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Offshore traders and developers
Changes in the 2015 Budget introduced the Diverted Profits Tax. Details were provided in our newsletter at the time. One of the categories of transaction covered was for overseas companies operating in the UK without a permanent establishment. The 2016 Budget included further measures specifically to target such transactions in respect of property trading and development. This is not covered in the this Finance Bill but was included in a technical note published by HMRC which can be found here. This is a consultation document to which responses are required by 29th April.
On the face of it, the new proposed changes are unnecessary as the Diverted Profits Tax already provides HMRC with the means to challenge such arrangements. As the technical paper notes, in practice it is very difficult for an overseas company to avoid creating a UK PE where it has engaged contractors to carry on construction activities at a UK building site. HMRC is challenging structures such as these and considers it has strong arguments that a UK PE exists. The Diverted Profits Tax significantly strengthens HMRC's ability to mount such an argument if it is reasonable to assume that the activities of the overseas company are designed to avoid a charge to corporation tax. However, some business have argued that this does not allow the UK to tax the entire profit from the development. This would seem to us to be tenuous, but HMRC seem keen to put the position beyond doubt.
The proposals go further than "no permanent establishment" provisions and seek to challenge the tax position of non-resident developers more broadly. HMRC is looking to change double tax treaties to prevent developers using offsore SPVs to avoid UK tax on develpments.
In the structure, each development is undertaken in a separate company. It is argued that none of these companies are trading for tax purposes as it is always intended that they will hold the completed development as a long-term investment once completed.
However, in economic terms the persons funding the development have no desire to hold the completed properties (which they hope to sell to long-term investors). Instead of disposing of the properties once complete, they dispose of the shares in each Propco to the end-user. It is argued that the Propcos are not trading in land as they make no disposal.
In case anyone is in any doubt, HMRC has produced a helpful diagram, which may look familiar to many offshore property developers:
Going forward, the new anti-enveloping rule will apply where directly, or indirectly, more than 50% of the value of the property disposed of derives from UK land. Where it is necessary to trace value this can take place through layers of property, through entities, trusts or other arrangements to arrive at a just and reasonable attribution of value.
This is intended to catch transactions where the underlying sale would have been regarded as a trading rather than an investment disposal.
We will be monitoring this and commenting further in due course.
