In the second of two articles on dealing with foreign entities in UK property deals, Neil Warriner and Casey O’Hara discuss the tax implications
Following last week’s article, The cost of opinion (EG, 28 February, p105), what are the timing and procedural implications of transactions relating to investment in UK commercial real estate, both for the non-UK company itself, and also for other parties to the transaction?
Setting up the non-UK company
In order to be non-resident for UK tax purposes, a non-UK incorporated company must be “centrally managed and controlled” (ie decisions about the strategic policy and direction of the company must be made) outside the UK. This is a factual test, based on what actually happens in practice. However, at the outset, the constitutional documents should set up a framework that supports maintenance of non-UK residence (eg appointment of appropriately qualified directors, no board meetings in the UK and the majority of directors are non-UK resident, etc).
In addition, care must be taken not to create any permanent establishment in the UK for tax purposes (this can be an office or even the presence of employees). Appointing a truly independent asset manager or managing agent should not create a permanent establishment.
The non-resident landlord (NRL) scheme
Non-UK resident companies entitled to rental income from UK real estate do not pay UK corporation tax but instead pay income tax, currently at the rate of 20% on the profits of the property rental business.
The NRL scheme is designed to encourage UK tax compliance by requiring tenants and/or UK letting agents to deduct UK income tax from rent and other income payments made to a NRL unless the NRL has obtained authorisation from HMRC to receive gross payment. Even if a NRL receives such authorisation, it will need to declare its income on its UK tax return and pay any tax due. Key transactional implications include:
• The authorisation must be in place before any rental payment (or other payment of an income nature) is made gross to the NRL. If it is not, and the tenant is making the payment directly to the NRL, then the tenant must deduct 20% from the payment and account to HMRC. If the tenant fails to do so and makes the payment gross it will still have an obligation to pay the 20% to HMRC.
• This can be avoided if the NRL appoints a UK agent to receive payments. The tenant can pay the agent gross and the agent will then wait to receive authorisation from HMRC before paying on to the NRL.
• Registering under the NRL scheme can take several weeks. However, a registration cannot be made on a pre-emptive basis and may be refused unless the non-UK company already holds UK property or has entered into a contract to acquire UK property. If payments of rent are expected shortly after completion of a transaction, consider whether there will be sufficient time to obtain an authorisation or if an alternative solution (ie deferral of payment or retention of payment by the UK agent) is required.
VAT
A non-UK company making taxable supplies of UK real estate (ie, new build commercial or where an option to tax has been made) will still need to register for VAT in the UK and account to HMRC for VAT on the land supplies it makes.
The VAT legislation applies to non-UK and UK companies in broadly the same way, but there are a number of important differences:
• For an overseas company, making any taxable supplies in the UK will trigger a requirement to register (unlike a UK company, which needs to make £81,000 of taxable supplies before it is required to register for VAT).
• VAT registrations for non-UK companies are dealt with by a separate VAT office in Aberdeen and can take longer to process. Sending the application for registration to the incorrect office can cause delays.
• An important practical tip is that, if the overseas company expects to receive VAT refunds (because it is incurring VAT on supplies to it but is not yet making taxable supplies itself) then it will need to include details of a UK bank account with its VAT registration and will need to set this up as soon as possible.
• Supplies received by non-UK companies will still incur UK VAT if they relate to UK land (ie preparation of a certificate of title or lawyers acting on the acquisition of a UK property). However, supplies not connected to land (ie advice in relation to financing or corporate arrangements for the non-UK company or acquiring shares in another non-UK company holding property) may be outside the scope of
UK VAT.
Withholding tax
If the non-UK company is to receive any payments of interest that have a UK source, there may be UK withholding tax. HMRC clearance may be obtained for gross payment, depending on the non-UK company’s jurisdiction of residence. This process can take several weeks to process and so, as with NRL authorisations, alternative solutions may be required if the clearance is not likely to be in place when payment is due.
Early consideration is key
What is clear is that early identification of which registrations will be required and what payments are likely to be made (and when) is essential to ensure that there are not unexpected delays or cash flow issues. Tax advice should therefore be sought at the outset.
Important tax reminders for real estate transactions involving an overseas company
- Documents created at the outset (constitutional documents, board minutes, business plans etc) should provide the framework for the non-UK company to be centrally managed and controlled outside the UK (though what happens in fact is what matters).
- The tax registrations and compliance required for non-UK companies can have timing implications for the transaction and/or give rise to cash flow issues if not carefully managed and considered at an early stage of the transaction.
- Withholdings from rent or interest payments received by the non-UK company may be required if payments are made before necessary HMRC authorisations are in place.
- VAT registrations should be made promptly to ensure that VAT recovery is available in a timely manner and will always be required if the non-UK company makes any taxable supplies.
Neil Warriner is a partner and Casey O’Hara is an associate in the tax team at Herbert Smith Freehills LLP, London
