It was announced in the 2016 Budget that new legislation will be introduced, to charge corporation tax on non UK resident property developing/trading companies.
It is proposed that non UK resident companies trading in or developing land (and buildings) in the UK that do not have a UK permanent establishment (‘PE’), will be chargeable to UK corporation tax on the full profits on the disposal of the land. Protocols have been agreed with Guernsey, IOM and Jersey to amend the double taxation agreements to ensure the UK has taxing rights over UK land and these changes are effective from Budget Day.
“The new charge will apply to disposals that occur on or after the date the legislation is introduced in Parliament at Report Stage, expected to be in June 2016. To protect the core charge in the interim, anti-avoidance rules come into force with immediate effect from Budget Day, 16 March 2016. If, during the period between 16 March and the Report Stage a person transfers land to a related party who is not intended to be the ultimate recipient. This will prevent arrangements to “rebase” the land value between March 16th and the Report Stage.”
Although no draft legislation has been produced, this does appear to indicate that there will be no rebasing to 16 March 2016 and disposals after the Report Stage will attract UK corporation tax on the full profits, regardless of when the land was purchased or development started. This seems unfair as there was previously no corporation tax payable by non-resident companies on disposal of UK land where there is no PE and there is usually rebasing where a new charge to tax arises. HMRC have also announced that the new legislation will contain anti-fragmentation rules (to prevent connected persons from circumventing the legislation) and rules to prevent disguised trading through enveloping (to bring the sale of a property owning company within the charge).
Consultation on the proposed changes closes on 29 April 2016.
It is difficult to comment in detail without the draft legislation, and there may be changes to the proposed tax charges, but at this stage it looks as though all UK property developments carried out by offshore companies will be liable to UK corporation tax, currently 20%, but falling to 17% by 2020.
For more information, please contact:
Associate tax director
+44 (0) 1624 682 141