United Kingdom

Budget, Consultations, and Autumn Statement

The United Kingdom (UK) Chancellor delivered her Autumn Budget on 30 October 2024 and Finance Bill 2024-25 was subsequently published.  The Bill is currently progressing through Parliament and will be enacted in Spring 2025.

Changes that have taken effect in the past year

Reforms that took effect in the past year include:

• Legislation was enacted in the United Kingdom that introduced the following elements of the Organisation for Economic Co-operation and Development's (OECD’s) Pillar Two rules:
• An Income Inclusion Rule (IIR), known locally as the ’multinational top-up tax‘ (MTT), which requires large UK-headquartered multinational groups to pay a top-up tax where their foreign operations have an effective rate of less than 15%.
• A domestic minimum top-up tax (DMTT), intended to be a qualified domestic top-up tax (QDMTT), which requires 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 United Kingdom has also introduced legislation in Finance Bill 2024-5 which, when enacted, will introduce an Under Taxed Profits Rule (UTPR) in the United Kingdom which will take effect for accounting periods beginning on or after 31 December 2024.

• Finance (No. 2) Act 2024 included amendments to the Energy (Oil and Gas) Profits Levy Act 2022 to include the new Energy Security Investment Mechanism (ESIM). This new mechanism has an impact on the application of the Energy Profits Levy (EPL). 
• From 1 April 2024, the scope of Tonnage Tax was extended to include elections into the regime by companies that manage qualifying ships, and the capital allowance limit for persons who lease ships to companies within Tonnage Tax was increased. 
• An Enhanced R&D Intensive Support (ERIS) regime was introduced for accounting periods commencing on or after 1 April 2024, requiring 30% of total group expenditure to be on qualifying R&D to enable a loss-making company to benefit from the regime. 
• A new merged R&D scheme was enacted in Finance Act 2024. The merged scheme applies to accounting periods commencing on or after 1 April 2024. This includes new rules regarding subcontracting and the eligibility of overseas costs.

• From 1 April 2023, the annual investment allowance (AIA) for capital expenditure became permanent at a rate of 1 million pounds sterling (GBP). 
• In Finance Act 2024, the 2026 end date for full expensing is removed, resulting in full expensing becoming permanent. The full expensing First Year Allowance (FYA) is available for capital expenditure incurred by companies . 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. 
• The first year allowance (FYA) for qualifying expenditure on zero-emission cars and the 100% FYA for qualifying expenditure on plant or machinery for electric vehicle charge points, will be extended to 31 March 2026 for corporation tax purposes and 5 April 2026 for income tax purposes.
• 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 a multinational enterprise (MNE) group that meets the ‘MNE country-by-country (CbC) reporting threshold’, which is global consolidated turnover greater than 750 million euros (EUR) in a given financial year (guidance is given for determining whether the CbC reporting threshold is breached where the UK entity and MNE group have non-coterminous year-ends). Those UK entities that meet the MNE CbC reporting 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, His Majesty’s (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 CbC reporting notification obligations in the United Kingdom for many MNE groups, albeit there still remain some specific scenarios where a UK notification may still be required (e.g. where a surrogate of the MNE group is filing a CbC report [e.g. to avail itself of Exception B under the legislation]). 
• The value-added tax (VAT) registration threshold has increased from GBP 85,000 to GBP 90,000, effective from 1 April 2024.
• Following the United Kingdom’s departure from the European Union (EU), the Retained EU Law (Revocation and Reform) Act was enacted in 2023. This act makes provision for significant changes to the status and operation of retained European law. In order to prevent the repeal of several EU derived UK VAT and excise provisions as a result of this act, Finance Act 2024 included specific provisions for retained EU law relating to VAT, excise, and customs duty. As a consequence, UK VAT and excise law that was in force prior to 1 January 2021 (EU exit day) will continue to be interpreted in line with EU law principles.

Forthcoming changes

Forthcoming changes include:

• As noted above,  legislation was introduced in Finance Bill 2024-5 which, when enacted, will implement an UTPR in the United Kingdom.  The UTPR will take effect for accounting periods beginning on or after 31 December 2024 and will supplement the IIR and DMTT that were enacted in Finance (No.2) Act 2023 and took effect for accounting periods beginning on or after 31 December 2023.
• Legislation has been introduced in Finance Bill 2024-5 which, when enacted, 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 take place alongside the introduction of the UTPR, which the government considers will more comprehensively discourage the multinational tax-planning arrangements that ORIP sought to counter.

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 EU Mandatory Disclosure Rules (MDR) with regulations that broadly follow the 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’ (RIF) and is likely to be particularly relevant in relation to investment in UK real estate. Draft regulations intended to implement the RIF were published for consultation in April 2024. The process is currently on hold following  the General Election in July 2024, although the Labour Government did in the Autumn Budget state their intention to proceed with the proposals.
• 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.
• Finance Bill 2024-25 contains measures to increase the rate of Energy Profits Levy (EPL) by 3% to 38% with effect for accounting periods commencing on or after 1 November 2024; to abolish the levy’s 29% investment allowance from 1 November 2024 and to cut the rate of the decarbonisation allowance from 80% to 66% from the same date. In addition, the EPL is proposed to continue until 31 March 2030. 

• The government continues to review the UK oil and gas fiscal regime and engage with the energy sector on future changes. The outcome from the most recent call for evidence was confirmation from the government of the core principles that will direct future policy decisions.
• A consultation has taken place for the introduction of a UK Carbon Border Adjustment Mechanism (CBAM) from 1 January 2027. The UK CBAM is intended to place a carbon price on certain industrial goods imported to the United Kingdom, including from the aluminium, cement, ceramics, fertiliser, glass, hydrogen, iron, and steel sectors. The aim of the UK CBAM is to mitigate the risk of carbon leakage, which occurs when production shifts to jurisdictions with lower or no carbon pricing, and to support the UK's transition to net zero emissions by 2050.
  
  The consultation sets out the government's proposals for the design, implementation, and administration of the CBAM and invites views from stakeholders, including importers, domestic producers, overseas exporters, trade bodies, and other interested parties. The consultation covers the following aspects of the CBAM:
  • The sectoral and product scope, which will include aluminium, cement, ceramics, fertilisers, glass, hydrogen, iron, and steel. 
  • The calculation of the CBAM liability, including emissions reporting, default values, the UK’s carbon price, and adjustments for carbon prices applicable overseas.
  • The administration, payment, and compliance of the UK CBAM, including the CBAM tax point, registration thresholds, reporting, payment, and other compliance requirements for liable persons and their agents.
• HM Treasury and HMRC continue to consult  on whether broader changes could be made to simplify the existing capital allowances legislation. This exercise has been limited to the plant and machinery part of the Capital Allowances Act 2001. The consultation does not seek to increase or alter the types of expenditure/assets that fall within the scope of plant and machinery allowances. 
• The Autumn Budget 2024 confirmed that there is  a continued consideration of extending full expensing to assets that are bought for leasing or hiring when fiscal conditions permit such a move. As part of a consultation exercise in 2024, HM Treasury began exploring and identifying solutions that support the leasing sector to access the benefits of full expensing (as enjoyed by other companies), whilst managing the risks of abuse and error.
• Following Gunfleet Sands Ltd and others vs. HMRC (2023) decision on predevelopment costs a consultation will be published in late 2024 or early 2025, with impacted stakeholders, to understand the impact of the case and tax legislation and explore the options for change. This will be with the intention to encourage investment in large development projects. 

• Land remediation relief provides a 150% tax deduction for companies remediating and making safe previously contaminated or derelict land (where various conditions are met). A consultation will be published to review the effectiveness of Land Remediation Relief in Spring 2025. 

• A consultation on widening the use of advance clearances in the R&D reliefs will be launched in 2025. This is a welcome announcement for many businesses who anticipate challenges in applying the complex changes within the merged regime, particularly around the contracting rules. 
• In the Autumn Budget 2024 the Government published a Corporate Tax Roadmap which aims to provide predictability, stability and certainty to businesses and investors. Its key features include capping the main rate of corporation tax at 25% for the duration of the Parliament whilst ensuring that the UK’s regime remains competitive.The small profits rate and marginal relief will be maintained at their current rates and thresholds. A consultation on corporate tax administration will be launched in Spring 2025, to develop a process through which investors in major projects can obtain increased tax certainty in advance.

Measures focused on international matters

• 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 whilst retaining their legal personality. An expert panel was subsequently convened to explore the options and advise the government on how best to establish a UK corporate re-domiciliation framework and the panel published its report on 14 October 2024. The report suggests how various components of the regime could work and, most notably, strongly supports the introduction of a two-way re-domiciliation regime to allow UK companies to re-domicile outside the UK as well as those registered outside the UK to become a UK company.  Whilst the panel has made quite detailed proposals, it recommended that there should be further consultation once the Government has decided on more detailed proposals.
• 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. A public consultation on this requirement was expected to take place, however, given the areas of further consultation announced in the Autumn Budget 2024 (see below) this is now not expected in the near future. This are discussed in Transfer pricing documentation in the Group taxation section.
• On 19 June 2023, the government published a consultation document asking for views on proposed reforms to transfer pricing, permanent establishment (PE), and Diverted Profits Tax (DPT) to ensure that the application of these rules is clear and the outcome of their application remains consistent with the policy intention, international standards, and the UK’s tax treaties. The consultation closed on 14 August 2023, and on 16 January 2024 HMRC published a summary of responses received. These are discussed in the Group taxation, Corporate residence, and Taxes on corporate income sections, respectively.Following the 2023 consultation, the Autumn Budget 2024 contained updates on a number of transfer pricing matters on which further consultation is expected in 2025:
• The potential removal of medium-sized groups from the current transfer pricing SME exemption. This is discussed in Transfer pricing and thin capitalisation in the Group taxation section.
• The potential removal of UK-UK transactions from the UK transfer pricing legislation. This is discussed in Transfer pricing and thin capitalisation in the Group taxation section.
• The potential introduction of a new annual reporting requirement, the International Dealing Schedule (IDS). This is discussed in Transfer pricing and thin capitalisation and in Transfer pricing documentation in the Group taxation section.
• A review of the transfer pricing treatment of cost contribution arrangements, where the costs and benefits of developing intellectual property are shared by group companies, will be undertaken to ensure the rules are certain and do not act as a deterrent to investment.