Today’s Budget had the feel of a government clearing its inbox. There were a few headline grabbers: the cut to the surcharge on banking companies, the imposition of a new tax on residential property developers, and the new qualifying asset holding company regime edged closer to implementation. However, there were also swathes of seemingly small technical changes of the type that have a terrible habit of creeping up on taxpayers. Taxpayers will therefore need to invest some time in making sure those obscure changes are analysed.
Today’s announcement saw three measures relating to diverted profits tax (DPT) announced. The first is a technical change in direct response to Vitol Aviation UK Ltd and others v HMRC [2021] UKFTT 353 (TC), which was recently decided by the First-tier Tribunal. In that case, the company successfully forced HMRC to issue a closure notice and effectively converted a DPT charge into a corporation tax liability. The government intends to legislate, with immediate effect, to ensure that neither final nor partial closure notices may be given until the end of the DPT review period. This means that a DPT charge will be permanent unless a company amends its corporation tax return within the review period.
The second DPT related change is to extend the time period in which such an amendment can be made from the current period of 12 months, to 30 days before the end of the 15 month review period (i.e., 14 months). Again, this change has immediate effect.
Lastly, where the mutual agreement process (MAP) under a double tax treaty has been used to resolve a double tax dispute, legislation will be passed to ensure DPT is one of the taxes to which the outcome of the MAP can apply so that relief can be granted. This change is stated to take effect for decisions reached in MAP after 27 October.
An unexpected, but pleasant, surprise for large business taxpayers is the government’s decision to drop the third reporting trigger of the uncertain tax treatment regime, for the time being at least.
Reporting triggers under the regime will therefore be limited to: 1) an accounting provision that has been recognised in respect of the treatment and 2) the treatment is not in accordance with HMRC’s known position.
Whilst this is welcome news for taxpayers, a number of other issues were highlighted in response to the consultation on the draft legislation. The first draft of the Finance Bill is due for publication on 4 November; it remains to be seen whether these points will be addressed.
Also, the government has indicated that it is committed to further consideration of the third trigger, so one could suppose there’s a substantial possibility we may see it reintroduced at a later stage…
In the run up to Budget day, one of the eye-catching policies that was ‘pre-announced’ by the government was the reduction in the surcharge on banking companies, from 8% to 3%. This was to avoid a combined rate of 33% being imposed on banking companies from 1 April 2023, following the previously announced increase in the main rate of corporation tax.
As these changes will not be enacted until next year, banks may still have to measure deferred tax assets and liabilities at the 33% rate for the purposes of their 2021 balance sheets.
The government did not quite reveal all in advance of the Budget; the chancellor announced that the surcharge allowance of £25m would be increased to £100m from 1 April 2023. This allowance applies to banks of all sizes so will be welcome news across the sector.
In a curious reflection of political and public opinion, as the surcharge on banking companies is reduced, a new tax on residential property developers is announced, which will take effect from 1 April 2022.
The residential property developer tax will impose an additional 4% rate on the profits of residential property developers, being essentially their trading profits after a number of adjustments. An annual allowance will exempt the first £25m of profits generated by residential property developers within a group each financial year.
Another interesting sign of our times was reflected through changes to film tax relief (FTR). A production that intended to release in commercial cinema, but subsequently releases through television broadcast, will still be eligible to claim FTR, provided the production satisfies the criteria for high-end television tax relief at the time of release. This change is intended to take effect from 1 April 2022.
It has become almost custom for chancellors to use their Budgets to tinker with the capital allowances regime. After the headline grabbing introduction of the ‘super-deduction’ in March, this Budget was one of continuity for capital allowances. The only change announced was to extend the availability of the annual investment allowance at its current level of £1m for a further 15 months until 31 March 2023.
The chancellor used his speech to announce that R&D tax reliefs will be amended to include costs relating to the use of data and cloud computing, which the government’s Overview of tax legislation and rates confirms as taking effect from April 2023. However, the chancellor also warned that the rules would be amended to ensure that only activities that take place in the UK would continue to meet the definition of qualifying expenditure.
The government is continuing to get to grips with its newly acquired ability to legislate contrary to EU law; in this Budget, cross-border group relief found itself in the government’s sights.
Currently, a UK permanent establishment of an EEA resident company is only restricted from its ability to surrender losses under UK group relief rules where that loss has actually been deducted against non-UK profits. This is in contrast to the treatment of UK permanent establishments of non-EEA resident companies who are restricted from surrendering losses where there is simply an ability for the loss to be offset against non-UK profits (actual relief does not need to have been claimed).
The government will legislate to treat all UK permanent establishments the same; each will be restricted from surrendering losses where there is only a theoretical ability to relieve the loss against non-UK profits.
The second change is in relation to the relief provided for non-UK losses, which was brought about by the M&S group relief case that went before the CJEU in 2005 (Case C-446/03). UK group relief legislation was amended to ensure that non-UK losses that arose in EEA subsidiaries could be used in the UK when essentially all other possibilities for relief had been exhausted. The government has indicated they intend to repeal the legislation which gives effect to this ability.
Both these changes have effect immediately, with a split period approach applied to accounting periods that straddle 27 October.
As previously anticipated, the government will legislate in the coming Finance Bill to introduce a regime for the taxation of qualifying asset holding companies (QAHCs). This new regime will provide for specific rules for the taxation of QAHCs and certain payments that QAHCs may make.
Broadly, the QAHC must be at least 70% owned by diversely-owned funds, or certain institutional investors, and mainly carry out investment activity with no more than insubstantial trading. It has been confirmed that the regime will include a number of advantageous tax provisions for QAHCs, such as exempting gains on disposals of certain shares and overseas property held by QAHCs and allowing deductions for certain interest payments that would usually be disallowed as distributions (along with necessary consequential changes to the hybrid-mismatch rules). The regime will also allow certain amounts paid by a QAHC to UK taxpayers subject to the remittance basis of taxation to be treated as non-UK source, reflecting the underlying mix of UK and overseas income and gains, which will be welcome by UK non-domiciled individuals. The new regime is intended to take effect from 1 April 2022.
As announced when the draft Finance Bill clauses were published in July, the hybrid mismatch-rules will be amended to ensure Chapter 7 of the rules (hybrid payee deduction/non-inclusion) treats non-UK entities that are treated as fiscally transparent in the jurisdiction in which they are constituted as though they are a partnership (provided that jurisdiction actually taxes the members of the entity). This ensures that a counteraction under Chapter 7 only applies to profits attributable to a member of the entity that is resident in a jurisdiction that regards the entity as fiscally opaque. This primarily affects US LLCs; the government had intended to solve the treatment of such entities under the rules through FA 2021 following a consultation in 2020. However, extra time was needed to ensure the legislation operated as intended. This change is intended to be treated as having had effect from the inception of the hybrid-mismatch rules, on 1 January 2017.
Alongside a slew of reliefs to business rates, the government announced its much expected consultation on an online sales tax will shortly be held. The consultation will explore the arguments for and against the tax, which is seen, by some, as a corollary to business rates for online businesses. However, the government will need to carefully balance the risk that an online sales tax is seen as another unilateral measure aimed at ‘big tech’, having just agreed to refrain from introducing such measures as part of the deal reached by the Inclusive Framework on 8 October.
Another proposal that was ‘pre-announced’ prior to the Budget is a consultation on facilitating the ability of non-UK incorporated companies to re-domicile in the UK. The consultation is looking at a broad range of issues, though it raises some important tax considerations. The consultation closes on 7 January 2022.
There are many more changes that will be of interest to certain corporate taxpayers: amendments to loss relief restrictions to deal with onerous leases; powers granted to the government to deal with the adoption of IFRS 17 by insurance companies, the taxation of life insurer’s acquisition expenses and the treatment of securitisation companies and insurance linked-securities under stamp duty and SDRT; reform of tonnage taxes; reform of alcohol duties; increases in tobacco duty rates; increases in gross gaming yields in line with inflation, and the continued implementation of the economic crime levy.
One thing that was conspicuously missing from the Budget was international tax reform. Following the OECD Inclusive Framework’s most recent announcement on 8 October and the deal reached between the UK, the US, and a number of other European countries on 14 October in relation to the phasing out of digital services taxes, one might have expected to see the beginnings of the process of implementing those changes into UK domestic law. It seems that this Budget may have come too soon. However, given the OECD’s ambitious timeline for implementation – enactment in 2022, taking effect in 2023 – there appears much to do in very little time. Not least because the coming Finance Bill may be the mechanism through which Parliament enacts many of those changes; unless we have retroactive legislation in 2023, or squeeze through a second Finance Bill in late 2022. One thing is assured: there is much more to come in the next 12 months.
Today’s Budget had the feel of a government clearing its inbox. There were a few headline grabbers: the cut to the surcharge on banking companies, the imposition of a new tax on residential property developers, and the new qualifying asset holding company regime edged closer to implementation. However, there were also swathes of seemingly small technical changes of the type that have a terrible habit of creeping up on taxpayers. Taxpayers will therefore need to invest some time in making sure those obscure changes are analysed.
Today’s announcement saw three measures relating to diverted profits tax (DPT) announced. The first is a technical change in direct response to Vitol Aviation UK Ltd and others v HMRC [2021] UKFTT 353 (TC), which was recently decided by the First-tier Tribunal. In that case, the company successfully forced HMRC to issue a closure notice and effectively converted a DPT charge into a corporation tax liability. The government intends to legislate, with immediate effect, to ensure that neither final nor partial closure notices may be given until the end of the DPT review period. This means that a DPT charge will be permanent unless a company amends its corporation tax return within the review period.
The second DPT related change is to extend the time period in which such an amendment can be made from the current period of 12 months, to 30 days before the end of the 15 month review period (i.e., 14 months). Again, this change has immediate effect.
Lastly, where the mutual agreement process (MAP) under a double tax treaty has been used to resolve a double tax dispute, legislation will be passed to ensure DPT is one of the taxes to which the outcome of the MAP can apply so that relief can be granted. This change is stated to take effect for decisions reached in MAP after 27 October.
An unexpected, but pleasant, surprise for large business taxpayers is the government’s decision to drop the third reporting trigger of the uncertain tax treatment regime, for the time being at least.
Reporting triggers under the regime will therefore be limited to: 1) an accounting provision that has been recognised in respect of the treatment and 2) the treatment is not in accordance with HMRC’s known position.
Whilst this is welcome news for taxpayers, a number of other issues were highlighted in response to the consultation on the draft legislation. The first draft of the Finance Bill is due for publication on 4 November; it remains to be seen whether these points will be addressed.
Also, the government has indicated that it is committed to further consideration of the third trigger, so one could suppose there’s a substantial possibility we may see it reintroduced at a later stage…
In the run up to Budget day, one of the eye-catching policies that was ‘pre-announced’ by the government was the reduction in the surcharge on banking companies, from 8% to 3%. This was to avoid a combined rate of 33% being imposed on banking companies from 1 April 2023, following the previously announced increase in the main rate of corporation tax.
As these changes will not be enacted until next year, banks may still have to measure deferred tax assets and liabilities at the 33% rate for the purposes of their 2021 balance sheets.
The government did not quite reveal all in advance of the Budget; the chancellor announced that the surcharge allowance of £25m would be increased to £100m from 1 April 2023. This allowance applies to banks of all sizes so will be welcome news across the sector.
In a curious reflection of political and public opinion, as the surcharge on banking companies is reduced, a new tax on residential property developers is announced, which will take effect from 1 April 2022.
The residential property developer tax will impose an additional 4% rate on the profits of residential property developers, being essentially their trading profits after a number of adjustments. An annual allowance will exempt the first £25m of profits generated by residential property developers within a group each financial year.
Another interesting sign of our times was reflected through changes to film tax relief (FTR). A production that intended to release in commercial cinema, but subsequently releases through television broadcast, will still be eligible to claim FTR, provided the production satisfies the criteria for high-end television tax relief at the time of release. This change is intended to take effect from 1 April 2022.
It has become almost custom for chancellors to use their Budgets to tinker with the capital allowances regime. After the headline grabbing introduction of the ‘super-deduction’ in March, this Budget was one of continuity for capital allowances. The only change announced was to extend the availability of the annual investment allowance at its current level of £1m for a further 15 months until 31 March 2023.
The chancellor used his speech to announce that R&D tax reliefs will be amended to include costs relating to the use of data and cloud computing, which the government’s Overview of tax legislation and rates confirms as taking effect from April 2023. However, the chancellor also warned that the rules would be amended to ensure that only activities that take place in the UK would continue to meet the definition of qualifying expenditure.
The government is continuing to get to grips with its newly acquired ability to legislate contrary to EU law; in this Budget, cross-border group relief found itself in the government’s sights.
Currently, a UK permanent establishment of an EEA resident company is only restricted from its ability to surrender losses under UK group relief rules where that loss has actually been deducted against non-UK profits. This is in contrast to the treatment of UK permanent establishments of non-EEA resident companies who are restricted from surrendering losses where there is simply an ability for the loss to be offset against non-UK profits (actual relief does not need to have been claimed).
The government will legislate to treat all UK permanent establishments the same; each will be restricted from surrendering losses where there is only a theoretical ability to relieve the loss against non-UK profits.
The second change is in relation to the relief provided for non-UK losses, which was brought about by the M&S group relief case that went before the CJEU in 2005 (Case C-446/03). UK group relief legislation was amended to ensure that non-UK losses that arose in EEA subsidiaries could be used in the UK when essentially all other possibilities for relief had been exhausted. The government has indicated they intend to repeal the legislation which gives effect to this ability.
Both these changes have effect immediately, with a split period approach applied to accounting periods that straddle 27 October.
As previously anticipated, the government will legislate in the coming Finance Bill to introduce a regime for the taxation of qualifying asset holding companies (QAHCs). This new regime will provide for specific rules for the taxation of QAHCs and certain payments that QAHCs may make.
Broadly, the QAHC must be at least 70% owned by diversely-owned funds, or certain institutional investors, and mainly carry out investment activity with no more than insubstantial trading. It has been confirmed that the regime will include a number of advantageous tax provisions for QAHCs, such as exempting gains on disposals of certain shares and overseas property held by QAHCs and allowing deductions for certain interest payments that would usually be disallowed as distributions (along with necessary consequential changes to the hybrid-mismatch rules). The regime will also allow certain amounts paid by a QAHC to UK taxpayers subject to the remittance basis of taxation to be treated as non-UK source, reflecting the underlying mix of UK and overseas income and gains, which will be welcome by UK non-domiciled individuals. The new regime is intended to take effect from 1 April 2022.
As announced when the draft Finance Bill clauses were published in July, the hybrid mismatch-rules will be amended to ensure Chapter 7 of the rules (hybrid payee deduction/non-inclusion) treats non-UK entities that are treated as fiscally transparent in the jurisdiction in which they are constituted as though they are a partnership (provided that jurisdiction actually taxes the members of the entity). This ensures that a counteraction under Chapter 7 only applies to profits attributable to a member of the entity that is resident in a jurisdiction that regards the entity as fiscally opaque. This primarily affects US LLCs; the government had intended to solve the treatment of such entities under the rules through FA 2021 following a consultation in 2020. However, extra time was needed to ensure the legislation operated as intended. This change is intended to be treated as having had effect from the inception of the hybrid-mismatch rules, on 1 January 2017.
Alongside a slew of reliefs to business rates, the government announced its much expected consultation on an online sales tax will shortly be held. The consultation will explore the arguments for and against the tax, which is seen, by some, as a corollary to business rates for online businesses. However, the government will need to carefully balance the risk that an online sales tax is seen as another unilateral measure aimed at ‘big tech’, having just agreed to refrain from introducing such measures as part of the deal reached by the Inclusive Framework on 8 October.
Another proposal that was ‘pre-announced’ prior to the Budget is a consultation on facilitating the ability of non-UK incorporated companies to re-domicile in the UK. The consultation is looking at a broad range of issues, though it raises some important tax considerations. The consultation closes on 7 January 2022.
There are many more changes that will be of interest to certain corporate taxpayers: amendments to loss relief restrictions to deal with onerous leases; powers granted to the government to deal with the adoption of IFRS 17 by insurance companies, the taxation of life insurer’s acquisition expenses and the treatment of securitisation companies and insurance linked-securities under stamp duty and SDRT; reform of tonnage taxes; reform of alcohol duties; increases in tobacco duty rates; increases in gross gaming yields in line with inflation, and the continued implementation of the economic crime levy.
One thing that was conspicuously missing from the Budget was international tax reform. Following the OECD Inclusive Framework’s most recent announcement on 8 October and the deal reached between the UK, the US, and a number of other European countries on 14 October in relation to the phasing out of digital services taxes, one might have expected to see the beginnings of the process of implementing those changes into UK domestic law. It seems that this Budget may have come too soon. However, given the OECD’s ambitious timeline for implementation – enactment in 2022, taking effect in 2023 – there appears much to do in very little time. Not least because the coming Finance Bill may be the mechanism through which Parliament enacts many of those changes; unless we have retroactive legislation in 2023, or squeeze through a second Finance Bill in late 2022. One thing is assured: there is much more to come in the next 12 months.
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