HMRC’s Offshore Property Developers Task Force
16 Feb 2017
Initially announced by George Osborne in Budget 2016, HMRC’s ‘Offshore Property Developers Task Force’ (OPDTF) appears to be up and running, and in all likelihood was responsible for the recent glut of letters which have been received by offshore property development companies enquiring into their corporate residence, and whether they have a permanent establishment (PE) in the UK through which they have been trading - (see our recent article here, either of which would bring them within the scope of corporation tax (CT) in the UK. According to a recent article in ‘Tax Journal’, the OPDTF’s remit is to investigate offshore property developers who have carried out developments in the UK to ensure that they have declared and paid the correct amount of tax. The OPDTF is therefore likely to have many Isle of Man companies in its sights given the concentration of UK property development companies here over the last thirty years or so. Company directors and corporate service providers (CSPs) need to be prepared for interest from the OPDTF, and confident that they have evidence easily to hand to rebut any assertions made by HMRC that they are managed and controlled in the UK and /or have been trading in the UK through a PE.
As you will no doubt be aware, the landscape for offshore property developers changed from 5 July 2016 so that a new trade of dealing in or developing UK land was brought within the scope of CT, whether that company has a PE in the UK or not – further detail of this can be found at the above link. However the change in the rules does not mean that HMRC has given up pursuing offshore development companies who have historically considered that they were non-UK resident without a UK permanent establishment, or able to benefit from treaty relief, so that their profits were outside the scope of CT. Far from it: the purpose for establishing the OPDTF appears to be to police the new regime, as well as investigating companies under the ‘old’ rules.
HMRC has a wide variety of sources of information at its disposal in order to select cases to investigate, principally via ‘Connect’, its relatively new ‘super-computer’ which pulls and links together (hence the name) information from various sources to identify possible under-declared or unreported tax. These sources of information include the Land Registry, the internet, third parties (e.g. planning departments, large building companies and offshore jurisdictions) and tax returns (e.g. historic income tax returns where treaty relief claims have been made).
It is understood that HMRC’s Fraud Investigations Service (FIS) large business and transfer pricing teams will jointly head the OPDTF with various other HMRC teams involved including valuations, employer compliance, VAT and non-resident landlord. Tax Journal reports that FIS will investigate the 50 most significant cases involving ‘substantial’ tax risk across all years, including developments straddling the legislative change. FIS will use HMRC’s ‘Code of Practice 8’ (COP8), which is used for civil investigations covering fraud and ‘bespoke avoidance’ to open new investigations, although some existing enquiries may be transferred into COP8.
Investigations will not be restricted to corporation tax but are also likely to cover Diverted Profits Tax , VAT, employer compliance related taxes and SDLT as appropriate.
As has been seen from the first batch of letters issued, HMRC’s technical focus is likely to be on whether the developer was UK resident (by virtue of being managed and controlled in the UK), or had a UK PE via a fixed place of business or a dependent agent. A detailed examination of the facts will need to be carried out in order to establish this, and so the directors of non-resident companies and CSPs will need to be prepared to produce detailed and plentiful documentation to HMRC including company minutes, agreements etc.
There is a risk that HMRC may be able to look back 20 years in some cases on the basis that if CT returns were not submitted (perhaps because income tax returns with treaty relief claims were submitted, as is likely to be the case for many Isle of Man development companies) HMRC could argue that the non-resident company failed to notify its chargeability to CT. If the non-resident development company had a reasonable excuse for the failure, HMRC should be restricted to four years’ tax (unless other years are open due to ongoing enquiries or appeals).
Tax due at the end of a ‘COP8’ investigation is usually assessed via a settlement contract. Otherwise HMRC normally proceeds by issuing assessments, closure notices and determinations against which the developer may appeal.
And the pain does not stop there - penalties may be charged for failure to notify chargeability to tax. If the failure to notify has arisen out of a difference of technical opinion (e.g. the non-resident company obtained tax advice and followed that advice as regards implementation, but HMRC disagree with the advice on a technical basis), it is our understanding that penalties may not be charged. If tax arises due to acting in a way outside the advice obtained (e.g. the non-resident company has taken advice that it is not within the scope of CT, but then proceeds to conducts its affairs such that it becomes UK resident by virtue of its management and control on the facts), then it is more likely that penalties may be charged. Remember, HMRC’s approach to corporate residence is that they will first look to establish if the directors of the company in fact exercise central management and control, and if they do they will seek to determine where the directors exercise this central management and control (which is not necessarily where they meet). Where the directors do not exercise central management and control of the company, HMRC will then look to establish where and by whom it is exercised. The best defence against this approach is to have corporate minutes that clearly demonstrate (by way of their subject matter and attention to detail amongst other things) that it is the directors who exercise central management and control, and they do so at board meetings which take place in the Isle of Man (or other offshore jurisdiction if appropriate).
What does all this mean for Isle of Man incorporated companies who have developed UK property, and the CSPs that administer them? The new legislation means that such companies are likely to be within the scope of CT from 5 July 2016. If they believe they are not, given the broad scope and application of the new rules it would be prudent to take tax advice to confirm this, if only to mitigate against penalties should HMRC enquire and take the contrary view. In respect of the past, directors and CSPs should ensure they are in a good position to defend against any enquiry from the OPDTF with a thorough understanding of the tax technical issues potentially in point. If a formal enquiry is received, especially if made under COP8, it would be wise to engage a tax advisor to assist in dealing with the enquiry to ensure that any technical questions are answered to give the company the best chance of dissuading HMRC that any tax is due. We can assist with all of the foregoing and are also happy to help with general corporate residence reviews, and practical advice as to how to ensure corporate residence of offshore companies remains outside the UK.
If you wish to discuss any of the above please do not hesitate to contact Paul, Katie or Vanessa by email email@example.com or on 872140.