Territorial limitations on the scope of UK taxes open up the possibility of tax free property development. At least this is the case for non-UK residents who can arrange matters such that they avoid a permanent establishment in the UK (for example, a site office or show-home) and are resident in a jurisdiction with a favourable treaty. Typically, such developers do not pay tax in their home jurisdiction.
Legislation is to be introduced so as to remove the permanent establishment requirement for a corporation tax charge. This charge is to be supported by a targeted anti-avoidance rule; HMRC will consult on its precise scope.
In addition, treaty changes will be required. As HMRC’s technical note explains, the majority of the UK’s tax treaties preserve UK taxing rights over land in the UK. But some older treaties do not – protocols have been agreed with Guernsey, the Isle of Man and Jersey to effect change with effect from today. But there remain treaties with other jurisdictions which, for the moment, will continue to confer exemption. These persons should examine their arrangements urgently in the light of the announcements.
There is no change to the position of non-UK investors.
This is already a complex area, with difficult distinctions between trading and investment, existing anti-avoidance provisions in the form of the transactions in land rules and potential for charges to Diverted Profits Tax. There is also scope for residual charges to income tax in certain circumstances. For residential property the non-resident capital gains tax charge may sometimes be relevant.
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.