Non-UK Resident Companies and the Small Profits Rate: HMRC Clarifies the Position

There has been ongoing confusion around whether non-UK resident companies that are subject to UK Corporation Tax—for example, those receiving UK rental income or carrying on a UK property development trade—can benefit from the small profits rate or marginal relief, introduced from 1 April 2023.

Some non-resident companies have filed their Corporation Tax returns using the lower small profits rate or have claimed marginal relief in error. HMRC has since clarified its position on this issue.

The Legislative Background

Under Section 18A of the Corporation Tax Act 2010 (CTA 2010), the small profits rate applies only to companies that are UK resident during the accounting period.

However, confusion has arisen in part due to non-discrimination clauses found in many of the UK’s double tax treaties. Some taxpayers and advisers believed these clauses might extend the small profits rate to non-resident companies, arguing that such companies should be treated in the same way as UK residents.

HMRC’s view, however, is clear. The non-discrimination clauses in treaties based on the OECD Model Convention do not apply in this context. A company that is not resident in the UK is not “in the same circumstances” as a company that is UK resident. As a result, there is no discrimination in restricting the small profits rate to UK resident companies only.

HMRC Action and Compliance

Through its one-to-many communication programme, HMRC has written to non-resident companies with UK rental income to confirm that the main rate of Corporation Tax (25% from 1 April 2023) applies.

Where HMRC has identified that a company has incorrectly applied the small profits rate or claimed marginal relief, it has issued a CT620 “Notice of Correction” setting out the additional Corporation Tax due.

Key Takeaway

Non-UK resident companies subject to UK Corporation Tax should not apply the small profits rate or marginal relief. The main Corporation Tax rate of 25% applies from 1 April 2023, and the updated CT600 coding from 1 April 2025 will help ensure that the correct rate is used automatically.