My client is a non-UK resident company, which has acquired a plot of land in the UK, on which it intends to build a commercial office park. Third party agents have been appointed to develop the site on behalf of the client. The acquired land is a brownfield site and as part of the clearance of the site, a large amount of old pipework has been found. This pipework has been sold for scrap metal and my client is unsure how this income should be declared for tax purposes, as it has no other UK presence.
Firstly, it would be worth firmly establishing under the contractual arrangements whether the income received is beneficially owned by your client or whether any money received is in fact beneficially owned by the third party contractors, which may then results in a reduction in the overall development fee due to the contractors rather than income to your client. For the remaining part of your enquiry, it is assumed that your client is beneficially entitled to the income. In order to determine how this income should be recognised for tax purposes, it is necessary to consider whether the income received is from a trading activity or from a UK property business.
In the event that the income is deemed to arise from a trading activity, in accordance with CTA 2009 s 5(2), the non-resident company would be subject to corporation tax to the extent that it is carrying on the trade through a permanent establishment in the UK.
If it is determined that the non-resident company is undertaking the trading activity within the UK but not through a permanent establishment, it would fall to tax under the income tax rules in accordance with ITTOIA 2005 s 6(2), which states: ‘profits of a trade arising to a non-resident are chargeable to tax under this Chapter only if they arise:
(a) from a trade carried on wholly in the United Kingdom; or
(b) in the case of a trade carried on partly in the United Kingdom and partly elsewhere, from the part of the trade carried on in the United Kingdom.’
Therefore, if the income is considered to be trading, it would be necessary to obtain further information to determine the extent of the permanent establishment created in the UK by the non-resident company; for example, consider the contractual arrangements with the agents and site access rights. It may also be necessary to examine any double tax treaty convention in place to assess whether there are any additional reliefs that can be claimed in accordance with the treaty.
In the event that the income is deemed to arise from a UK property business, it will fall to be taxed as income in accordance with ITTOIA 2005 Part 3.
Turning first to the definition of what constitutes a trade, this is found in ICTA 1988 s 832(1), which states a ‘trade includes every trade manufacture, adventure, or concern in the nature of a trade’. This is not particularly helpful in taking the matter forward and is certainly wide enough to cover income received from scrap metal.
Fortunately, the definition of a UK property business is clearer and helps with the distinction. Under ITTOIA 2005 s 264, a UK property business is defined as ‘every business which the person carries on for generating income from land in the United Kingdom’.
The crucial question is therefore does the pipework form part of the land for UK tax purposes. ‘Land’ is itself defined within the legislation. Interpretation Act 1978 Sch 1 states: ‘Land includes buildings and other structures, land covered with water, any estate, interest, easement, servitude or right in or over land.’
The question, therefore, becomes whether or not the pipework in the ground can itself be regarded as a ‘structure’. Here there are a couple of useful tax cases from the capital allowances sphere. In particular, the case of Cardiff Rating Authority and Cardiff Assessment Committee v Guest Keen Baldwin’s Iron and Steel Company Ltd [1949] 1 All ER 27 held that the mains in that case were indeed ‘structures’ which formed part of the land and in the case Transco v Dyall (Insp of Taxes) [2002] STC (SCD) 199, it was held that the gas network was a ‘structure’.
So where does this leave us?
Based on the above analysis, the income should be treated as property income. In the case of your client, the fact that this income should be treated as property income may well mean that the requirement to submit an income tax return has been brought forward from that what they were expecting.
Generally, where an overseas investor is developing UK land for investment purposes, the commencement of the rental business, and therefore the requirement to submit an income tax return, does not start until the first letting is put in place. At this juncture, it may also be worth considering registering under the non-resident landlord scheme now as well, as there is no requirement to wait until there is a lease in place.
