UK land trading and development

Fri 15 Jul 2016

Finance Bill 2016 will contain new rules taxing profits from trading in and developing UK property, effective from the date when they are included in the Bill at the Committee Stage. HMRC opened consultation on the content of the provisions through a technical note issued on 16 March (Budget day 2016) and the changes were originally intended to be introduced later in the Bill’s progress, at the Report Stage.

The new rules are being brought in because the Government’s previous attempt to curb what it sees as unacceptable avoidance of UK tax by property developers, by treating a building or property development site as a permanent establishment (PE) have proved too easy to circumvent.

This is how David Sayers, International Tax Partner, Mazars LLP summed up the proposed changes when commenting on the Budget:

“The core change is that non-resident companies will be taxed on trading from a UK property trade regardless of whether or not they have a UK “permanent establishment”.  This change is in line with most of the UK’s double tax agreements, although a few of the older treaties will require changes to make this clear (e.g. Jersey, Guernsey and Isle of Man, with which appropriate protocols have been agreed).

The detailed rules will, however, be more complex and will be designed to prevent so-called “fragmentation”.  An example of this is where one non-UK company holds UK land but another non-UK related company carries out the development and makes the majority of profits in its capacity as a “service provider” rather than as a land-owner.  In such circumstances, the intention is that the development company’s profits will be taxed as well as those of the land-owning company.

Similarly, new rules will also be introduced to combat “enveloping”, that is the disposal of shares in multiple SPV’s rather than the underlying real estate itself. This is essentially a widening of the existing rules relating to Transactions in Land, which were previously found to be ineffective.

No clear details have been given as to how the new rules will apply to existing development projects that straddle the commencement date, save a comment that “the charge will be based on profits from disposal made on or after that date”.  Our suspicion is that existing projects will be caught, although to the extent that any profit can be allocated to the period pre-commencement, that profit would be outside the new rules.  (This then raises the tricky question as to how that profit element would be calculated.)

Similar changes will be made to income tax, so that individuals, partnerships and trusts carrying on a trade of dealing in or developing UK land can likewise not avoid UK tax.

Of course, there is always the practical matter that HMRC may not necessarily be in a position to enforce payment against persons that are not based in the UK.  If it proves difficult to collect the tax in practice, the Government has signalled that it will consider introducing a withholding tax in order to ensure full compliance with the new rules.

The position for offshore investors in property who are holding for the longer term (i.e. are not in the business of UK property development) remains unchanged.”