July 5th 2016- A turning point for Offshore Property Developers & Traders

Lee Magner
Jan 31, 2017
3 min read

An interesting article for anyone holding UK residential property in an offshore company appeared in the Tax Journal this month, written by Helen Adams from BDO's tax dispute resolution team. The gist of the article is that HMRC has now appointed a task force, as the title suggests, to target developers ( but equally applies to anyone dealing in UK property) making gains on UK residential property and attempting to avoid paying tax by holding the property in an offshore company.

As part of the government’s commitment, together with other members of the OECD to shut down international tax avoidance, The Finance Act in 2016, introduced new provisions making almost all non-resident companies now subject to either UK Corporation Tax (CT) or Income Tax from July 5th 2016 ( although subject to anti avoidance rules, it could affect trades entered into after the 16th March 2016.)

In my previous Blog Post in November 2015, I referred to the marvellous research undertaken by Private Eye, who revealed through Land Registry data, that between 1999 and 2014, offshore companies had acquired an enormous £170 Billion worth of UK property assets and by far the most popular jurisdiction of choice was the British Virgin Islands.

The Finance Act 2016, was a "Sea Change" for such companies, both extending the territorial scope of corporation tax and overriding existing double taxation treaties (DTT) in those countries such as BVI, Jersey, Guernsey which property developers and traders in the past have used to shelter from UK taxes on profits from their UK residential property deals.

The new CTA 2009 S5A provides that "if a company has entered into an arrangement ... one of the main purposes of which is to obtain a relevant tax advantage" this "is to be counteracted by means of adjustments". Section 5A(2) further provides that a relevant tax advantage ‘includes [doing so] by virtue of any provisions of double taxation arrangements, but only where the relevant tax advantage is contrary to the object and purpose of the provisions of the double taxation arrangements [and this has effect] regardless of [TIOPA 2010 s 6(1)]’.

The scope of Act is not intended to extend to investors (for now), but applies where a company "carries on a trade of dealing or developing" in UK land. The definition of “Land” being “ any interest in Land” will extend to leasehold, freehold property and contracts for the purchase off plan of new build flats, therefore advisers to offshore companies, block buying to “flip” ,need to break the news to their principals that these transactions are now chargeable to tax and HMRC will be expecting a declaration of profits from these trades.

The supporting documents have also suggested that HMRC has an enforcement budget of £2.6m and whilst is likely that they will be targeting the "lowest hanging fruit". first, being larger development companies, with readily available data from HM Land Registry, it is likely that the scope of their investigations is unlikely to remain targeted towards the bigger players.

My own observation speaking to clients, is that the penny is "still dropping". Many developers and traders are still harbouring the belief that tax is not due on the profits, because they are non resident and don't have a Permanent Establishment in the UK or in the case of Companies incorporated in Jersey and Guernsey that Income Tax is not payable because they have Treaty (DTT) relief. This is a misconception which could be costly.

I would urge principles or advisers of any Non- UK resident company dealing or developing UK property to take urgent advise.

Whilst it may not affect pre July 2016 transactions (and this is subject to anti avoidance provisions as already stated) any deals concluded by way of an exchange of contracts after 5th July are likely to be subject to tax and the penalties for either not making a return or making an incorrect return will be punitive. If CT returns are not submitted, HMRC may consider that the developer failed to notify its chargeability to corporation tax, putting them in the firing line of a 20 year tax assessment !

Lauriston Saggar LLP are a small City of London firm and in collaboration with senior tax counsel are already advising clients in this space, so please don't hesitate to make contact either by emailing Lee Magner at lee@lauristonsaggar.co.uk or schedule a no fee initial consultation by clicking on the link below and if you havent registered to receive more Property Tax updates you can do so by clicking on the same link.