Income tax: Changes to the regulations for the Non-residents Landlord Scheme
Published 17 February 2020
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This publication is available at https://www.gov.uk/government/publications/income-tax-changes-to-the-regulations-for-the-non-residents-landlord-scheme/income-tax-changes-to-the-regulations-for-the-non-residents-landlord-scheme
Who is likely to be affected
Non-UK resident company landlords that have an amount on account of tax withheld from rents collected on their behalf by agents, and agents who pay financing costs or who direct others to pay financing costs on behalf of a non-UK resident company landlord.
General description of the measure
Finance Act 2019 enacted rules whereby non-UK resident companies that carry on a UK property business, or have other UK property income, will be charged to Corporation Tax on their property income, rather than being charged to Income Tax as at present. As a consequence, they will be subject to the Corporate Interest Restriction rules at Part 10 of the Taxation (International and Other Provisions) Act 2010 (“TIOPA 2010”) on the deductibility of financing costs.
Some of these non-UK resident company landlords have an amount withheld on account of tax from their rents under the Non-residents Landlord Scheme.
This measure amends the Non-residents Landlord Scheme Regulations which govern the Non-residents Landlord Scheme. It introduces a rule, subject to an irrevocable election, to enable an agent, being a prescribed person under the Non-residents Landlord Scheme, who has paid out financing costs (or has directed others to pay out financing costs) on behalf of the non-UK resident company landlord to apply an alternative to Corporate Interest Restriction as set out at Part 10 of TIOPA 2010.
Policy objective
The rule introduced by this measure will enable those agents who are prescribed persons under the Non-residents Landlord Scheme to use an alternative rule to Corporate Interest Restriction as set out at Part 10 of TIOPA 2010.
In many cases, the alternative rule will lead to the right amount of relief for financing costs and the right amount being withheld on account of tax. A non-UK resident company landlord must pay any shortfall if the amounts withheld under the Non-residents Landlord Scheme do not meet its Corporation Tax liability.
Background to the measure
Following announcement at Autumn Statement 2016, the government consulted in March 2017 on the case and options for bringing non-UK resident companies’ UK property income and gains (previously chargeable to Income Tax and non-UK resident Capital Gains Tax respectively) into Corporation Tax. Some of these non-UK resident company landlords had an amount on account of tax withheld from their rents under the Non-residents Landlord Scheme.
At Autumn Budget 2017, the government published a response document to the consultation and announced that it would make this change in April 2020.
Changes to the taxation of non-UK resident Capital Gains Tax gains were enacted at section 13 and Schedule 1 to the Finance Act 2019 and came into force on 1 April 2019.
Following a technical consultation, changes to the taxation of the UK property business or other UK property income of a non-UK resident company were enacted at section 17 and Schedule 5 to the Finance Act 2019 and come into force on 6 April 2020.
Detailed proposal
Operative date
The amendments will have effect on or after 1 April 2020, subject to transitional provisions in relation to financing costs attributable to the period before 6 April 2020.
Current law
The rules governing the Non-residents Landlord Scheme are the Taxation of Income from Land (Non-residents) Regulations 1995 (S.I. 1995/2902) which came into force on 1 December 1995.
Proposed revisions
The SI substitutes wording at regulation 9(4) of the Taxation of Income from Land (Non-residents) Regulations 1995 so that, if an irrevocable election has been made, financing costs that have been calculated under an alternative rule to Corporate Interest Restriction are included as specified expenses for the purpose of calculating the amount on account of tax to be withheld.
The SI introduces new regulation 9A which sets out the alternative rule to Corporate Interest Restriction. The rule provides that the deduction for any financing costs is limited to a fixed allowance of 30% of the UK rental income net of deductible expenses other than financing costs. Any unused allowance may be carried forward from one quarter period to the next, and any unused financing costs above the allowance may also be carried forward.
The rule is subject to an irrevocable election which is made by the prescribed person and is to be notified to Her Majesty’s Revenue and Customs with the annual return that is made by the prescribed person under the Non-residents Landlord Scheme.
Transitional provision is made to disregard any financing costs attributable to the period before 6 April 2020 for the purposes of applying the alternative rule to Corporate Interest Restriction.
A consequential amendment to the interpretation of the term “deductible expense” is made to reflect how relief for financing costs is given for Corporation Tax.
Summary of impacts
Exchequer impact (£million)
| 2019 to 2020 | 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 | 2024 to 2025 |
|---|---|---|---|---|---|
| - | Negligible | Negligible | Negligible | Negligible | Negligible |
This measure is expected to have a negligible impact on the Exchequer.
The impacts of the original Non-UK Resident Company Landlords measure were set out in Table 2.1 of Budget 2017 when the policy was announced. More details can be found in the policy costings document published alongside Budget 2017. Revisions to the impact of the measure in light of changes made here will be subject to scrutiny by the Office for Budget Responsibility and will be set out at the next fiscal event.
Economic impact
This measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
This measure has no impact on individuals as it only affects companies. The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
We do not anticipate that this measure will impact on groups sharing protected characteristics.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on an estimated 6,300 agents who are “prescribed persons” that pay financing costs on behalf of non-UK resident company landlords some of whom may make an election to apply the alternative to the Corporate Interest Restriction rules in respect of financing costs paid by it or paid at its direction.
From 6 April 2020, a prescribed person must identify whether the non-UK resident landlord is subject to Income Tax or Corporation Tax and to apply the relevant rules when working out the amount on account of tax to withhold. If the non-UK resident landlord is subject to Corporation Tax, the prescribed person must have regard to the Corporate Interest Restriction rules as set out at Part 10 TIOPA 2010 in order to determine if the financing costs can be taken into account. Corporate Interest Restriction is complex and being reasonably satisfied as to its application may require the prescribed person to have, or obtain, detailed knowledge of the non-UK resident landlord and its wider group funding requirements.
This measure provides an alternative rule in place of Corporate Interest Restriction. The rule provides that the deduction for any financing costs is limited to a fixed allowance of 30% of the UK rental income net of deductible expenses other than financing costs. Any unused allowance may be carried forward from one quarter period to the next. Any unused financing costs above the allowance may also be carried forward
One-off costs will include familiarisation with the changes and identifying where an election would be beneficial. Where an election is made, one-off costs are also expected to include inserting the rule into existing processes used for the purposes of determining the amount to be withheld on account of tax from the rental income of the non-UK resident company landlord.
On-going costs could include ensuring that the rule is correctly applied.
Where prescribed persons are in a position, and elect, to use the alternative rule to Corporate Interest Restriction, customer experience is expected to improve given that this is a simpler process. In all other cases, customer experience is expected to stay broadly the same.
There is expected to be no impact on civil society organisations.
Operational impact (£million) (HMRC or other)
There are no changes to the operational impact on HMRC for the Non-residents Landlord Scheme.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be kept under review through communication with affected taxpayer groups.
Further advice
If you have any questions about this change, contact Susan Gardner on Telephone: 03000 563815 or email: susan.m.gardner@hmrc.gov.uk.
Declaration
The Rt Hon Jesse Norman MP, Financial Secretary to the Treasury, has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.