United Kingdom

Budget, Consultations, and Spring Statement

The United Kingdom (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 2021. Royal assent of the Bill, which became Finance Act 2022, was granted on 24 February 2022. 

On 30 November 2021, Her Majesty's Revenue and Customs (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 research and development (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.

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) R&D claims was introduced. 
• Generous temporary reliefs were introduced in the 2021 Budget in respect of main pool and special rate pool expenditure, including the super-deduction, which provides a 130% first year allowance for expenditure that qualifies for main pool plant and machinery.
• Starting from 1 April 2022, large businesses (corporates and partnerships) need to disclose to HMRC ‘uncertain tax treatments' (UTTs) in partnership, corporation tax, VAT, and PAYE returns due to be filed on or after that date.

• 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 amendments to the Diverted Profits Tax (DPT) rules. These are discussed in 'Diverted profits tax' in the taxes on corporate income section.
• 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 that 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 GBP 25 million (on a group basis, where relevant).
• 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. In November 2022, the EPL rate was increased to 35% from 1 January 2023 and the sunset clause extended to 31 March 2028 from 31 March 2025. The latest changes are expected to be enacted before the end of 2022.

Changes enacted but not yet in force

Changes enacted but not yet in force include:

• 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.
• From 1 April 2023 the rates of SME research & development relief will reduce to an additional 85% corporate tax deduction from the current 130% additional tax deduction. Also the rate of Research & Development Expenditure Credit (RDEC) will increase to 20% from 13%.
• From 1 April 2023 the Annual Investment Allowance for capital expenditure will become permanent at a rate of GBP 1 million.

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 further on a wide-ranging reform of R&D tax relief.

• 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 due by 1 July 2022. 
• 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 which 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 and confirmed that regulations implementing OECD MDR will come into force in the first half of 2023 and the regulations implementing EU MDR will be repealed.  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, there will not be a manual reporting system.
• Draft legislation included in Finance Bill 2023 will introduce a range of changes to the R&D regimes. Applying to accounting periods commencing on or after 1 April 2023 these include: 
• Pre notification requirements.
• Mandatory documentary requirements
• Cloud and data costs will become qualifying cost types
• Overseas costs relating to externally provided workers (EPWs), subcontractors and contributions to independent R&D (such as payments to universities) will no longer be eligible - except where the conditions necessary for the R&D are not present in the UK, but are present in the place where the R&D is carried out, and where it is wholly unreasonable for the company to replicate the conditions in the UK. 
• To include pure math research within the scope of the R&D relief
• HM Treasury will open a consultation before the next Budget in the Spring to gather views on whether the SME and RDEC regimes should be combined into an RDEC-like above the line regime. The Government will also discuss with industry possible additional support for high R&D intensive SMEs to compensate them for the drop in the SME rate. 
• A consultation has been published on a number of potential changes to audio-visual tax reliefs, which include film, television and video games tax reliefs. The proposed changes include the following:

• • Merging the film and television tax relief 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 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 £1m cap on eligible subcontracted spend, and restricting eligible costs to UK expenditure only (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. 

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 UK) 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 will be included in the Spring Finance Bill 2023.

  It was also announced that the government intends to implement the backstop Undertaxed Profit Rule in the UK, but with effect no earlier than accounting periods beginning on or after 31 December 2024.

• Following a consultation, the UK government has announced that it intends to introduce a re-domiciliation regime, which will make it possible for companies 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 engagement is needed before that is possible and has not yet given a timeline for the completion of this task.
  

• The government has decided not to introduce an online sales tax (OST), and its response to the OST consultation will be published shortly.

• The government is consulting on changes to the existing tax exemptions available to sovereign immune bodies. The consultation document suggests that the exemption be limited to “UK source interest income” other than where the interest income relates to trading activities undertaken in the UK and that from 1 April 2024 sovereign immune entities will come within the charge to corporation tax on:

  • Trading profits
  • Income from a UK property business
  • Property Income Distributions (paid by a UK REIT or PAIF)
  • UK source royalty income 
  • Capital gains on disposals of direct and certain indirect disposals on UK immovable property (subject to proposed rebasing)

  The consultation closed in September 2022 and the outcome had not been published as at 12 December 2022.

• 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 below.