From 6 April 2020, an overseas company that owns UK rental property moves from the income tax regime into the corporation tax system.
The income tax legislation requires rental profits to be calculated for the year to 5 April. Corporation tax, in contrast, is not charged by reference to the tax year. The charge is based on the company’s accounting year.
In practice, in the past, an overseas company has often not used the fiscal year figures where it has prepared accounts for its own domestic purposes to a date other than 5 April. For example, most US companies adopt a 31 December accounting year in line with the US tax year. In such a case, it has often not been felt cost-effective to prepare additional 5 April accounts for UK tax purposes. Instead one of two pragmatic solutions has been adopted, namely:
1. Apportioning the figures shown in the US accounts. For example, calculating the UK profits for the year to 5 April 2020 by adding 9/12ths of the profits for the year to 31 December 2019 to 3/12ths of those to 31 December 2020, or
2. Treating the profits of the year to 31 December 2019 as if they were the profits for the year to 5 April 2020.
Neither of these solutions has been formally endorsed by HMRC. It is usual to note on the UK tax return which of the above assumptions has been made to arrive at the UK taxable profits, and HMRC have not challenged the treatment adopted although they have not formally agreed to it either.
This problem does not arise where a company has a 31 March accounting date as HMRC are content to regard 31 March as if it were 5 April.
So what happens now where one of the above non-statutory short-cuts has been adopted in the past?
Where the apportionment method (method 1 above) has been used, there is unlikely to be a problem. The legislation deals with the transitional year by treating the company’s transitional accounting year as starting on 5 April 2020. So a US company with accounts to 31 December 2020 will be treated as having a corporation tax accounting period from 6 April 2020 to 31 December 2020, and only the 9 months profit of that deemed accounting period will be charged to corporation tax. Provided that 12 months profits have been declared each year, HMRC are unlikely to want to disturb the previous assessments as they will have taxed the profits for the whole of the period that the rental business has been carried on.
Where the profits of the company’s accounting year ending in the UK’s fiscal year have been adopted as the measure of the income of the fiscal year (method 2), it may appear that some income escapes tax. In the above example, the profits for the three months from 1 January 2020 to 5 April 2020 will not form the basis of the tax payable for any year for either income tax or corporation tax. However, this is not because profits are not being taxed; it is because the profits of an accounting year of the company have been treated as a fair measure of the profits for the fiscal year. If the income in that missing period is exceptionally high, this ought to be disclosed to HMRC to give them the opportunity, if they wish, to revise the amount assessed to income tax in earlier years. However, if they are a normal amount as compared with earlier years, it is probably not necessary to raise this with HMRC where previous returns have explained that the figures adopted as the profits for the fiscal year were based on the company’s accounts ended during the fiscal year.
If you have any questions or concerns, please do not hesitate to contact our tax team directly.