HMRC closure of offshore developer loophole seen ineffectual

Removal of a ‘loophole’ in last week’s Budget that has been seen to allow some offshore property investors developing property in the UK to avoid UK tax on their trading profits has been dismissed as having “more or less zero impact”.

Promises of a new regime of tough criminal laws aimed at enforcing the international rules on the taxation of trading profits derived from property was heralded last week.  The HM Treasury Budget document relating to offshore property developers noted that it was “unfair to allow property developers to use offshore structures to avoid UK tax on their trading profits from developing property in the UK”.

But John Cassidy, tax investigations partner at Crowe Clark Whitehall, dismissed the likely potential impact of the new measures.

Cassidy said that he was not concerned about the implications of the amendments to what amounts to a UK double tax agreement, despite the fact that it could affect property developers in Jersey, Guernsey and the Isle of Man, and even see criminal prosecutions.

The loophole – often dubbed “the island handshake”, he pointed out – has been under investigation by HMRC for years.

“This issue has been around for years, and HMRC has long said that this doesn’t work,” said Cassidy. “HMRC has been investigating UK developments that have involved oversees equity or trusts for a long time, so I’m struggling to see the impact [of this latest measure]. The Revenue have been challenging it in the past, and those challenges have been going on in some cases for 10 years.”

Offshore structures

The government is introducing legislation in its Finance Bill 2016 to ensure offshore structures cannot be used to avoid UK tax on profits that are generated from developing UK property.  In last week’s Budget, the Government also stated that it will also create a task force to focus on offshore property developers.

This task force will target offshore structures used to avoid tax on profits and rental income from property development in the UK. The task force was described as aiming to achieve  “a long-term improvement in taxpayer compliance tackling tax avoidance and evasion”.

Cassidy did warn that retrospective legislation, which has been implemented in similar cases, could potentially become an issue for some property developers, but even this, he said, would probably have little ultimate impact. “There has been a hoo-hah regarding retrospective legislation in these areas in the past, so this could be retrospective too,” he said.

“But I think that most of the guys affected are already under investigation, so the impact of this is more or less zero.”

ABOUT THE AUTHOR
Gary Robinson
Deputy Editor, International Investment and Head of Video at Open Door Media Publishing. A fully qualified journalist and filmmaker with more than 20 year's financial services experience.

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