The United Kingdom (UK) government responded to the coronavirus pandemic by implementing a comprehensive range of emergency financial support measures to businesses during 2020. Subsequently, the government delivered a Spring Budget in March 2021 that set out a plan to provide continuing support for jobs and businesses as the United Kingdom forges a path to recovery from the pandemic.
Finance Act 2021 introduced generous innovation incentives to encourage capital investment by businesses during 2021 and 2022. An extended three-year trade loss carryback will generate, for many companies, an immediate corporation tax repayment. Accompanying these reliefs is an increase from 19% to 25% in the main rate of corporation tax, but not until 1 April 2023. A small profits rate of 19% for companies with profits not exceeding 50,000 pound sterling (GBP) will take effect from the same date.
This rise in the corporation tax rate is a marked departure from the government's extensive reforms to the corporation tax system in the years prior to the coronavirus outbreak, a key feature of which was a declining rate of corporation tax since 2010. These earlier reforms were intended to maintain the United Kingdom's competitive position and had 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 other main areas of reform are still being progressed by the UK government, namely:
- 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, and the transition exit period ended on 31 December 2020, resulting in a number of changes discussed below as a consequence of various EU tax measures ceasing to apply.
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 successful bids came from East Midlands Airport, Felixstowe and Harwich, Humber, Liverpool City Region, Plymouth and South Devon, Solent, Teesside, and Thames.
Subject to agreeing their governance arrangements and successfully completing their business cases, these Freeports are expected to begin operations from late 2021. 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.
Brexit: Value-added tax (VAT), customs, and excise duties
Following the end of the Brexit transitional period on 31 December 2020, goods moving between Great Britain (GB) and the European Union are treated as imports and exports.
The Northern Ireland Protocol (NIP) requires that Northern Ireland (NI) remains part of the single market and will continue to follow the rules for intra-Community supplies and acquisitions, so that goods moving between Great Britain and Northern Ireland are treated as though they are imports/exports, and goods arriving into Northern Ireland from the European Union will be subject to ‘NI acquisition VAT’. Goods entering Great Britain from Northern Ireland are therefore subject to VAT as though they were imports, and relevant UK legislation applies. Goods entering Northern Ireland from Great Britain are also subject to VAT as though they were imports, and relevant EU or UK legislation applies as appropriate.
‘Distance sales' of goods from GB to EU consumers (B2C transactions) will no longer be subject to the distance selling thresholds set by member states, and GB suppliers will be required to comply with the rules on imported goods and local supplies in each of the EU member states (including local 'low value consignment relief' rules).
Businesses identified for VAT purposes under the NIP will be subject to existing rules in respect of distance sales of goods to consumers (B2C) in EU member states, and EU businesses will be able to supply goods to NI consumers under existing distance selling arrangements.
Following the withdrawal of 'low value consignment relief', import VAT is no longer due at the border for most consignments valued below GBP 135. From 1 January 2021, overseas businesses selling direct to UK consumers are required to register and account for VAT in the United Kingdom where the value of any consignment is GBP 135 or less. However, 'low value consignment relief' from import VAT for consignments not exceeding GBP 15 continues to apply in Northern Ireland (although not in respect of goods that are ordered remotely).
For movements of own goods from Great Britain to Northern Ireland, output VAT will need to be accounted for on the VAT return; this may also be reclaimed as input VAT (on the same VAT return), subject to the normal rules. For movements of own goods from Northern Ireland to Great Britain, no VAT will need to be accounted for unless the goods have been subject to a sale or supply to a customer.
UK VAT groups will continue to operate largely as they do now. The exceptions are:
- Where goods are supplied by members of a VAT group, and those goods move from Great Britain to Northern Ireland, VAT will now be due in the same way as when a business moves its own goods.
- Where supplies of goods are made between members of a VAT group, those goods are located in Northern Ireland at the time that they are supplied, and one or both members only have establishments in Great Britain, VAT must be accounted for by the representative member but may be reclaimed, subject to the normal rules.
Supplies of services between the United Kingdom and the European Union are treated, with effect from 1 January 2021, as supplies of services to a third country. The UK VAT rules determine the place of supply, whether the supply is subject to UK VAT, and whether input VAT incurred in making the supply is recoverable in the United Kingdom.
EU goods imported into the United Kingdom by entering Northern Ireland are treated as domestic goods and will not be chargeable to import duty. Non-EU goods imported into the United Kingdom by entering Northern Ireland are subject to duty charged in accordance with EU customs legislation.
From 1 January 2021:
- All imports to and exports from Great Britain require customs declarations.
- Most businesses importing goods into Great Britain from the European Union between 1 January 2021 and 31 December 2021 have up to six months to defer full customs declarations and pay customs duty.
- Full import declarations for controlled goods, such as excise products, are required from 1 January 2021.
- From 1 January 2022, full import declarations are required for all goods.
Rules will allow traders to use a duty deferment account without holding a Customs Comprehensive Guarantee.
VAT-registered traders choosing not to, or not eligible to, defer their import declarations will still be able to use postponed VAT accounting if they choose to do so.
The Excise Movement and Control System (EMCS) will continue to operate but solely for internal UK duty suspended movements, including movements between the importer or exporter’s warehouse and the port.
Importers wishing to move goods under excise duty suspension will need to be approved as a Registered Consignor (or seek the services of one) to declare goods to EMCS from the port of import. An excise movement guarantee must be in place (if required) for duty suspended imports to cover the movement from the port to the warehouse.
Traders using the Common Transit Convention to import and export will need to follow all transit procedures from 1 January 2021.
Changes that have taken effect in the past year
Reforms that took effect in the past year include:
- At the end of the transition period, the United Kingdom also ceased to be within the scope of two EU-specific means of addressing double taxation: the EU Dispute Resolution Directive (EUDRD), which came into force in the United Kingdom with effect from 14 February 2020 in relation to accounting periods commencing on or after 1 January 2018, and the European Union Arbitration Convention (EUAC), which provides a uniform system of mandatory and binding arbitration across the European Union. These are available to EU members in addition to making a claim under the appropriate bilateral tax treaty. The United Kingdom will not consider any new requests for access to the EUDRD or the EUAC submitted to the UK (or another EU member state where the United Kingdom is a party to the dispute) after the end of the transition period. The United Kingdom will, however, continue working cases to a conclusion where the requests were received before the end of the transition period.
- As a result of Brexit and the end of the transition exit period on 31 December 2021, from 1 January 2021, payments of interest, royalties, and dividends to UK companies ceased to qualify for relief under the Interest and Royalties Directive (IRD) and the Parent-Subsidiary Directive (PSD), respectively. The United Kingdom had incorporated the IRD into domestic law in a way that did not rely on the United Kingdom being a member of the European Union to continue to be effective, so UK companies initially continued to be able to pay interest and royalties without deducting withholding tax (WHT) in circumstances where the IRD would have applied. However, that UK legislation was repealed with effect from 1 June 2021 (or 3 March 2021 where anti-abuse measures apply). From that date, payments of interest and royalties by UK companies to associated companies resident in the European Union will be subject to WHT unless relief is available under the applicable double tax treaty (DTT) (and subject to the conditions and limitations of that treaty). The United Kingdom does not impose WHT on dividend payments, so the loss of the PSD does not impact the WHT on dividend payments made by UK companies.
- The period for which trading losses can be carried back against the total profits of a company was temporarily extended from 12 months to 3 years. This extension applies to trading losses that have been generated in accounting periods ended between 1 April 2020 and 31 March 2022. Whilst the amount of trading losses that can be carried back up to 12 months remains unlimited, there is a cap on the amount of losses that can be carried back beyond 12 months (this cap is, broadly, GBP 2 million for all trading losses generated in accounting periods ended between 1 April 2020 and 31 March 2021, with a separate GBP 2 million cap for losses generated in accounting periods ended between 1 April 2021 and 31 March 2022).
- A new pay-as-you-earn (PAYE) cap on small and medium enterprise (SME) research and development (R&D) claims was introduced. The cap is effective for expenditure incurred on or after 1 April 2021. The amount of payable tax credit a qualifying loss-making business can receive is capped at three times the company’s total PAYE and national insurance contributions (NICs) liability for that year.
- The amount of qualifying investment in plant and machinery that benefits from a 100% allowance was maintained at GBP 1 million where the expenditure is incurred between 1 January 2019 and 31 December 2021. This increased from GBP 200,000 in the year ended 31 December 2018.
- Generous temporary reliefs were introduced in the 2021 Budget in respect of main pool and special rate pool expenditure:
- The super deduction will provide a 130% first-year allowance for expenditure that qualifies for main pool plant and machinery.
- A 50% first-year allowance will be available for expenditure incurred on assets qualifying for the special rate pool (normally at 6%).
- An enhanced 10% rate of structures and buildings allowance (SBA) for constructing or renovating non-residential structures and buildings within Freeport tax sites was also introduced, as well as an enhanced capital allowance of 100% for companies investing in plant and machinery for use in Freeport tax sites.
- In 2018, the European Union introduced EU Mandatory Disclosure Rules (MDR), which member states were required to transpose into their domestic law. These rules require that cross-border arrangements that meet certain conditions (hallmarks) must be reported by EU-based advisers (intermediaries) or taxpayer entities to the relevant EU tax authority within 30 days of certain trigger events. That tax authority must then share details of the arrangements with the tax authorities in other EU member states.
However, following the agreement of the EU/UK Trade and Cooperation Agreement in December 2020, the obligation to report an arrangement to Her Majesty's Revenue and Customs (HMRC) has been limited to cross-border arrangements meeting the Category D hallmarks. These hallmarks relate to arrangements that may have the effect of undermining reporting obligations under the Common Reporting Standard (CRS) or that involve ownership structures where the beneficial owners are made unidentifiable, and they are consistent with the OECD’s model MDR rules. The UK government intends to consult on replacing the EU MDR-based rules with regulations based purely on the OECD model in due course.
A cross-border arrangement (i.e. one that involves the United Kingdom or an EU member state and at least one other territory) that meets one or more of the Category D hallmarks must be reported by UK intermediaries (or in some cases by the taxpayer) to HMRC within 30 days of certain trigger events.
- 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 the Construction Industry Scheme (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.
- From 1 April 2023, an increase from 19% to 25% in the main rate of corporation tax and the introduction of a 19% small profits rate of corporation tax for companies whose profits do not exceed GBP 50,000.
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. A second report on simplifying key practical, technical, and administrative capital gains tax issues was published in May 2021.
- The government has announced that the implementation of the new requirement for large businesses (corporates and partnerships) to notify HMRC of uncertain tax treatments will be delayed until April 2022. This new obligation will apply to the legal interpretation of corporation tax, income tax (including PAYE), and VAT legislation for returns that are due to be filed with HMRC after April 2022 and the tax amount involved is more than GBP 5 million.
- The government is currently consulting 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.
- Views on how the tax administration framework could be reformed to support a trusted, 21st century tax administration system. The consultation closes on 13 July 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 United Kingdom a more competitive location for asset holding companies. The draft legislation is expected to be published during 2021.
- The government is consulting on the UK’s transfer pricing documentation requirements, including the introduction of OECD 'Master File' and 'Local File' reports and an 'International Dealings Schedule'.