and for the Exchequer. 8.5 In addition, in undertaking its assessments, we suggest that the Government should be mindful of the fact that the CT regime will not be familiar to a large number of smaller non-resident companies which are landlords in respect of one property occupied by, typically, a beneficiary of a trust that holds the shares in the company. It is likely that P/tech/subsfinal/CT/2017 4

5 the administrative burden of transition to, and familiarisation with, a new corporation tax regime will fall disproportionately on such companies. 8.6 Therefore we consider that it is important that the number of companies in this category is established (using data from the non-resident landlord scheme/returns) in order to fully assess and evaluate the impact of these proposals. Consideration should be given as to how such smaller non-resident companies can be assisted with the change in their taxation regime. 8.7 We also refer to our recent submission on the interaction of these proposals with the Government s Making Tax Digital (MTD) project. In that submission we noted that the Government is proposing that digital record keeping and digital reporting obligations for businesses subject to income tax will take effect from either April 2018 or April 2019 (depending upon the business s turnover level), but that digital record keeping and digital reporting obligations for businesses subject to corporation tax will not take effect until April As things stand, non-resident landlord companies will be brought into the MTD regime from April 2018 for income tax purposes. However, if these proposals are adopted, and non-resident companies are moved to the corporation tax regime, they will be required to enter the MTD regime for corporation tax from April Given this planned move to the corporation tax regime we think non-resident companies should not have to move in and out of the MTD income tax regime between April 2018 (or April 2019) and April 2020; this would seem to be an unnecessarily confusing, costly and burdensome exercise for them to have to undertake. Our full submission on this can be found at 9 Acknowledgement of submission 9.1 We would be grateful if you could acknowledge safe receipt of this submission, and ensure that the Chartered Institute of Taxation is included in the List of Respondents when any outcome of the consultation is published. 10 The Chartered Institute of Taxation 10.1 The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. The CIOT s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer. The CIOT draws on our members experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work. P/tech/subsfinal/CT/2017 5

6 The CIOT s 18,000 members have the practising title of Chartered Tax Adviser and the designatory letters CTA, to represent the leading tax qualification. The Chartered Institute of Taxation 12 June 2017 P/tech/subsfinal/CT/2017 6

Capital Gains Tax: Payment window for residential property gains (payment on account) Response by the Chartered Institute of Taxation

Capital Gains Tax: Payment window for residential property gains (payment on account) Response by the Chartered Institute of Taxation 1 Introduction 1.1 This Stage Two 1 consultation follows the government