Extensive and far reaching reforms to the United Kingdom’s (UK's) corporation tax system have been made in recent years. The reforms have a stated aim of “creating a tax system that is easy to understand, simple to engage with, and hard to evade, [and] successfully supports investment in business, as well as those who work hard and save” (Financial Secretary to the Treasury, December 2015). The reforms are also intended to maintain the UK’s competitive position. The main areas of reform have included:
- Reductions in the rate of corporation tax.
- Redefining the corporate tax base, including aspects of the Organisation for Economic Co-operation and Development (OECD) base erosion and profit shifting (BEPS) project.
- Policy and practice concerning tax evasion and unacceptable tax avoidance.
- Administration and collection, including plans for increased use of digital systems.
Because the UK legislative process can lag behind the announcement of proposals, certain changes are already law, others are very likely, or practically certain, to become law, whilst others are issues announced for wider consultation and future enactment into law.
Typically, most of the reforms to tax rules are announced in November/December each year, with reforms expected to become law in February or March of the following year. Any reforms of significance, and proposals for important reforms, included in those processes, are discussed below.
The United Kingdom left the European Union (EU) on 31 January 2020. The transition exit period is likely to end on 31 December 2020, and the full implications will depend to a substantial extent on the terms on which exit is agreed and, therefore, remain unclear at this stage. The information included in this tax summary assumes, for now, the continuance of the UK’s agreements with the European Union from its previous membership.
Changes that have taken effect in the past year
Reforms that took effect in the past year include:
- The OECD is currently working to address tax challenges of the digitalisation of the economy, and has adopted a two-pillar approach as the basis for a work program. However, political agreement is not expected on this package until mid-2021 at the earliest. In the interim, the UK has introduced a Digital Services Tax (DST) to address these tax challenges. It will be disapplied once the OECD's appropriate global solution is in place. From April 2020, a new digital services tax of 2% applies to the revenues of certain digital businesses to reflect the value they derive from the participation of UK users, pending an appropriate international solution. The tax applies to annual ‘UK’ revenues above 25 million pound sterling (GBP) from activities relating to Internet search engines, social media platforms, and online marketplaces (of businesses with in-scope annual global revenues of more than GBP 500 million). Loss-makers are exempt, and businesses with very low profit margins are subject to a reduced effective rate.
- Relief for carried forward capital losses are brought into line with relief for carried forward income losses from 1 April 2020. Capital losses carried forward can only be offset in a later accounting period against 50% of any capital gains arising in excess of GBP 5 million, with a single GBP 5 million ‘deductions allowance’ per group against which carried forward losses (both income and/or capital) can be set.
- The amount of qualifying investment in plant and machinery that benefits from a 100% allowance went up from GBP 200,000 to GBP 1 million where the expenditure is incurred between 1 January 2019 and 31 December 2021.
- A Structures and Buildings Allowance (SBA) was introduced applicable to qualifying spend from 29 October 2018. Initially, the allowance was at 2%, which was increased to 3% for qualifying expenditure from 1 April 2020.
- The rate of Research and Development (R&D) Expenditure Credit was increased from 12% to 13% from 1 April 2020.
- A new PAYE cap on SME R&D claims will be introduced. Draft legislation has been published. The cap will be effective for expenditure incurred on or after 1 April 2021.
- The European Union introduced new EU Mandatory Disclosure Rules (EU MDR) in 2018 which Member States are required to transpose into their domestic law. These rules require disclosure to the tax authorities of cross-border arrangements that fall within certain broadly defined hallmarks. Notwithstanding Brexit, the United Kingdom has introduced regulations implementing EU MDR into domestic legislation. The UK regulations generally follow the EU requirements closely, although the main benefit test only considers tax advantages inconsistent with the principles and policy objectives of the relevant tax law. The hallmarks are very broadly defined and many commercial transactions will be within the scope of the rules. The full regime took effect from 1 July 2020, although reportable transactions that were implemented in the transitional period (25 June 2018 to 30 June 2020) will also need to be disclosed. Following optional deferral of reporting regimes implemented by the European Union in June 2020, the United Kingdom has extended the reporting deadlines as follows:
- The deadline for reporting transitional arrangements (where implementation started between 25 June 2018 and 30 June 2020) will be required by 28 February 2021.
- For arrangements where the reporting trigger occurs between 1 July 2020 and 31 December 2020, disclosures will be required by 31 January 2021.
- For all arrangements where the reporting trigger occurs on or after 1 January 2021, disclosure will be required to be made within 30 days of the relevant trigger date.
- From 1 January 2020, when a company becomes resident in the United Kingdom or a company that is not resident in the United Kingdom begins to hold an asset for the purposes of a trade carried on by the company in the United Kingdom through a permanent establishment (PE), the asset or assets concerned will be deemed to have been acquired by the company at market value if the company has been subject to an EU exit charge in relation to them.
- From 6 April 2020, the taxation of non-UK resident landlord companies has been brought within the scope of corporation tax rather than income tax.
- The Finance Act 2020 restored HMRC’s crown preference with effect from 1 December 2020. Previously the Enterprise Act 2000 had ranked HMRC as an unsecured creditor but now HMRC will be a preferential creditor in respect of a large number of what are described as priority taxes including VAT, PAYE, NICs and CIS. This will include historic taxes as well as taxes post the change.
Changes enacted but not yet in force
Changes enacted but not yet in force include:
- A reduced rate of corporation tax for businesses based in Northern Ireland may be introduced. This is subject to joint approval by the Northern Ireland government and the UK Treasury. The commencement date has not yet been finally determined.
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) is currently undertaking a Capital Gains Tax Review. It is not clear when the Government will make any decisions in respect of this, but we expect to hear more in the next Budget in Spring 2021.
- A number of technical changes to the hybrid and other mismatches regime. These changes are designed to ensure that the regime operates proportionately and as intended (informed by HMRC’s experience of applying the rules for three years, extensive consultation with stakeholders and by the fact that other jurisdictions have implemented equivalent rules since 2017). Many of the changes will be retrospective and have effect from 1 January 2017, whilst others will have effect from Royal Assent of the Finance Bill 2021.
- The Government has announced that the implementation of the new requirement for large businesses to notify HMRC of uncertain tax treatments will be delayed until April 2022.
- The Government has announced that it will consult in the new year on measures to tackle promoters of tax avoidance, including tougher sanctions and additional HMRC powers. This is in line with the Government’s strategy to tackle promoters of tax avoidance.
- There is a project currently ongoing to replace LIBOR (and other equivalent reference rates) with new risk-free rates. The transition is due to take place from 2022 onwards and will have effect from the date of Royal Assent to Finance Bill 2021.
- Plans to move all tax reporting, compliance, and payments onto a digital platform by 2020. There is an ongoing consultation which is seeking views on the potential design of the Making Tax Digital system for incorporated businesses and other organisations within the charge to Corporation Tax. The consultation closes on 5 March 2021.
Measures focused on international matters
- The Government is consulting on the ‘Tax treatment of asset holding companies in alternative fund structures’, with a view to potentially introducing targeted tax changes that could help to make the UK a more competitive location for Asset Holding Companies.