United Kingdom

Budget, Consultations, and Spring Statement

The United Kingdom (UK) Chancellor delivered his Spring Budget 2023 on 15 March 2023. Finance (No. 2) Bill 2023 was subsequently published on 23 March 2023 and is currently progressing through Parliament. The Bill is expected to be enacted sometime in July 2023.

Changes that have taken effect in the past year

Reforms that took effect in the past year include:

• In the March 2021 Budget and following a bidding process, the Chancellor announced the creation of eight new Freeports in England with discussions to continue with the devolved administrations to ensure delivery of Freeports in Scotland, Wales, and Northern Ireland as soon as possible. The Freeports will contain areas where businesses will benefit from more generous tax reliefs, customs benefits, and wider government support, bringing investment, trade, and jobs to regenerate regions across the country that need it most.
• A new pay-as-you-earn (PAYE) cap on small and medium-sized enterprise (SME) research and development (R&D) claims was introduced. 
• Starting from 1 April 2022, large businesses (corporates and partnerships) need to disclose to His Majesty's Revenue and Customs (HMRC) ‘uncertain tax treatments' (UTTs) in partnership, corporation tax, value-added tax (VAT), and PAYE returns due to be filed on or after that date.

• 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.
• Effective 26 May 2022, a new 25% Energy Profits Levy (EPL) on the profits of oil and gas companies was announced, with effect for profits arising after that date. The EPL rate increased to 35% from 1 January 2023, and the sunset clause was extended to 31 March 2028 (from 31 March 2025). 
• 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).
• In Budget 2023, the government announced a new window for entry into the tonnage tax regime for eligible companies 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.

Forthcoming changes

Forthcoming changes include:

• From 1 April 2023, the rates of SME R&D relief reduce to an additional 85% corporation tax deduction from the current 130% additional tax deduction. Also, the rate of Research & Development Expenditure Credit (RDEC) will increase to 20% from 13%. This change is part of the Finance Bill currently progressing through Parliament.
• Also from 1 April 2023, qualifying costs and the definition of R&D is amended so that certain cloud computing and data acquisition costs will become eligible for claims, as will advances in ‘pure mathematics’. This change is part of the Finance Bill currently progressing through Parliament.
• 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% .
  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 Finance Bill currently progressing through Parliament.

• From 1 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 change is part of the Finance Bill currently progressing through Parliament.
• From 1 April 2023, the annual investment allowance (AIA) for capital expenditure will become permanent at a rate of GBP 1 million. This change is part of the Finance Bill currently progressing through Parliament.
• 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. 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. This change is part of the Finance Bill currently progressing through Parliament.

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.
• The government has consulted on the merger of the two R&D regimes. Any changes are likely to be implemented from 1 April 2024. In addition, from 1 April 2024, restriction on overseas costs may be implemented. This will aim to refocus qualifying spend on the UK market with restrictions on the eligibility of overseas externally provided worker (EPW) and subcontract costs (there will be some fairly narrow exceptions).

• 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.
• A consultation outcome proposes a number of changes to audio-visual tax reliefs, which include film, television, and video games tax reliefs from 1 January 2024. The proposed changes include the following:

• • Merging the film and television tax reliefs, including aligning some of the eligibility requirements, such as the cultural test.
  • Amending the way that the reliefs are given, to operate in a similar way to the RDEC. The intention would be to ensure that the benefit of the reliefs is preserved following the introduction of the 'Pillar 2' rules.
  • For video games tax relief, removing the GBP 1 million cap on eligible subcontracted spend and restricting eligible costs to UK expenditure only (European Economic Area [EEA] spend may no longer qualify).
  • For high-end television tax relief, reviewing the minimum slot length and minimum expenditure requirements, and defining a ‘documentary’ in the legislation.

• 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 9 June 2023, the government announced a review of the UK oil and gas fiscal regime and will be consulting with industry and interested parties during the remainder of 2023.
• On 9 June 2023, it was announced that a new Energy Security Investment Mechanism (ESIM) is to be introduced, which will impact the application of the EPL. The timing of the applicability of the ESIM is unclear, but it is likely to apply from 9 June 2023. Detailed guidance and draft legislation are awaited.
• Changes to the tonnage tax regime were announced in Budget 2023 (with effect from 1 April 2024) and will be legislated for in Finance Bill 2024.

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. For accounting periods beginning on or after 31 December 2023, the government will introduce:
• an Income Inclusion Rule (IIR), which will require large-UK-headquartered multinational groups to pay a top-up tax where their foreign operations have an effective tax rate of less than 15%, and 
• a supplementary Qualified Domestic Minimum Top-UP (QMDTT) tax rule, 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 tax rate of less than 15%.
• Both the IIR and QDMTT will incorporate the substance-based income exclusion that formed part of the G20-OECD agreement. The legislation for these changes is set out in the Spring Finance Bill 2023, which is currently progressing through Parliament and is expected to be enacted some time in July 2023.
• It was also announced that the government intends to implement the backstop Undertaxed Profit Rule in the United Kingdom, but with effect no earlier than accounting periods beginning on or after 31 December 2024.
• On 19 June 2023, the UK government launched a consultation on potential changes to aspects of the UK legislation across several areas of taxation that will impact multinationals: transfer pricing, permanent establishments (PE), and DPT. The consultation will be open for eight weeks through 14 August 2023.
• It considers various transfer pricing issues, including the arm’s-length principle and UK to UK transfer pricing. In relation to PE, the government is considering changing the definition of a PE and asks for views on the potential advantages, disadvantages, and consequences of two proposed options. The core DPT issue under consideration is whether to remove DPT’s status as a separate tax and instead bring it into the corporation tax regime.
• 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.
• The government consulted on changes to the existing tax exemptions available to sovereign immune bodies but concluded that no changes should be made. New transfer pricing documentation requirements are being introduced, coming into effect for accounting periods beginning on or after 1 April 2023. These are discussed in Transfer pricing documentation in the Group taxation section.