At a time when the government is pushing for more new homes to be built, changes to tax rules could push property developers into making losses including on housing currently being constructed, according to analysis from accountants Moore Stephens which is calling on the government to introduce transitional arrangements to mitigate the impact of new tax avoidance legislation on company distributions
The draft Finance Bill 2016 contains revised rules to prevent business owners from regularly winding up their companies and then immediately setting up a very similar business, in order to gain a tax advantage.
A new targeted anti-avoidance rule comes into force in April next year which is linked to the dividend changes effective from 6 April 2016, so that a distribution from a close company (on winding up or liquidation) which may have previously between treated as a capital distribution liable to capital gains tax will instead be liable to income tax (as a dividend).
The legislation is to be widely drawn, on a ‘reasonable for HMRC to assume’ basis, to treat the distribution as liable to income tax if the individual receiving the distribution (or a connected person) carries on a trade or activity which is the same as, or similar to, that carried on by the company. This applies if the trade or activity is carried on either by an individual or through a company.
According to Moore Stephens these measures could have unintended consequences which will see small housing developers’ personal tax rate almost quadruple, from 10% to 38.1%.
At present small developers typically set up a new company for each property they develop for commercial reasons, such as having different funding or construction service providers for each project, and then dissolve the company after the property is sold. Dissolving the company releases the company’s capital to the developer with a 10% rate of tax.
Government proposals would see the capital released from the company taxed as income – equivalent to a dividend. This would mean a tax rate of 32.5% for higher rate tax payers and 38.1% for additional rate taxpayers.
Vincent Wood, partner at Moore Stephens, said: ‘Profit margins for small housing developers are extremely tight and projects are planned down to the last penny. These changes will make it extremely difficult for many new and ongoing developments to make a worthwhile profit and when you add in the developer’s time and effort it will effectively drive many developments into loss-making territory.
‘These changes are part of a government commitment to cracking down on tax avoidance but come with significant unintended consequences.
‘These changes will come in on 6 April 2016 which is far too soon for developers to plan adequately and transitional arrangements to phase in the changes should be considered urgently.’
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