United Kingdom

Budget, Consultations, and Autumn Statement

The United Kingdom (UK) Chancellor delivered his Spring Budget on 6 March 2024. Finance (No. 2) Bill 2023-24 was subsequently published and was enacted as Finance (No. 2) Act 2024 on 24 May 2024.

Changes that have taken effect in the past year

Reforms that took effect in the past year include:

• Legislation has been enacted in the United Kingdom that introduces 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‘, 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), 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 published draft legislation to implement an Under Taxed Profits Rule (UTPR) in the United Kingdom. The draft provisions do not include a commencement date and will not take effect until they have been included in a Finance Bill, but His Majesty's Revenue and Customs (HMRC) has confirmed that the commencement date will not be earlier than 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. 
• From 1 April 2023, the rates of small and medium-sized enterprise (SME) research and development (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.
• The R&D-intensive regime was introduced for qualifying expenditure incurred on or after 1 April 2023, requiring 40% of total group 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.
• 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 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 (AIF). 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 1 million pounds sterling (GBP). 
• 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 (now permanent, see below). 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. 
• In Finance Act 2024, the 2026 end date for full expensing is removed, resulting in full expensing becoming permanent. 
• 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]). 
• 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 that fall within its intended scope and the rules better achieve their intended effect. These changes are intended to further enhance the attractiveness of the United Kingdom 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.
• 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, an IIR and DMTT have been enacted in the United Kingdom and apply for accounting periods beginning on or after 31 December 2023. In addition, draft legislation has also been published to implement a UTPR in the United Kingdom. The draft provisions do not include a commencement date and will not take effect until they have been included in a Finance Bill, but HMRC has confirmed that the commencement date will not be earlier than 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.

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, but the process is now on hold until after the General Election in July 2024.
• 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.
• In the Spring Budget on 6 March 2024, the government announced a further extension to the EPL through 31 March 2029; however, this was not included in Finance (No. 2) Act 2024.
• 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.
• Following the Autumn Statement 2023, it was announced:
• In light of full expensing being made permanent, HM Treasury and HMRC launched a consultation on whether broader changes could be made to simplify the existing capital allowances legislation. This is 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. 
• A working group has been set up to 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.

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 IIR and a supplementary DMTT, which apply for accounting periods beginning on or after 31 December 2023.
• The government has announced that it intends to implement the backstop UTPR in the United Kingdom and has published draft legislation for this measure for inclusion in a future Finance Bill. The draft provisions do not include a commencement date, but HMRC has confirmed that it will not be earlier than accounting periods beginning on or after 31 December 2024.
• 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. The requirement for an International Dealings Schedule (IDS), a document which would report transactional data about intra-group, 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.
• 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. The government will be holding technical consultations on any draft legislation and guidance in 2024 in order to enable stakeholders to provide views and comments. These are discussed in the Group taxation, Corporate residence, and Taxes on corporate income sections, respectively.