These measures are intended to tax non-UK residents on profits from trading in UK land at the same level as UK residents.
The Government announced at Budget 2016 that it would introduce new measures in Finance Bill 2016-17 to ensure that offshore developers of UK land would pay the same amount of tax on their profits as UK developers. The new rules introduce a specific charge to income tax or corporation tax on trading profits from the disposal of UK land. As well as the legislation originally released as part of the draft Finance Bill, a number of amendments were made as part of the Public Bill Committee stage.
Explanatory notes have been published setting out the amendments to the legislation as originally released.
New clauses specifically extend the territorial scope of UK corporation tax to non-resident companies, to tax profits from dealing in and developing UK land. A new clause also replaces and extends the ‘transactions in land’ rules in the Corporation Tax Act (CTA) 2010.
Three changes are of particular note. Firstly, as previously announced the rules are extended to indirect interests in land where one of the main purposes of the person holding that interest is to realise a profit from the development of that land. Secondly, an anti-fragmentation provision aggregates the activities of any associated persons who make a contribution to the development of the land with those of the seller, with the seller’s profit then deemed to reflect that aggregate activity. Finally, the existing ‘sole or main object’ condition in relation to realising a gain from disposing of the land is extended to ‘main purpose, or one of the main purposes’ – a potentially significant expansion of the remit of the legislation.
There are also new rules concerning the treatment of pre-trading expenditure, which allows companies to deduct, as pre-trading expenses, expenses which they have incurred before the legislation commences but which are not deductible as expenses of the permanent establishment, where they were carrying on the trade in UK land through a permanent establishment before the introduction of this legislation.
The territorial scope of UK income tax is also extended to tax profits from trading in UK land in the hands of non-resident individuals. The ‘transactions in land’ rules in the Income Tax Act (ITA) 2007 have also been replaced and extended by a new clause.
The new rules for both corporation tax and income tax have effect for disposals made on or after 5 July 2016.
Anti-avoidance measures took effect from 16 March 2016 in relation to disposals made on or after this date and before 5 July 2016. The anti-avoidance rules apply to disposals made to associated persons, where a relevant tax advantage is gained due to the disposal, and where an HMRC officer gives notice of the tax advantage. These measures apply for corporation tax and income tax.
An anti-treaty shopping provision is included where a tax advantage is being obtained contrary to the object and purpose of the treaty. This is unlikely to have any impact on the Guernsey, Jersey and Isle of Man treaties which now have property rich company provisions for indirect sales, but should be considered for indirect sales by companies in other territories without such provisions in treaty.
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