Not mentioned in the verbal statement, but tucked away in paragraph 4.26 of the Autumn statement, was a key announcement for non-resident landlords. Namely that:
- the government is considering bringing all non-resident companies receiving taxable income from the UK into the corporation tax regime; and that
- there will be a consultation at Budget 2017 (normally in March)
The reasons cited were to deliver equal tax treatment to ensure that all companies are subject to the rules which apply generally for the purposes of corporation tax, including the limitation of corporate interest expense deductibility and loss relief.
So what does all this mean?
The announcement is not unexpected. It is in line with the OECD proposals on profit shifting (BEPS) and follows on from the announcement of the restriction from April 2017 on the restriction of interest deductibility (and on use of brought forward losses) for existing corporation taxpayers/groups.
Nonetheless, the change will, if implemented (which we believe it will) have potentially huge implications for the many non-resident companies and groups, including funds, whose structuring of investments in UK real estate includes debt, in particular internal debt, in the structure.
In particular, under the rules for corporation tax, there is a potential restriction to 30% of EBITDA with an alternative group test, where potentially all external debt may be deductible, but related party debt would not be deductible at all. The implication for relevant investments by non-UK resident landlords would be a reduction in the tax deductions against rental for the holding vehicle and, correspondingly, a reduction in the commercial return from the investment for the investors themselves. Of course, depending on their structure, some investments will be more at risk than others, with those with profit participating debt - which is very common looking particularly vulnerable - so restructuring at the very least is likely. On the plus side, the corporation tax rates are now scheduled to fall to 17% by 2020, so, under such a change, the rates at least would then be lower than the headline 20% under the current income tax regime.
The other, more substantial risk for many, is whether, by extending the corporation tax regime to non–residents, the government would also bring capital gains into the UK tax net. That is potentially implicit if there is to be "equal treatment" as the statement implies, subject to, it is assumed, certain important exceptions, for widely held structures, such as for REITs and their equivalents and certain funds to mirror other existing reliefs. The government has already this summer extended the ambit of corporation tax to profits from trading in land of non-UK companies. However, a potential extension to gains on investments is not mentioned at all in this press release and it is quite possible that it is not even being contemplated. There will certainly be strong lobbying against it, if it is, with a major focus on the commercial implications of such a change to the historic status quo for the UK economy – particularly at the moment, given all the existing uncertainty around Brexit.
The exemption from the taxation of capital gains for non-residents is, nonetheless, a particular benefit of investment in the UK and is quite unusual amongst nations. It is, of course, another factor that makes the UK particularly attractive as an investment jurisdiction. As such, the question of whether it would be retained was expressly raised by the industry at the time of the changes to the rules which brought non-residents’ gains from UK residential property into the tax net. At that time, the government confirmed that it would be. However, if all non-resident companies’ gains from UK assets were to become taxable, we would, at the very least, expect the government to accept (as they did in relation to the taxation of non-residential property) the economic argument for certain exemptions from the charge to continue to allow investment by large institutions and funds. Let’s hope we get clarity as soon as possible.
The rules are not of course limited to real estate assets but will be potentially much broader, catching other UK sources of income, such as interest and indeed royalties – subject to the usual treaty provisions. In practice, these too could impact on the structuring of transactions and financing and, indeed, on commercial terms, if there is more tax leakage to the relevant parties. One particular issue is whether it could effectively run a coach and horses through the relevance of structuring where current rules do not in practice generally tax income if there is no UK withholding tax.
Generally, bringing all non-resident companies into the corporation tax net, whatever final form that takes, is likely also to see an increased uptake in the use of UK based vehicles, where possible.
As for timing, the Autumn Statement gives little away on this save to indicate that a consultation is likely to start in March. Accordingly, and given the significance and complexity that the change would bring, whilst it is possible that any new rules would be in place for Autumn 2017, it would seem more likely that they would not be introduced until at least Spring 2018 (perhaps 6 April 2018 so as to coincide with the start of the 2017-2018 tax year).
The precise text of the announcement is set out below for fullness:
Bringing non-resident companies’ UK income into the corporation tax regime – The government is considering bringing all non-resident companies receiving taxable income from the UK into the corporation tax regime. At Budget 2017, the government will consult on the case and options for implementing this change. The government wants to deliver equal tax treatment to ensure that all companies are subject to the rules which apply generally for the purposes of corporation tax, including the limitation of corporate interest expense deductibility and loss relief rules.