Autumn Statement – a tax ticking time-bomb for developers?

Author: Neil Warriner, Partner, Real Estate Tax, London

From a real estate tax perspective, the Autumn Statement was a bit of a damp squib, but confirmation of a couple of well-trailed changes to restrict relief for interest costs and the use of carried-forward losses for corporation tax purposes, together with one apparently innocuous announcement of (yet another) consultation relating to non-UK companies, could potentially have a much bigger impact for developers of UK property in the not-too-distant future.

The two general changes to take effect from April 2017 for corporation tax purposes are:

• on interest costs, deductions for large companies or groups of companies (ie with net interest expenses of more than £2m) will from next year be restricted to, broadly, 30% of UK taxable earnings; and
   
• on carried forward losses, they will only be capable of being used to shelter up to 50% of taxable profits of any year to which they are carried forward, instead of up to 100% as now, though there will also be a £5m allowance for each standalone company or group.

These two things could affect groups like the major housebuilders and REITs who have taxable profits and use interest costs and losses carried forward for shelter. Although ultimately relief for the costs and losses won't be lost, use of that relief will be spread over a much longer period and could therefore significantly impact development appraisals.

These two changes don't apply to non-UK resident income tax paying companies, so there's no immediate problem for them, but this is where the apparently innocuous announcement comes in. It was to the effect that "[t]he government is considering bringing all non-resident companies receiving taxable income from the UK into the corporation tax regime…[t]he 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".  So many international investors who use, say, leveraged Luxembourg, Channel Islands or BVI companies to fund their acquisitions and developments could also find their financial appraisals significantly impacted and 'dry' tax charges arising, especially larger developments with pre-lets including rent-free periods where taxable income in the early years after practical completion is calculated by reference to accounting rules that spread the rental income over the whole of the life of the lease, notwithstanding the absence of cash flow at that time. There is also the possibility, given the way the announcement is worded, that non-resident companies could also be brought within the charge to tax on capital gains because corporation tax applies not only to income but also to such gains.

The consultation is said to brought forward at Budget 2017, but to avoid any further stagnation in the new developments pipeline, the sooner some detail is provided about how far this will go, the better.

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