UK and International Tax news

HMRC Guidance On Profits From Dealing Or Developing UK Land

Tuesday 28th February 2017

HMRC has recently published guidance on how non UK resident developers of UK property are to be subject to UK tax following announcements made in the 2016 Budget and provisions in FA2016.

The rules apply to resident and non resident companies and individuals carrying on a trade of dealing in or developing UK land either directly or indirectly through, for example, holding an interest in a partnership that carries on a trade of dealing in or developing UK land. Where the income or profits are already fully chargeable to tax,as income in the UK, there will be no double charge. This should mean there will be no impact on UK businesses if profits are already fully taxed as income in the UK

Amendments to the territorial scope provisions  within s.5 CTA 2009 and s.6 ITTOIA 2005 extend the scope of UK taxation to profits from a trade of dealing in or developing UK land, regardless of the residence of the person making the disposal.

The transactions in land legislation is also repealed and replaced by the new legislation with additional provisions, including specific rules with regard to fragmentation, enveloping and anti -avoidance.

Prior to the FA 2016 changes, a non-resident company was chargeable to UK corporation tax, only to the extent that the profits were attributable to a UK permanent establishment. It is now no longer necessary for it to be trading through a permanent establishment in the UK or to be resident in the UK.

In circumstances where its arrangements met the specific conditions in Part 3 FA 2015, it may have been charged to Diverted Profits Tax

The expansion of the territorial scope does not impact the treatment of rental income to non-resident landlords. Where a non-resident company which does not carry on a trade in the UK through a permanent establishment in the UK is within the new CT charge and holds investment properties or derives rental income from properties in the UK such rental income remains subject to income tax and is not taxed as part of the new trade.

Where a non-resident company is within the new CT charge and it derives rental income from properties it holds as part of its trade, the rental income will be subject to corporation tax if it is derived from a permanent establishment in the UK. If the non-resident company has no permanent establishment in the UK the rental income will be subject to income tax.

The legislation applies to disposals from 5 July 2016 and the anti -forestalling rules apply to transactions on or after 16 March 2016.

Of particular note is how the new rules override treaty protection for traders in UK land, whether by amending the treaty or overriding it under domestic law.

Amendments to the Jersey, Guernsey and Isle of Man treaties with the UK were made with effect from 16 March 2016 to allow the UK to tax trading profits from the disposal of UK land and now provide that ‘gains derived by an ‘island’s resident’ from the alienation of UK immovable property may be taxed in the UK. This also applies to gains from unquoted shares deriving more than 50% of their value from UK land.

A key question is whether the change which allows the UK to tax gains on UK land includes trading profits as the capital gains article of a treaty does not normally deal with trading profits. This will depend on the interpretation, object and purpose of the relevant terms.

Non UK resident investors will need to ensure that their investment status is supported by evidence as whilst HMRC say that the new rules only apply to traders seeking to avoid tax, they do apply where one of the main purposes of acquiring the land is to realise a profit or gain from its disposal.  The guidance, to be included in HMRC’s Business Income Manual, includes a number of examples of investment versus trading transactions.

As far as treaty override is concerned, the new CTA 2009 provision refers to entering into an arrangement which includes a main purpose of obtaining a relevant tax advantage.

Where HMRC argue that the purpose of a treaty is not to permit double non taxation, it may be preferable for the developer to choose a jurisdiction for a new structure which does tax profits.

If you would like more information on the above, please contact Keith Rushen on 0207 486 2378.

 

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