Increased HMRC focus on offshore property for developers

04 April 2018

What is the OPDTF?

Over the last year or so HMRC’s Offshore Property Developers Task Force (OPDTF), a cross-discipline specialist team charged with investigating UK property development carried out by non-resident entities, has been set up and has commenced its work.

The new task force is staffed by experienced HMRC officers based in various locations spread across the UK – people with tried and tested skills in investigating both complex international tax issues and historic property development cases.

HMRC clearly regards property development by offshore entities as a significant potential source of lost revenue and, as announced in Budget 2016, for that reason it is allocating more resource to focus on applying a consistent approach to this specific area of taxation.

Why was the OPDTF set up?

Non-resident property developers typically used offshore companies which were structured to minimise the likelihood and impact of UK permanent establishments being created . By doing so, UK corporation tax was either not charged on their profits or was minimised. These structures often utilised the tax treaties with Crown Dependencies to ensure that the profits were only subject to tax where the property holder was resident, rather than in the UK.

In March 2016 the UK’s tax treaties with Jersey, Guernsey and the Isle of Man were amended in order to prevent claims which moved taxable profits outside the UK.

From July 2016 (with anti-forestalling rules from March 2016) dealers and developers of UK real estate have been directly subject to UK tax on their profits. Additionally, the anti-avoidance legislation for transactions in UK land was broadened. The legislation disapplies treaty claims where there is an avoidance motive.

What will an OPDTF Investigation look like?

The OPDTF will select the most significant cases which will be investigated under HMRC’s Code of Practice 8 (COP 8). It will consider and delve into transactions involving all taxes including corporation tax, diverted profits tax, income tax, construction industry scheme liabilities, VAT, SDLT and employer compliance issues.

The OPDTF will be expected to use the full range of HMRC’s assessment and information powers including exchange of information with the relevant offshore jurisdictions.

The investigations will be carried out within the existing framework of time limits and penalty provisions.

Any tax found to be due following an investigation will be assessed, or more likely included within a contract settlement, to include interest and penalties. Should an incorrect settlement statement be made , such that other tax related irregularities are later identified, criminal investigation and prosecution could follow .

Conclusion

It is apparent that HMRC is investing heavily in this perceived area of risk to the Exchequer.

Although there are business ownership structures which are exposed to UK tax, many have been established and maintained in a way that treaty claims could have been made which will still minimise exposure to UK tax .

Should your clients be investigated by the OPDTF under COP8, careful consideration should be given to appointing a tax investigation specialist who is familiar with historic property structures to manage the process and thus help minimise penalties and reduce the inevitable stress involved.

It would also be advisable that any such offshore property development structures are reviewed from a tax perspective to ensure that they were/are fit for purpose and appropriate disclosure made. 

Mindful of HMRC’s increasingly hostile approach to offshore tax irregularities, there is now an urgent need to identify any potential issues upfront. As ‘unprompted’ disclosures generally attract less stringent penalties, offshore developers who come forward and voluntarily notify HMRC of an error will usually achieve a better outcome than those who fall foul of an investigation initiated by the OPDTF.

For more information, please get in touch with Justin Stevenson or Mike Down.