Before diving into the developments L-day brought us, it is worth acknowledging that the last two years have brought a level of disruption to a tax policymaking cycle that had just been tightened up with a view to bringing more certainty and stability to stakeholders. In light of the slightly disjointed timeline that has unfolded since 2019, it is worth taking stock at the outset to recalibrate and confirm where exactly L-day is supposed to sit in this process and what might come next.
‘Legislation day’ sees the publication of the draft tax legislation that the government intends to lay before Parliament several months down the line. The draft legislation generally implements proposed measures announced at the preceding Budget (in this case, March 2021) and brings to a conclusion any consultations that have run outside of these events. The idea is to give sufficient time for ample technical scrutiny of the legislation before it is put to Parliament officially as the Finance Bill some months later.
Seasoned readers will remember that Spring Budgets were supposed be a thing of the past: a relic of the time when the UK was the only major economy to have two major fiscal events (i.e. both a Spring and Autumn Budget/Statement) per annum. In 2016, the government announced that the Budget would move to the Autumn, as the first key step in a process that would allow both sufficient consultation on measures ahead of L-day, and sufficient scrutiny of the draft legislation afterwards. Although the mandate for a single Autumn Budget never changed, events overtook and this year saw the second of two Spring Budgets in a row (with the November 2019 Budget being rolled to March 2020 as a result of the general election, and the deferral of Autumn 2020’s Budget to March this year because of covid).
However, despite another ‘late’ Budget in this cycle, L-day has gone ahead on time, meaning that, assuming there are no further significant disruptions, the draft legislation published is likely to receive scrutiny and royal assent in time for the next tax year. In terms of the next Budget, it remains to be seen which will win out: keeping the number of Budgets in 2021 down to one, or moving back to the model of an Autumn Budget as quickly as possible.
So, what has the government published? Some of the highlights are as follows.
Following two consultations on the subject, HMRC has listened and made substantial changes to the proposed measure to introduce a new notification for uncertain tax treatments by large businesses. The rationale for the measure remains unchanged: this is the government’s attempt to reduce the legal interpretation of the tax gap, being the difference between the tax that would have been collected under HMRC’s interpretation of the law (whether or not that interpretation is correct) and the tax that was actually collected. Crucially, the government now accepts that HMRC is not always right and this regime should not prevent taxpayers from taking a different position.
The proposal would see large businesses notify HMRC where they have adopted an uncertain tax treatment, defined by three triggers (much reduced from the seven triggers featured in the previous iteration of proposals). The three triggers that require notification are:
1. a provision is recognised in the accounts in accordance with GAAP to reflect the probability that a different tax treatment will be applied to the transaction;
2. an interpretation or application of the law is not in accordance with how HMRC is known to interpret or apply the law; or
3. it is reasonable to conclude that if a tribunal or court were to consider the tax treatment there is a substantial possibility that the treatment would be found to be incorrect in one or more material respects.
For businesses without a CCM, a new route for discussion around tax uncertainty will be established. This is a welcome development in and of itself as businesses without a dedicated CCM have been placed in an inferior position and not able to have the same contact with an appropriate officer or technical specialist with the authority to make a decision around a point of tax uncertainty.
The draft legislation sets out the definition of large businesses caught within the regime which includes companies, partnerships and LLPs with a turnover above £200m, a balance sheet total over £2bn, or both. The consultation alluded to an exemption for asset managers such that the threshold calculation would not include portfolio companies. The draft legislation attempts to define this but seemingly gets lost along the way, so asset managers will want to clarify the application of this during the consultation period.
Other elements that remain unchanged since the consultation include the fact that the regime would apply only to corporation tax, employment taxes and VAT and there would be a notification threshold of £5m where there is a difference of more than £5m between the taxpayer and HMRC’s calculation of the tax liability. Crucially, and perhaps most significantly, the government has not budged on the timing of introduction. The rules would come into effect for tax positions taken in any returns due to be filed after April 2022, meaning that corporation tax positions being taken today fall within the new regime.
The government has published draft legislation – and, somewhat unusually, an accompanying consultation – with a view to simplifying the rules for basis periods (the rules that determine which profits of an unincorporated trading business are allocated to which tax years). The changes have not waited for the conclusions from the spring 2021 consultation into the wider tax administration framework that closed just seven days before the legislation was published, suggesting there is an appetite to start making some significant changes to archaic building blocks of the tax system (indeed, even before engagement has begun with the simultaneously launched consultation).
The government is seeking to make changes that would see businesses taxed on profits arising in a tax year in order to remove the complexities associated with the rules when a business draws up accounts to a year end not aligned to the tax year (i.e. 5 April or 31 March). In moving to these new rules, businesses would still be free to choose their own accounting period but importantly, the date would no longer have any impact on taxation. Businesses with a year-end different to the tax year would apportion profit in the same way as other forms of income. Transitional issues are identified by the government and these will need to be worked through during the consultation period.
The government remains committed to strengthening the UK as a destination for asset holding companies (AHCs) in alternative fund structures. The publication of draft legislation heralds the arrival of this anticipated regime which seeks to remove a number of tax barriers preventing widespread use of UK AHCs. The UK is set to compete with Luxembourg and, to a lesser extent, Ireland by offering a highly competitive regime.
Legislation for the regime is being trickled out so the 11 pages published on L-day should not be seen as the complete framework. Tranche one of the legislation focuses on the conditions of entry into the regime, so it defines what a qualifying AHC is in terms of ownership and activity requirements. We learn that the AHC must be owned by at least 70% of good investors (which are broadly diversely owned eligible funds and certain institutional investors) and that the AHC should undertake qualifying investment activities.
The legislation also provides a fix for one of the main challenges that has prevented UK AHCs from being widely used due to the way the existing rules for repatriating profits to investors treat certain distributions as income for tax purposes (even if the underlying profit is capital). The regime will also introduce a wide-ranging participation exemption and exemption for disposal of non-UK real estate without condition meaning there should be no tax on gains arising in the AHC (except for UK land and assets that derive 75% or more of their value from UK land). The legislation also confirms there will be an exemption from withholding tax on interest payments made in respect of securities held by investors in the AHC.
Although the legislation for the regime is not complete, the summary of consultation responses provides a good indication of the wider framework for the regime by providing details of decisions that government has made; for example, a stamp duty exemption will only be provided for the repurchase of share and loan capital, not the desired wider exemption for the acquisition of securities by a qualifying AHC. Further details are anticipated on what mechanism the government will use to prevent the conversation of income into capital. Horribly complex tracking rules were initially proposed; however, further thought is being given to the rules to hopefully avoid creating an unnecessary compliance burden that would not compare favourably with Luxembourg. It is also not clear how the regime will accommodate non-domiciled UK residents, with the details under further consideration.
As for the next steps, a working group will be set up for stakeholders to discuss the unresolved issues with HMT and HMRC. Further legislation is expected in the autumn, with the regime going live from April 2022.
A number of changes intended to make the REIT regime more attractive for real estate investment have been proposed, largely by relaxing rules that are currently perceived to introduce unnecessary costs, constraints or administrative burdens on REITs and those looking to invest in them.
Several amendments are set out, but two are likely to be seen as particularly welcome: the broad removal of a requirement to admit REIT shares to trading on a recognised stock exchange (where at least 99% of its ordinary share capital is owned by one or more institutional investors); and removing the ‘holder of excessive rights’ charge to corporation tax where property income distributions are paid to investors entitled to gross payment. The measures have been produced in part in response to questions on investments in real estate set out in the recent asset holding company consultations.
The removal of the listing requirement is a particularly positive development in eradicating what had become seen as a somewhat arbitrary barrier to entry for the regime – not least because it is possible to satisfy even where there is unlikely to be regular trading of investors’ interests through listing the REIT on the International Stock Exchange (TISE), which does not have a trading requirement. The enforced use of a foreign stock exchange had been seen to dilute the attractiveness of a REIT vehicle if one of the main attractions is that it is seen as a UK-based vehicle.
The changes are stated to take effect from 1 April 2022.
Described as a ‘minor change’ to the hybrids regime, the government’s proposed legislation would provide some clarity on the treatment of certain non-UK entities in the context of establishing hybrid payee deduction/non-inclusion mismatches.
It is understood the changes are in part aimed at providing clarity on the treatment of, for example, US LLCs in the hybrid context. The government had previously proposed amendments to the definition of a ‘hybrid entity’, with the primary purpose of removing US LLCs from the scope of the hybrid mismatch rules, in the last round of changes to the regime, but scrapped them after identifying unintended consequences arising from those changes. This update is seen as tackling the same issue, with retroactive effect (the changes will apply from 1 January 2017).
Before diving into the developments L-day brought us, it is worth acknowledging that the last two years have brought a level of disruption to a tax policymaking cycle that had just been tightened up with a view to bringing more certainty and stability to stakeholders. In light of the slightly disjointed timeline that has unfolded since 2019, it is worth taking stock at the outset to recalibrate and confirm where exactly L-day is supposed to sit in this process and what might come next.
‘Legislation day’ sees the publication of the draft tax legislation that the government intends to lay before Parliament several months down the line. The draft legislation generally implements proposed measures announced at the preceding Budget (in this case, March 2021) and brings to a conclusion any consultations that have run outside of these events. The idea is to give sufficient time for ample technical scrutiny of the legislation before it is put to Parliament officially as the Finance Bill some months later.
Seasoned readers will remember that Spring Budgets were supposed be a thing of the past: a relic of the time when the UK was the only major economy to have two major fiscal events (i.e. both a Spring and Autumn Budget/Statement) per annum. In 2016, the government announced that the Budget would move to the Autumn, as the first key step in a process that would allow both sufficient consultation on measures ahead of L-day, and sufficient scrutiny of the draft legislation afterwards. Although the mandate for a single Autumn Budget never changed, events overtook and this year saw the second of two Spring Budgets in a row (with the November 2019 Budget being rolled to March 2020 as a result of the general election, and the deferral of Autumn 2020’s Budget to March this year because of covid).
However, despite another ‘late’ Budget in this cycle, L-day has gone ahead on time, meaning that, assuming there are no further significant disruptions, the draft legislation published is likely to receive scrutiny and royal assent in time for the next tax year. In terms of the next Budget, it remains to be seen which will win out: keeping the number of Budgets in 2021 down to one, or moving back to the model of an Autumn Budget as quickly as possible.
So, what has the government published? Some of the highlights are as follows.
Following two consultations on the subject, HMRC has listened and made substantial changes to the proposed measure to introduce a new notification for uncertain tax treatments by large businesses. The rationale for the measure remains unchanged: this is the government’s attempt to reduce the legal interpretation of the tax gap, being the difference between the tax that would have been collected under HMRC’s interpretation of the law (whether or not that interpretation is correct) and the tax that was actually collected. Crucially, the government now accepts that HMRC is not always right and this regime should not prevent taxpayers from taking a different position.
The proposal would see large businesses notify HMRC where they have adopted an uncertain tax treatment, defined by three triggers (much reduced from the seven triggers featured in the previous iteration of proposals). The three triggers that require notification are:
1. a provision is recognised in the accounts in accordance with GAAP to reflect the probability that a different tax treatment will be applied to the transaction;
2. an interpretation or application of the law is not in accordance with how HMRC is known to interpret or apply the law; or
3. it is reasonable to conclude that if a tribunal or court were to consider the tax treatment there is a substantial possibility that the treatment would be found to be incorrect in one or more material respects.
For businesses without a CCM, a new route for discussion around tax uncertainty will be established. This is a welcome development in and of itself as businesses without a dedicated CCM have been placed in an inferior position and not able to have the same contact with an appropriate officer or technical specialist with the authority to make a decision around a point of tax uncertainty.
The draft legislation sets out the definition of large businesses caught within the regime which includes companies, partnerships and LLPs with a turnover above £200m, a balance sheet total over £2bn, or both. The consultation alluded to an exemption for asset managers such that the threshold calculation would not include portfolio companies. The draft legislation attempts to define this but seemingly gets lost along the way, so asset managers will want to clarify the application of this during the consultation period.
Other elements that remain unchanged since the consultation include the fact that the regime would apply only to corporation tax, employment taxes and VAT and there would be a notification threshold of £5m where there is a difference of more than £5m between the taxpayer and HMRC’s calculation of the tax liability. Crucially, and perhaps most significantly, the government has not budged on the timing of introduction. The rules would come into effect for tax positions taken in any returns due to be filed after April 2022, meaning that corporation tax positions being taken today fall within the new regime.
The government has published draft legislation – and, somewhat unusually, an accompanying consultation – with a view to simplifying the rules for basis periods (the rules that determine which profits of an unincorporated trading business are allocated to which tax years). The changes have not waited for the conclusions from the spring 2021 consultation into the wider tax administration framework that closed just seven days before the legislation was published, suggesting there is an appetite to start making some significant changes to archaic building blocks of the tax system (indeed, even before engagement has begun with the simultaneously launched consultation).
The government is seeking to make changes that would see businesses taxed on profits arising in a tax year in order to remove the complexities associated with the rules when a business draws up accounts to a year end not aligned to the tax year (i.e. 5 April or 31 March). In moving to these new rules, businesses would still be free to choose their own accounting period but importantly, the date would no longer have any impact on taxation. Businesses with a year-end different to the tax year would apportion profit in the same way as other forms of income. Transitional issues are identified by the government and these will need to be worked through during the consultation period.
The government remains committed to strengthening the UK as a destination for asset holding companies (AHCs) in alternative fund structures. The publication of draft legislation heralds the arrival of this anticipated regime which seeks to remove a number of tax barriers preventing widespread use of UK AHCs. The UK is set to compete with Luxembourg and, to a lesser extent, Ireland by offering a highly competitive regime.
Legislation for the regime is being trickled out so the 11 pages published on L-day should not be seen as the complete framework. Tranche one of the legislation focuses on the conditions of entry into the regime, so it defines what a qualifying AHC is in terms of ownership and activity requirements. We learn that the AHC must be owned by at least 70% of good investors (which are broadly diversely owned eligible funds and certain institutional investors) and that the AHC should undertake qualifying investment activities.
The legislation also provides a fix for one of the main challenges that has prevented UK AHCs from being widely used due to the way the existing rules for repatriating profits to investors treat certain distributions as income for tax purposes (even if the underlying profit is capital). The regime will also introduce a wide-ranging participation exemption and exemption for disposal of non-UK real estate without condition meaning there should be no tax on gains arising in the AHC (except for UK land and assets that derive 75% or more of their value from UK land). The legislation also confirms there will be an exemption from withholding tax on interest payments made in respect of securities held by investors in the AHC.
Although the legislation for the regime is not complete, the summary of consultation responses provides a good indication of the wider framework for the regime by providing details of decisions that government has made; for example, a stamp duty exemption will only be provided for the repurchase of share and loan capital, not the desired wider exemption for the acquisition of securities by a qualifying AHC. Further details are anticipated on what mechanism the government will use to prevent the conversation of income into capital. Horribly complex tracking rules were initially proposed; however, further thought is being given to the rules to hopefully avoid creating an unnecessary compliance burden that would not compare favourably with Luxembourg. It is also not clear how the regime will accommodate non-domiciled UK residents, with the details under further consideration.
As for the next steps, a working group will be set up for stakeholders to discuss the unresolved issues with HMT and HMRC. Further legislation is expected in the autumn, with the regime going live from April 2022.
A number of changes intended to make the REIT regime more attractive for real estate investment have been proposed, largely by relaxing rules that are currently perceived to introduce unnecessary costs, constraints or administrative burdens on REITs and those looking to invest in them.
Several amendments are set out, but two are likely to be seen as particularly welcome: the broad removal of a requirement to admit REIT shares to trading on a recognised stock exchange (where at least 99% of its ordinary share capital is owned by one or more institutional investors); and removing the ‘holder of excessive rights’ charge to corporation tax where property income distributions are paid to investors entitled to gross payment. The measures have been produced in part in response to questions on investments in real estate set out in the recent asset holding company consultations.
The removal of the listing requirement is a particularly positive development in eradicating what had become seen as a somewhat arbitrary barrier to entry for the regime – not least because it is possible to satisfy even where there is unlikely to be regular trading of investors’ interests through listing the REIT on the International Stock Exchange (TISE), which does not have a trading requirement. The enforced use of a foreign stock exchange had been seen to dilute the attractiveness of a REIT vehicle if one of the main attractions is that it is seen as a UK-based vehicle.
The changes are stated to take effect from 1 April 2022.
Described as a ‘minor change’ to the hybrids regime, the government’s proposed legislation would provide some clarity on the treatment of certain non-UK entities in the context of establishing hybrid payee deduction/non-inclusion mismatches.
It is understood the changes are in part aimed at providing clarity on the treatment of, for example, US LLCs in the hybrid context. The government had previously proposed amendments to the definition of a ‘hybrid entity’, with the primary purpose of removing US LLCs from the scope of the hybrid mismatch rules, in the last round of changes to the regime, but scrapped them after identifying unintended consequences arising from those changes. This update is seen as tackling the same issue, with retroactive effect (the changes will apply from 1 January 2017).
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