United Kingdom

Corporate - Significant developments

Last reviewed - 30 December 2021

Finance Act 2021 introduced generous innovation incentives to encourage capital investment by businesses during 2021 and 2022. An extended three-year trade loss carryback generateed, 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.

Freeports 

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.

At Autumn Budget 2021, three of the English Freeport tax sites (Humber, Teesdie, and Thames) have been designated. These Freeports began initial operations from November 2021. Subject to agreeing their governance arrangements and successfully completing their business cases, the remaining 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.

The UK Chancellor presented his second Budget of the year on 27 October 2021, along with a response to the latest economic forecasts and a Comprehensive Spending Review. Subsequently, the Finance (No.2) Bill was published in early November. Royal assent of the Bill, which becameFinance Act 2022, was granted on 24 February 2022. 

On 30 November 2021, HMRC published a number of papers and consultations relating to tax policy development under the collective title 'Tax Administration and Maintenance'. As the name suggests there was a strong focus on administration but there were also some substantive tax announcements, such as future changes being announced to the R&D Tax Relief and Transfer Pricing regimes.

On 23 March 2022, the UK Chancellor of the Exchequer delivered his Spring Statement. It contained a number of tax announcements (for instance, on R&D tax relief reform). In addition, the Chancellor published a 'Tax Plan' designed to strengthen the UK economy during the remainder of the Parliament.The three part plan will help families with the cost of living, support growth in the economy and ensure that the proceeds of growth are shared fairly.

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.

VAT

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 ‘Northern Ireland 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.

Customs duty

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.

Excise duty

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.

Transit

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:

  • 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 applied to trading losses which were generated in accounting periods ended between 1 April 2020 and 31 March 2022.  Whilst the amount of trading losses which could be carried back up to 12 months remained unlimited, there was a cap on the amount of losses which could be carried back beyond 12 months (this cap was, broadly, GBP 2m for all trading losses generated in accounting periods ended between 1 April 2020 and 31 March 2021, with a separate GBP 2m cap for losses generated in accounting periods ended between 1 April 2021 and 31 March 2022).
  • A new PAYE cap on SME 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 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 March 2023. 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 From 1 April 2021 until 31 March 2023: : 
    • The super-deduction  provides a 130% first year allowance for expenditure that qualifies for main pool plant and machinery.
    • A 50% first year allowance is  available for expenditure incurred on assets qualifying for the special rate pool (normally at 6%).
  • An enhanced 10% rate of SBA for constructing or renovating non-residential structures and buildings within Freeport tax sites was also introduced as well as enhanced capital allowance of 100% for companies investing in plant and machinery for use in Freeport tax sites.
  • Starting from 1 April 2022, large businesses (corporates and partnerships) need to disclose to HMRC ‘uncertain tax treatments (UTT)’ in Partnership, Corporation Tax, VAT and PAYE returns due to be filed on or after that date. The stated objective of the new rules is to reduce the ‘legal interpretation’ tax gap - the tax HMRC say is due, but is not collected, where taxpayers and HMRC interpret the law or its application differently. The UTT regime works by requiring the business concerned flagging, at an early stage, particular uncertain areas which may not be apparent from tax returns, such as where there is an accounting provision or where the tax treatment applied is not HMRC’s known position on the particular point. The rule applies where the tax amount involved is more than GBP5m, subject to a number of exemptions.
  • In 2018 the European Union (EU) introduced EU Mandatory Disclosure Rules (MDR) which Member States were required to transpose into their domestic law. These rules require that cross-border arrangements which 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 HMRC has been limited to cross-border arrangements meeting the Category D hallmarks.  These hallmarks relate to arrangements which may have the effect of undermining reporting obligations under the Common Reporting Standard (CRS) or which involve ownership structures where the beneficial owners are made unidentifiable, and are consistent with the OECD’s model MDR rules.  

A cross-border arrangement (i.e. one which involves the UK or an EU Member State and at least one other territory) which 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. 

On 20 November 2021, the UK government launched a consultation on the implementation of regulations to replace the existing EU MDR-based rules.  The government envisages that these draft regulations, which broadly follow the OECD model, will come into force in summer 2022.  

  • Following Brexit, group relief for non-UK losses of EEA-resident companies arising in accounting periods beginning on or after 26 October 2021 is no longer available (subject to special provisions where there are straddling accounting periods).  
  • Legislation was introduced in Finance Act 2022 to amend the loss relief rules to ensure that the legislation continued to work as intended for companies adopting International Financial Reporting Standard (IFRS) 16. The amendments were intended to address the fact that changes to the way leases are accounted for under IFRS 16 meant that companies in financial distress were denied the exemption from the loss restriction for carried-forward losses that are set against profits arising from lease renegotiations. The changes have retrospective effect from 1 January 2019.
  • Finance Act 2022 also included an amendment to the Diverted Profit Tax (‘DPT’) rules, which came into force from 27 October 2021, providing that a final closure notice may not be issued in relation to an open enquiry where the review period for a DPT charging notice remains open. Other DPT changes include: 
    • extending the ability to amend tax returns to the last 30 days of the review period instead of the first 12 months of the review period; and
    • a measure to allow relief against DPT to be given where it is necessary to give effect to a decision reached in MAP.
  • A UK residential property development sector tax (‘RPDT’) has been introduced with effect from 1 April 2022. It applies to a company or corporate group which holds or has held interests in land/property as trading stock in the course of a trade and is subject to corporation tax on trading profits from residential property development activity.  The tax applies at a rate of 4% to annual profits exceeding £25m (on a group basis, where relevant).

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.
  • For companies in the Banking sector, Finance Act 2022 enacted measures to reduce the rate of the supplementary corporation tax charge from 8% to 3% on profits above GBP 100 million from 1 April 2023.

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.
  • Following a consultation process, on 30 November 2021, the Government announced its response to the review of large businesses’ experiences of UK tax administration, including the degree to which it provides businesses with early certainty where appropriate, ensures the efficient resolution of disputes in accordance with the law, and promotes a collaborative and constructive approach to compliance with the law.  The review explored current challenges and areas for improvement, with a particular focus on: tax risk and certainty, compliance, enquiries and disputes and the co-operative compliance and Customer Compliance Manager (CCM) model. As a result of this review, the Government announced some action to improve tax administration for large businesses and make the UK an easier place to do business in three main areas: (1) mitigating uncertainty through new Guidelines for Compliance and improved guidance, (2) changes to help address long-running enquiries with reference made to particular challenges faced in transfer pricing enquiries and (3) improving the co-operative compliance experience. In 2022 HMRC has launched workstreams in these three areas in order to address these issues.
  • The Government has consulted further on a wide ranging reform of Research & Development (R&D) Tax Relief. The consultation closed in February 2022. The Chancellor’s Spring Statement, on 23 March 2022, provided some further information on the reform of Research & Development (R&D) reliefs. The Government provided some further clarifications on the changes to reform R&D credits with the detailed announcements expected in the Autumn. The key changes are: 
  • A new announcement to include pure maths research within the scope of the R&D relief. This is likely to benefit those undertaking data science or artificial intelligence based R&D activities. 
  • There was further clarification on the changes to allow data and cloud computing costs, which will now include cloud storage, which had been excluded from previous proposals.
  • Proposals to fully exclude overseas costs from claims but the new proposals will allow some narrow exceptions for R&D that needs to be undertaken overseas, including where there are: 
    • Material factors such as geography, environment or population that are not present in the UK; or
    • Regulatory / legal requirements where the activities must take place outside of the UK, such as clinical trials. 

The practicalities behind these proposals remain to be seen as it will likely require the claimant to prove they were unable to undertake the R&D activities in the UK. 

 

 Draft  legislation is to be published as part of the draft Finance Bill in the Summer. HM Treasury continues its review of the R&D schemes and we will also see further announcements on this in the Autumn.

  • In May 2022, HM Treasury issued a policy paper for discussion and response on the reform of the UK’s capital allowance regime. Response is by 1 July 2022. 
  • A consultation was also launched on 30 November 2021 on the implementation of regulations to replace the existing EU MDR-based rules.  The Government envisages that the draft regulations, which broadly follow the OECD model, will come into force in summer 2022. 
  • On 26 May 2022, a new 25% Energy Profits Levy ("EPL") on the profits of oil and gas companies was announced by the UK Government, with effect for profits arising after that date. The EPL is temporary and is expected to expire on 31 December 2025. The Government will introduce a Bill to legislate for the EPL in early July 2022 and so we may see changes to the current proposals when it is enacted.

Measures focused on international matters

The other main areas of tax reform are still being progressed by the UK Government, namely: 

  • As noted above, one of the main areas of tax reform being progressed by the UK government relates to redefining the corporate tax base, including aspects of the Organisation for Economic Co-operation and Development (OECD) base erosion and profit shifting (BEPS) project.  In particular, the UK government has recently consulted on the implementation of the model rules that have been released by the OECD in relation to Pillar 2, which will establish a global minimum tax regime applicable to both public and privately held multinational groups with consolidated revenue over  over €750m. Following that consultation, the government has announced that the UK’s Pillar 2 rules will begin to apply to accounting periods beginning on or after 31 December 2023 and that draft legislation will be published in the summer of 2022.  
  • The EU has already released a draft directive requiring EU member states to introduce the rules by 31 December 2023 and the UK Treasury is consulting on the implementation rules with a current target date of accounting periods ending after 1 April 2023. We understand that consideration is being given to a later UK commencement date, possibly to accounting periods commencing on or after 1 January 2024, with draft legislation targeted for release in Summer 2022.
  • On 30 November 2021 the Government published the outcome of its public consultation on transfer pricing documentation.  The Government decided that it will legislate to require larger businesses to maintain OECD-format “Master File” and “Local File” documentation.  In addition, a “summary audit trail” (SAT), described in the consultation outcome as “a short, concise document summarising the work already undertaken by the customer in arriving at the conclusions in their transfer pricing documentation” will be required as part of the Local File. HMRC stated that it will move forward with consultation on draft legislation and guidance in 2022, with new rules taking effect from April 2023.
  • The UK’s transfer pricing documentation rules currently rely on the generic legal requirement to keep sufficient records to deliver correct and complete returns and limited guidance on the form and content of the documentation. In practice this is already commonly understood to mean OECD-compliant documentation in most cases.  The new rules will make this an explicit legal requirement for larger businesses with the additional requirement for the inclusion of the SAT. The documents would not need to be filed with HMRC as a matter of course, but would be required to be provided within 30 days of an HMRC request. Penalties would be available to HMRC for failure to comply with the new requirements.
  • Following a consultation, the UK government has announced that it intends to introduce a redomiciliation regime, which will make it possible for companies to move their domicile to and relocate to the UK.  (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 engagement is needed before that is possible and has not yet given a timeline for the completion of this task.
  • The Government will consult shortly on an Online Sales Tax. The consultation will explore the arguments for and against the introduction of an Online Sales Tax.
  • As noted above, the Government is consulting further on a wide ranging reform of Research & Development (R&D) Tax Relief. Of particular interest in the international context are the proposed restrictions on relief for overseas costs from April 2023.