BIM60615 | Profits from a trade of dealing in or developing UK land: Anti-fragmentation: Example
From HM Revenue & Customs · Business Income Manual
Relationships in this Scenario
| Entity or asset | Role or description | Notes |
|---|---|---|
| Non-resident owner | Owner of non-UK resident companies Dealer and Devco | All located outside the UK |
| Dealer (offshore) | Legal owner of UK property | Will realise a profit when developed property is disposed of |
| Devco (offshore) | Related to Dealer (common parent company) | Appoints UK contractors to develop the UK property. Bears all the risk relating to the UK property and manages the development |
| UK Property | Property in the UK legally owned by Dealer | Property is developed and sold to realise a profit |
| UK Contractors | Undertake works on UK property | Appointed by Devco |
In the situation above, ‘Dealer’ is subject to the Transactions in UK Land charge because it will realise a profit from the disposal of the developed land.
In this case ‘Dealer’ does not have the assets (e.g. cash) or employees to manage the risk associated with the development. Therefore, non-UK resident related company ‘Devco’ provides funding for the development and provides other services to Dealer.
‘Devco’ performs many of the Significant People Functions (SPFs), and as such is paid the majority of profits realised from the sale of the UK property (by way of interest and payments for services). This is done in a manner that is designed to be compliant with UK transfer pricing methodologies.
The contribution ‘Devco’ is making to the development of the land is not insignificant and the anti-fragmentation rules will apply in this case.
‘Dealer’ has disposed of land in the UK,
Conditions A and D are met in relation to the land, and
‘Devco’ has made relevant contributions to the development of the land
Any profit realised by ‘Devco’ linked to the contributions made will be taxed on ‘Dealer’ as if ‘Dealer’ and ‘Devco’ were one entity.
Note that if ‘Devco’ was UK resident then Section 356OC(3) would provide relief, so far as the profits would be brought into account as income in calculating Devco’s UK profits.