Government clamps down on offshore developers of UK land
Until now the general rule has been that liability to UK tax in respect of trading activities has only arisen where the trade is carried on by a UK resident or where the underlying business is represented by what is termed a permanent establishment.
This limitation to the scope of UK tax has been used in a wide range of circumstances on UK property development projects. A common example of this would be the development of UK property by say a Jersey or Guernsey resident company. The assertion was that by its very nature a development site is not a permanent establishment: by its very nature, the carrying on of business at the site is intended to be time limited i.e. not permanent.
An attack on the use of this route was announced in the Budget, however, the proposed legislation regarding this matter was not published until 5 July 2016. The objective of this new legislation is to ensure that profits they generated from trading in and developing UK land are subject to UK tax regardless of the residence of the underlying developer and whether or not there is a permanent establishment.
The rules will capture the profits of a UK property trade carried on by a person in so far as the trade consists of:
- dealing in any estate, interest or right in or over land in the UK, or
- developing any land in the UK with a view to disposing of any estate, interest or right in or over the land; this will include redevelopment.
- To be captured by the new rules, one of the following requirements must be met:
- One of the main purposes of acquiring the land was to realise a profit or gain from disposing of the land;
- One of the main purposes of acquiring any property deriving its value from land (e.g. shares) was to realise a profit or gain from disposing of the land;
- The land is held as trading stock; or
- One of the main purposes of developing the land was to realise a profit or gain from disposing of the land when developed.
These new provisions (coupled with various tax treaty changes reinforcing these new rules) will impact on how development of UK property is dealt with going forward. For developments in progress, where reliance was being placed on an absence of permanent establishment to mitigate exposure to UK tax, immediate consideration needs to be given to any resulting exposure.
These new provisions are stated to be part of creating a level playing field. Time will tell what the economic impact of widening the tax base in this fashion will be to UK property development.
If you are an offshore UK land developer and have any immediate questions please contact your local office or send enquiry as we are interested in discussing this with you.