Andy Tall explores the principle of ‘non-discrimination’ and explains why most non-resident companies with UK property income cannot rely on it to pay corporation tax at a rate lower than 25%.
In May 2024, HMRC updated its guidance on the corporation tax online service to highlight an issue affecting non-UK resident companies. Briefly, HMRC had identified a number of non-UK resident companies with income from UK property (referred to here as corporate non-resident landlords, or CNRLs) who may have made an error in completing their corporation tax returns by failing to apply the correct rate of tax. HMRC believes that a CNRL can only benefit from the small profits rate of corporation tax or from marginal relief in very limited circumstances. In recent months, HMRC has begun to contact some of the affected companies.
At first sight, denying CNRLs access to the small profits rate and marginal relief would appear to contradict the principle of ‘non-discrimination’, which is present in most of the UK’s double tax agreements (DTAs). However, in this article I’ll explain why HMRC is correct.
The rate of corporation tax
From April 2020, CNRLs are subject to corporation tax on income from UK property.
Corporation tax is paid at the rate of 25% except where:
- profits do not exceed the lower limit, in which case tax is paid at 19%; or
- profits exceed the lower limit but not the upper limit, in which case marginal relief applies with the result that the tax rate is between 19% and 25%.
Small profits relief and marginal relief are restricted to companies that are resident in the UK
The lower limit is £50,000 and the upper limit is £250,000 for a 12-month period. The limits are divided by the number of associated companies plus one. Broadly, a company is associated with another if one controls the other or both are under common control.
Restriction to UK residents
As is common in UK taxation, small profits relief and marginal relief are restricted to companies that are resident in the UK. However, this is subject to the application of any non-discrimination article in the relevant double taxation agreement (DTA).
HMRC describes the purpose of a non-discrimination article in the following terms:
“Some Sections of the Taxes Acts apply only to and may give particular reliefs only to United Kingdom residents. If there were no non-discrimination Article, a resident of an agreement country who had income arising in the United Kingdom, or who controlled a United Kingdom enterprise, might be liable to more United Kingdom tax than would a United Kingdom resident in the same circumstances.”
Why then does HMRC believe that a CNRL is prevented from benefitting from the small profits rate or marginal relief in most circumstances?
Non-discrimination
Most UK DTAs include a non-discrimination provision that is based on Article 24 of the OECD’s model tax convention on income and capital. As explained in the commentary to the convention, the purpose of Article 24 is to “prevent differences in tax treatment that are solely based on certain specific grounds”. The two circumstances relevant here are discrimination on the grounds of:
- nationality (paragraph one); and
- the situs of an enterprise (paragraph three).
The relevant part of each paragraph is reproduced below:
Paragraph one: Nationality
“Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected.”
Paragraph three: Situs of an enterprise
“The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities.”
In summary, where the DTA includes a non-discrimination article based on Article 24, and the CNRL falls within either paragraph 1 or paragraph 3, HMRC would be incorrect to deny access to the small profits rate or marginal relief.
Nationality
The commentary on Article 24 says that, in the case of a legal person (eg, a company) a ‘national of a contracting state’ means a person who “derives its status as such from the laws in the contracting state”. In most cases, this is the state in which the person is incorporated or registered and, under the domestic law of many states (including the UK), “incorporation or registration constitutes the criterion, or one of the criteria, to determine the residence of companies for the purposes of Article 4” (residence).
Accordingly, on the face of it, the CNRL would appear to fall within paragraph 1: it is a national of a contracting state subject to tax in the other contracting state and denied relief available to nationals of that other contracting state carrying on similar activities. However, this oversimplifies the expression “in the same circumstances”, particularly in the context of a company.
A non-UK resident national cannot be ‘in the same circumstances’ as a UK resident national
The commentary on Article 24 explains that the expression means “in substantially similar circumstances both in law and in fact” and that the reference “in particular with respect to ‘residence’” makes clear that the residence of the taxpayer is one of the factors that are relevant in determining whether taxpayers are placed in similar circumstances. Put simply, a non-UK resident national cannot be “in the same circumstances” as a UK resident national, as “residence” is a factor which is specifically identified as distinguishing the circumstances of one taxpayer from another. Paragraph 1 cannot therefore apply to a corporate non-resident landlord.
Situs of an enterprise
The purpose of paragraph three, as explained in the commentary to Article 24, is to prevent discrimination in the treatment of permanent establishments (PEs) as compared with resident enterprises. Article 5 provides a definition of a PE. A company may have a PE in a country where:
- it has a “fixed place of business through which the business of an enterprise is wholly or partly carried on” in that country; or
- a person (eg, an agent) is acting on the company’s behalf in that country, concluding contracts in the name of the company.
It is accepted that the holding of a UK rental property does not, on its own, constitute a PE, as the definition of PE in Article 5 of the OECD treaty is interpreted to not include a rental business as such a business lacks human and technical resources enabling it to act independently. Therefore, paragraph three will only be relevant where the CNRL has a UK PE in addition to its property rental activities.
Where this is the case, HMRC’s guidance states that, in determining if the small profits rate or marginal relief applies, reference should be made to:
- the income and profits of the company as a whole including other PEs (whether or not in the UK); and
- non-UK resident companies, as well as UK resident companies, in determining the number of associated companies.
Completing the CT600
In summary then, the majority of CNRLs will not benefit from the small profits rate or marginal relief. Arguably, this situation was not helped by the format of the corporation tax return (CT600). HMRC’s advice on how to ensure the correct rate of tax was applied was to indicate that the company was a close investment-holding company when completing the box ‘Type of company’. Thankfully, the position is improved from April 2025 onwards as the CT600 has been updated to allow the company to indicate that it is a non-resident company.
Andy Tall, Partner, HW Fisher
