For some NRLCs the effective tax rate may well have increased despite the headline Corporation Tax rate of 19% being lower than 20% payable to 5 April 2020 under the Income Tax rules. With Corporation Tax rates set to increase to up to 25% from 1 April 2023, there are areas of a company’s tax profile which could be reviewed in order to achieve a lower effective rate.
Key changes due to the transition to Corporation Tax
The transition to Corporation Tax has introduced several changes which may come as a surprise to unprepared NRLCs.
The transition was introduced to tax NRLCs on the same footing as UK tax resident companies. As Corporation Tax rules may not replicate those that applied before 6 April 2020, it is possible that tax liabilities will be greater than would have been the case under Income Tax rules.
Many NRLCs are viewing the changes as a good opportunity to restructure and identify whether there are any beneficial tax reliefs or allowances that they could claim in future periods.
Tax payment dates
The payment of Corporation Tax is generally due nine months and one day after the end of a company’s tax accounting period, although for larger companies with profits in excess of £1.5m tax may be due by instalments in advance. This limit of £1.5m is reduced for companies that are members of a group. A one-off transitional rule applies so that the instalments for large companies and the instalments for very large companies will not start until the second accounting period. This means, however, that for a company that is ‘large,’ advance taxes may already have become due.
For a ‘large’ company with a 31 December year end, the first instalment payment for the year ended 31 December 2021 was due on 14 July 2021 and interest will therefore be accruing (currently at a rate of 1.1%) if payment has not yet been made.
Other tax administration
The due date for Corporation Tax returns will depend on the NRLC’s accounting period end, as tax returns should be submitted online to HM Revenue & Customs (HMRC) within 12 months of this. Therefore, if the NRLC has a 31 December year end, its first tax return will be due by 31 December 2021.
Corporation Tax computations form part of the tax return and must be submitted in Inline eXtensible Business Reporting Language (iXBRL) format.
Accounts will also be required in most cases. HMRC’s guidance explains the format for the accounts. Helpfully, the guidance clarifies whether there an exemption from filing accounts in iXBRL format.
Corporation Tax treatment of financing costs
The key area affecting NRLCs relates to the treatment of interest and other financing costs. Loan relationship rules are separate to those for the calculation of property income, and finance costs require more analysis than was the case under Income Tax rules.
In some cases, the loan relationship rules may defer relief until the interest is actually paid. This could include interest payable to participators or certain connected close companies. These rules can therefore be of particular relevance to the treatment of deeply discounted securities which have been used to finance a property acquisition.
Property investment companies holding more valuable property assets and finance costs which exceed £2m per annum should review the impact of the Corporate Interest Restriction (CIR) rules. The rules can restrict the interest which is deductible on an annual basis to a proportion (by default, 30%) of the company’s earnings before interest, tax, depreciation, and amortisation (EBITDA) with limited opportunity to utilise disallowed interest over future periods.
The £2m de minimis amount applies on a group basis so heavily geared groups will invariably need to review and analyse the impact of the rules very carefully. The review will require a detailed understanding of the wider group’s financing costs. There are several administrative requirements to satisfy which may also apply even if there is a standalone company.
Anti-hybrid rules may alternatively limit the deductibility of interest where structures involve either hybrid instruments or hybrid entities (i.e. entities that are treated as opaque under the rules of one tax jurisdiction but transparent for the purposes of another’s). A review of the lender’s overseas tax treatment may therefore be required for more complex structures.
Transfer pricing rules and other legislation can reclassify interest payable as non-deductible distributions.
Losses at 5 April 2020 and Corporation Tax losses
Income Tax losses carried forward at 5 April 2020 can be set off against future profits from the same property business but not against chargeable gains and must be used in priority to Corporation Tax losses.
The use of post-5 April 2020 Corporation Tax losses is potentially more generous than those incurred under the Income Tax rules. A company (or group if one exists) can relieve Corporation Tax brought forward losses of £5m per annum without restriction and after this amount, up to 50% of the remaining Corporation Tax profits can be sheltered by brought forward losses. There are also several administrative requirements to deal with.
A reminder that if a company disposes of its property asset(s), the property business may cease. This is particularly relevant when there are losses to carry forward, unless there is only a temporary pause, a company may lose any remaining brought forward losses after a property sale.
Before selling their properties, NRLCs should therefore review the potential impact on their carried forward Income Tax and Corporation Tax losses and whether any steps are required to preserve the losses.
Recommended areas to review
There are several areas NRLCs could review to mitigate some of the adverse effects of the Corporation Tax rules on their tax position.
1. Financing costs
NRLCs should review their financing arrangements if they have not already done so, as it may be advantageous to restructure loans or other lending instruments which are in place.
For larger companies, there are a number of elections within the CIR rules which could potentially achieve a better result than a headline deduction for finance costs of 30% of EBITDA.
An NRLC may be a Public Infrastructure Companies for the purposes of the CIR legislation; these companies can elect to exempt third party interest from the CIR rules.
A word of caution: the Public Infrastructure Companies exemption rules are extremely complex and inflexible and will not be appropriate for all NRLCs. As an election for the exemption to apply must be made during the relevant accounting period, timing is of the essence.
2. Untapped capital allowances
Some NRLCs holding mainly commercial property have not historically sought to maximise Capital Allowances claims, particularly if they are otherwise loss making.
Are capital allowances available in respect of expenditure which has been previously incurred, where claims have yet to be made? This will mainly be relevant to commercial properties, but for specific types of residential properties there may be aspects of a building which could qualify for capital allowances.
If a property has been acquired recently, have all available elections been made to pass the value of fixtures to a purchaser? Such claims must be made within two years after the purchase. These claims are available, and often overlooked, when a property has been acquired from a non-tax paying person (e.g. a pension scheme or charity), where the vendor was unable to claim capital allowances.
Alternatively, a vendor may have been unable to claim allowances on assets such as integral features acquired before April 2008, but a subsequent purchaser is not generally precluded from including such expenditure in claims post-acquisition.
Ideally, companies should pool expenditure as soon as possible after it is incurred to claim 100% relief (up to the current annual limit of £1m) under the Annual Investment Allowance (AIA).
It is generally advisable to allocate the AIA first against expenditure included in the special rate pool as the capital allowances rate of 6% is lower than 18% for the main pool. The AIA must be claimed within two years after the end of the accounting period. If a company has missed the opportunity to claim the AIA, this does not mean that it cannot claim capital allowances on expenditure on assets it still owns but the lower capital allowances rates will apply.
There may also be scope to claim the temporary enhanced capital allowances reliefs introduced in 2021 following the last-minute amendment to the rules to include landlords. If relevant expenditure has been incurred, NRLCs could claim a 130% ‘super-deduction’ for new main pool expenditure or a 50% unlimited special rate allowance for integral features. This may therefore be more generous than the AIA. Some NRLCs are actively reviewing whether it would be appropriate to bring forward expenditure plans to benefit from the rules.
3. Structures and buildings allowances
Structures and buildings allowances were introduced for expenditure incurred after 28 October 2018 and allow companies to claim allowances on the cost of constructing, renovating or converting commercial structures and buildings.
The rate of relief increased to 3% of cost per year from April 2020. Whilst the AIA does not apply in the context of structures and buildings allowances, these claims could generate a cashflow saving in respect of capital expenditure which does not qualify for capital allowances.
4. Research & Development (R&D)
One opportunity which may be explored is whether there is scope to claim R&D tax reliefs on expenditure which a company has incurred on the resolution of scientific or technological uncertainties.
While the qualifying conditions are complex, this is an area which is growing in interest for landlords and developers who invest in green technology.
For SMEs, the rules can mean enhanced deductions for relevant expenditure of 230% on qualifying R&D expenditure. Losses may alternatively be surrendered to HMRC in exchange for a 14.5% cash repayment.
5. Land remediation relief
If costs have been incurred on cleaning-up contaminated land and buildings, companies could benefit from Land Remediation Relief which mean enhanced tax deductions may be available.
Similar to R&D rules, losses may also be surrendered for a repayable credit worth 24% of the spend.
6. Corporation Tax loss reliefs
As explained, Corporation Tax property losses (and loan relationship deficits) arising from 6 April 2020 can be transferred between group companies, which was not the case under the Income Tax rules. There is also scope to relieve capital losses of a 75% group member against gains of another if a joint election is made.
Where ownership is less than 100%, it is always recommended that companies review the group definitions. The definition of a 75% Corporation Tax loss group requires entitlement to 75% of distributable profits and assets on a winding up. This may be relevant to more complex investment structures.
Would you like to know more?
The introduction of the Corporation Tax basis for reporting income of NRLCs has introduced significant changes and the impact may only just be clear now that the first Corporation Tax accounting period returns are being prepared.
It is recommended that NRLCs review whether they are optimising reliefs available and claim any relevant allowances. This article provides a snapshot of possible opportunities for NRLCs to explore. While capital allowances which have not been claimed historically may be of key importance, there are other areas which NRLCs could review.
The Blick Rothenberg Property & Construction group includes a dedicated team which has been supporting NRLCs through the transition to Corporation Tax. If you have any questions or would like to discuss how this may affect you or your clients, please get in touch with one of the contacts listed on this page.
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