United Kingdom

Budget, Consultations, and Spring Statement

The United Kingdom (UK) Chancellor delivered his Autumn Statement 2023 on 22 November 2023. Finance Bill 2023-24 was subsequently published on 29 November 2023 and is currently progressing through Parliament. The Bill is expected to be enacted sometime early in 2024.

Changes that have taken effect in the past year

Reforms that took effect in the past year include:

• From 1 April 2023, the main rate of corporation tax increased from 19% to 25%, and a new 19% small profits rate of corporation tax was introduced for companies whose profits do not exceed 50,000 pounds sterling (GBP).
  This main rate applies to companies with profits in excess of GBP 250.000. For UK resident companies with augmented profits below GBP 50,000, a lower rate of 19% is generally applicable. For companies with augmented profits between GBP 50,000 and GBP 250.000, there is a sliding scale of tax rates. For corporate entities with associated companies, both profit limits are divided by the number of active companies worldwide.
• The usual rate of Diverted Profits Tax (DPT) charged on diverted profits (as defined) was increased from 25% to 31% from 1 April 2023, with apportionment provisions for accounting periods straddling the commencement date. This increase was made in order to maintain the differential between the rate of DPT and corporation tax, which was also increased by 6% from that date.
• The Energy Profits Levy (EPL) on the profits of oil and gas companies   increased from 25% to 35% from 1 January 2023, and the sunset clause was extended to 31 March 2028 (from 31 March 2025).  In addition, the investment allowance was reduced to 29% of qualifying capital expenditure (from 80%) except where it relates to decarbonisation expenditure. 
• On 9 June 2023, a new Energy Security Investment Mechanism (ESIM) which impacts the application of the EPL was introduced. The final details of the ESIM were published by the government on 22 November 2023. 
• A new window for entry into the tonnage tax regime for eligible companies applies from 1 June 2023 to 30 November 2024. This election window was implemented by a Statutory Instrument made on 9 May 2023.
• For companies in the banking sector, the rate of the supplementary corporation tax charge is 3% on profits above GBP 100 million for accounting periods beginning on or after 1 April 2023.
• From 1 April 2023, the rates of SME R&D relief reduced to an additional 86% corporation tax deduction from the current 130% additional tax deduction. Also, the rate of Research & Development Expenditure Credit (RDEC)  increases to 20% from 13%. 
• From 1 April 2023, qualifying costs and the definition of R&D is amended so that certain cloud computing and data acquisition costs are eligible for claims, as are advances in ‘pure mathematics’. 
• From 1 April 2023, a higher credit rate is available for loss-making, R&D-intensive SMEs, providing a higher cash benefit, as follows:
• Credit rate of 14.5%.
• Cash benefit of 27% of qualifying expenditure.
• This credit will be very much focused on businesses that need additional support, requiring that at least 40% of their total expenditure be on R&D expenditure. This change is part of the Autumn Finance Bill currently progressing through Parliament.

• From 8 August 2023, for R&D claims filed after this date, there are mandatory documentation requirements. This requires descriptions of the R&D undertaken, a breakdown of the qualifying costs, details of the company’s R&D advisor, and sign off from a senior officer of the company to be filed with the company’s tax return. This information is digitally filed using the Additional Information Form. The AIF must be filed before the tax return including the relevant R&D claim is filed.
• From 1 April 2023, the annual investment allowance (AIA) for capital expenditure became permanent at a rate of GBP 1 million. 
• From 1 April 2023, a full expensing First Year Allowance (FYA) is available for capital expenditure incurred by companies from 1 April 2023 to 31 March 2026 (see below re now permanent). Full expensing provides a 100% FYA in year 1 for main pool plant and machinery qualifying expenditure (with certain exclusions). Additionally, expenditure qualifying for special rate pool plant and machinery allowances could now benefit from a 50% FYA in year 1 under full expensing. 
• For accounting periods beginning on or after 1 April 2023 for corporate tax purposes, or 6 April 2024 for income tax purposes, new transfer pricing records rules apply. UK entities are in scope of the new rules if they are part of an MNE Group which meets the ‘MNE CbCR threshold’ - greater than EUR 750 million global consolidated turnover in a given financial year (guidance is given for determining whether the CbCR threshold is breached where the UK entity and MNE Group have non-coterminous year ends). Those UK entities that meet the MNE CbCR threshold in a given accounting period are required to keep specific transfer pricing records for that same accounting period, including a Master File and Local File, as per the 2022 OECD Transfer Pricing Guidelines, in relation to ‘material controlled transactions’ (subject to certain exemptions). 
• On 4 July 2023, HM Treasury made the Taxes (Base Erosion and Profit Shifting) (Country-by-Country Reporting) (Amendment) Regulations 2023 (SI 2023/752) and this was laid before Parliament on 5 July 2023. The effect of these changes is broadly the removal of the annual year-end CbCR notification obligations in the UK for a lot of MNE Groups, albeit there still remain some specific scenarios where a UK notification may still be required, for example where a surrogate of the MNE Group is filing a CbCR report (for example, to avail itself of Exception B under the legislation). 
• Following the successful introduction of the new Qualifying Asset Holding Companies (QAHC) tax regime from April 2022, the government legislated to make a number of targeted changes so that the regime is more widely available to investment fund structures which fall within its intended scope and the rules better achieve their intended effect. These changes are intended to further enhance the attractiveness of the UK as a location for establishing asset holding companies, by allowing more relevant companies to make use of the regime.  These are mostly relaxations but include prohibiting a securitisation company from also being a QAHC.  It will now also be possible for a QAHC to hold listed shares, provided the QAHC elects that dividends on these are taxed.  Some of these changes are deemed to have always had effect (although none will change the position of existing QAHCs), others from 20 July 2022, 15 March 2023, or 11 July 2023.

Forthcoming changes

Forthcoming changes include:

• Legislation has been enacted in the UK which introduces elements of the OECD’s Pillar Two rules:
• an Income Inclusion Rule (IIR), known locally as the “multinational top-up tax”, which will require large UK-headquartered multinational groups to pay a top-up tax where their foreign operations have an effective rate of less than 15% ;and 
• a domestic minimum top-up tax (DTT), which will require large groups (including those operating exclusively in the United Kingdom) to pay a top-up tax where their UK operations have an effective rate of less than 15%.

Both were enacted as part of Finance (No 2) Act 2023 and apply for accounting periods beginning on or after 31 December 2023.

The UK has also published draft legislation to implement an Under Taxed Profits Rule (UTPR) in the UK.  It has been announced that this will be included in a future Finance Bill (it is not included in the Finance Bill 2023-24 currently progressing through Parliament) and apply for accounting periods beginning on or after 31 December 2024.  

• The government has announced that it will abolish the Offshore Receipts in respect of Intangible Property (ORIP) rules in respect of income arising from 31 December 2024. The repeal of the ORIP rules will be legislated for in an upcoming Finance Bill, and take place alongside the introduction of the UTPR, which it considers will more comprehensively discourage the multinational tax-planning arrangements that ORIP sought to counter. 
• Following consultation in 2022 & 2023 , draft legislation was open for consultation from July 2023.on a merged R&D scheme. Autumn Finance Bill 2023 introduces the merged scheme which will apply to accounting periods commencing on or after 1 April 2024. This includes new rules regarding subcontracting and the eligibility of overseas costs.
• The R&D intensive regime (detailed above) was introduced from 1 April 2023, requiring 40% of total expenditure to be on qualifying R&D to enable a loss-making company to benefit from the regime. This 40% threshold is reduced to 30% for accounting periods commencing on or after 1 April 2024.. This change is part of the Autumn Finance Bill currently progressing through Parliament.

In the Autumn Finance Bill 2023 the 2026 end date for full expensing is removed, resulting in full expensing becoming permanent. Full expensing provides a 100% FYA in year 1 for main pool plant and machinery qualifying expenditure (with certain exclusions). Additionally, expenditure qualifying for special rate pool plant and machinery allowances could now benefit from a 50% FYA in year 1 under full expensing.

Consultations and proposals - ongoing

The most significant proposals, which include announced proposals and those in draft legislation, and those subject to consultations include:

Measures focused on domestic matters

• A range of specific and narrow anti-avoidance rules.
• Further reforms regarding collection of taxes, application of penalties, and related issues focused on tax evasion.
• The Office of Tax Simplification (OTS) has undertaken a capital gains tax review. Its first report outlining their proposals for the simplification of capital gains tax was published in November 2020. It is not clear when the government will make any decisions in respect of this. A second report on simplifying key practical, technical, and administrative capital gains tax issues was published in May 2021. Following this report, some small changes have been made.
• On 30 November 2021, following a consultation process, the government announced its response to the review of large businesses’ experiences of UK tax administration.

• A consultation was also launched on 30 November 2021 on the proposed replacement of the existing European Union (EU) Mandatory Disclosure Rules (MDR) with regulations that broadly follow the Organisation for Economic Co-operation and Development (OECD) model:
• On 24 November 2022, HMRC published a summary of the responses it received. 
• On 17 January 2023, the International Tax Enforcement (Disclosable Arrangements) Regulations 2023 were laid before the House of Commons. These regulations implement the OECD MDR and came into force on 28 March 2023; the regulations implementing EU MDR were also repealed on this date.
• The consultation document had proposed that pre-existing arrangements entered into since 29 October 2014 would be reportable under OECD MDR. However, HMRC has now confirmed that reporting of pre-existing arrangements will only be required from 25 June 2018 (the date of commencement of EU MDR) and that any arrangements reported under EU MDR will not be reportable under OECD MDR. Any reports will have to be made online using XML software; there will not be a manual reporting system.

• On 27 April 2023, as part of its response to a review of the UK funds regime, the government published a consultation on a new unauthorised UK contractual scheme that would be open to certain investors. The proposed new scheme is the ‘Reserved Investor Fund’ and is likely to be particularly relevant in relation to investment in UK real estate.
• On 27 April 2023, HMRC published a consultation on ‘Stamp Taxes on Shares modernisation’. It is widely accepted that the current stamp taxes system is very outdated, and HMRC have set out their proposals for how the Stamp Taxes on Shares framework should be modernised.
• On 22 November 2023, the government published the results of the call for evidence with respect to its review of the UK oil and gas fiscal regime which was announced in June 2023. The outcome from the call for evidence was confirmation from the government of the core principles that will direct future policy decisions.
• Finance Bill 2023-24 (published 29 November 2023) includes clauses to extend the scope of tonnage tax to include elections into the regime by companies that manage qualifying ships and to increase the capital allowance limit for ship leasing. Both amendments are proposed to take effect from 1 April 2024. 
• At Autumn Statement it was announced:
• In light of full expensing being made permanent,  HM Treasury and HMRC will undertake industry engagement with stakeholders to determine whether broader changes could be made to simplify the existing capital allowances legislation, this is expected to be limited to the Plant & Machinery part of the Capital Allowances Act 2001, and, as part of this announcement, it was advised that the consultation will not seek to increase or alter the types of expenditure/assets which fall within the scope of Plant & Machinery allowances. 
• A working group will discuss the existing exclusion of expenditure on plant and machinery for leasing from first-year capital allowances, with a view to exploring and identifying a solution that supports the leasing sector to access the benefits of full expensing, whilst managing the risks of abuse and error.

Creative sector - a call for evidence on recent trends in the visual effects industry has been published with a request to respond by 3 January 2024. It is intended that this will inform the design of additional tax relief for expenditure on UK visual effects work on film and TV, to be delivered through the Audio-Visual Expenditure Credit. The government will consult on the detailed policy design of further support. It is intended any changes will be implemented from April 2025.

Measures focused on international matters

• The most significant area of tax reform currently being progressed by the UK government is the implementation of the OECD’s Pillar Two. As noted above, legislation has been enacted that introduces an Income Inclusion Rule (IIR) and a supplementary Domestic Minimum Top-Up tax rule which will apply for accounting periods beginning on or after 31 December 2023.
• Following on from that,  the government has announced that it  intends to implement the backstop Undertaxed Profit Rule (UTPR) in the United Kingdom to apply for accounting periods beginning on or after 31 December 2024.  Draft legislation for this measure has been published and will be included in a future Finance Bill (but is not included in the Finance Bill 2023-24 that is currently progressing through Parliament).Transfer Pricing, Permanent Establishment (PE) and Diverted Profits Tax (DPT) legislative reform consultation
• Following a consultation, the UK government announced in April 2022 that it intends to introduce a re-domiciliation regime, which will make it possible for companies incorporated outside the United Kingdom to move their domicile to and relocate to the United Kingdom. It is yet to be confirmed whether the new rules will also permit re-domiciliations of UK incorporated companies to other territories. This policy will require legislation to be enacted, but the government has stated that more detailed analysis and stakeholder engagement is needed before that is possible and has not yet given a timeline for the completion of those tasks.   It was announced in November 2023 that an expert panel has been convened to explore the options and advise the government on how best to establish a UK corporate re-domiciliation framework. 
• The government consulted on changes to the existing tax exemptions available to sovereign immune bodies but concluded that no changes should be made. 
• Following the introduction of the new Transfer pricing documentation requirements, HMRC decided not to implement the Summary Audit Trail (SAT), but the final regulations provide HMRC with the power to introduce such a requirement at a later date. They have again noted that they intend to undertake a public consultation on this additional measure later in 2023. The requirement for an International Dealings Schedule (IDS), a document which would report transactional data about intragroup cross border transactions in a structured format, is also being kept under review. These are discussed in Transfer pricing documentation in the Group taxation section.