KPMG’s Greg Jones offers his views on the UK Chancellors second Budget.
The most noteworthy aspect of UK Chancellor Philip Hammond’s second Budget, delivered on 22 November, was not the eye-catching exemption from stamp duty land tax (SDLT) for first-time buyers on properties costing up to £300,000 (a saving of up to £5,000 on normal rates). Although this may be worth a few votes at the next election it was not the wholesale reform which the SDLT regime needs: the rules are complex and the high rates too severe an influence on the current property market.
Nor was it the announcement that, from April 2019, non-residents will have to pay UK capital gains tax (CGT) on profits from the sale of UK commercial property investments. UK real estate has been taxed to death in recent years and being based outside the UK is no longer a passport to tax-efficiency in the case of residential property, which is now subject to the full range of UK taxes: income/ corporation tax on trading profits, CGT on capital gains and finally - literally - inheritance tax on death. But commercial property (ie anything you don’t live in, eg shops, offices, industrial buildings etc) has largely escaped the Chancellor’s attention - until now. Whilst HMRC have put the matter out to consultation this is only to sort the detail: they are committed to extending CGT to commercial property disposals by non-residents, which will disappoint many IoM investors who hold UK commercial property interests, and will be a blow to local corporate service providers who will inevitably lose business.
For me, what stood out in this Budget was that HMRC no longer consider extra-territoriality as a bar to collecting taxes for the UK exchequer. Two proposals in particular exemplified this.
First, in addition to taxing non-residents on the sale of UK property which they own directly, HMRC propose to tax what they call “indirect” disposals, for example the sale of shares in (say) an IoM company, which itself owns UK property. Even where that sale is by someone living outside the UK - or maybe an offshore trust - and there is no change in the ownership of the property, HMRC will in future demand tax if there’s a gain. When the UK introduced Non-Resident CGT in 2015, HMRC considered, and quickly dismissed, the idea of taxing “indirect” disposals, largely because they felt enforcement would be impracticable.
Of course, since then we have seen the introduction of corporation tax on “enveloped” property disposals, and inheritance tax on residential property held in offshore companies. But HMRC’s new-found confidence in taxing overseas transactions appears to have reached its zenith: the second exemplar was the Chancellor’s announcement that the UK proposes to levy a withholding tax (ie one collected at source by someone making a payment) when one foreign company pays a royalty to another for the use of intellectual property (“IP”) used to generate profits from digital services in the UK.
So if a Dutch company pays a royalty to an IoM company for the privilege of using its IP to earn UK profits, HMRC will expect the Dutch company to share the spoils with the UK Taxman!
Ten, even 5 years ago, HMRC would not have attempted to collect tax in situations such as these. But the world is now a different place: tax, and particularly tax avoidance, is rarely out of the spotlight, international co-operation in tax enforcement has reached unprecedented levels, and HMRC have surrounded themselves with a veritable arsenal of weapons, from beneficial ownership registers to a general anti-abuse rule and eye-watering penalties (including for professional advisers in some situations) for non-compliance and failure to prevent evasion.
So I suspect this is only the beginning. The taxman has “bulked up” and is starting to flex his muscles. Be warned!
© 2019 KPMG LLC, an Isle of Man Limited Liability Company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.