Budget 2016: Property development – Osborne puts a stop to the property development tax treaty ‘shop’

A non-UK company is only subject to corporation tax on a UK based trade or from profits attributable to a Permanent Establishment (PE).

This meant that if a non-UK resident property developer could arrange his or her affairs such that they avoided a PE in the UK (for example, a site office or show-home) and are resident in a jurisdiction with a favourable treaty they could avoid tax in the UK.

Of course, it may well have been the case that the non-UK resident developer was based in a jurisdiction with a low (or nil) rate of tax!!!

Legislation is to be introduced which will remove the PE requirement when determining whether a corporation tax charge will apply. This will be beefed up by a targeted anti-avoidance rule (TAAR);

A period of consultation will open up in due course.

There will need to be changes to the some of the UK’s tax treaties as a consequence.

This has always been a rather complex area of tax legislation and it seems likely that this will add to, rather than relieve, that positions. In some cases, it can be a fine between whether a particular transaction is trading play or an investment.

Furthermore, there are already existing anti-avoidance provisions including:

• transactions in land rules; and
• potential for charges to Diverted Profits Tax.

It is difficult to identify good arguments against the extension of the corporation tax charge. So fine. But I do wonder whether at some stage the Government may look again at limitations on capital gains tax for non-UK residents.

These rules do not effect the position of non-UK investors.

If you or your clients are affected by these changes then please get in touch