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HMRC internal manual

Business Income Manual

Profits from a trade of dealing in or developing UK land: Anti-fragmentation: Example

Example

Diagram

In the situation above, ‘Dealer’ is subject to the new charge, as ‘Dealer’ will realise a profit from the disposal of UK Land. 

In this case ‘Dealer’ does not have the assets (e.g. cash) or employees to manage the risk comprised in the development. Instead, the risks associated with the development are funded by ‘Devco’.

In this example ‘Devco’ performs many of the significant people functions (SPFs), and as such is paid the majority of the profits realised from the sale of the UK property. 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,
  • Condition A  is met in relation to the land, and
  • ‘Devco’ has made a relevant contribution to the development of the land by assuming the risk.

Any profit realised by ‘Devco’ will be taxed on ‘Dealer’ as if ‘Dealer’ and ‘Devco’ were one entity. Only profits of ‘Devco’ that are directly attributable to Dealer are taxed in that entity, while Devco’s other [unrelated] profits remain taxable in ‘Devco.’

If ‘Devco’ is a UK resident Section 356OC(3) would provide relief, so far as the profits would be brought into account as income in calculating profits (of any other person).