Expert comment on aspects of Legislation day 2023.
Pillar Two: implementing the UK backstop
The government has published draft legislation which will implement in the UK the backstop undertaxed profits rule under the Pillar Two global anti-base erosion rules. This follows the introduction of a multinational top-up tax and domestic top-up tax (implementing Pillar Two’s income inclusion rule and qualified domestic minimum top-up tax, respectively) in F(No. 2)A 2023, with effect in relation to accounting periods commencing on or after 31 December 2023. These developments are all in line with the government’s announcements at Autumn Statement 2022 and reflect the government’s ongoing commitment to forging ahead with the implementation of Pillar Two in the UK.
Ben Jones & Rebekka Sandwell, Eversheds Sutherland
Yet more change
My personal favourites from Legislation day have to be the Pillar Two amendments (everyone saw that coming, but it is hilarious that the ink is barely dry on version one before they’re mucking about with it to reflect the OECD’s revised guidance – hilarious that is, unless you’re a business forced to go through the compliance expense of getting ready for version one and now have to re-set, not so funny that. If only the UK had followed other countries and enacted the OECD model by reference!; and the merged R&D draft legislation (which may or may not even be coming in – everyone brace for a lot of headaches and a lot of lobbying).
Eloise Walker, Pinsent Masons
R&D change: a rushed response?
I am struggling to understand how it can be considered a good use of time and resources to draft legislation on a merged R&D tax relief system that the government hasn’t even decided whether to introduce. The UK needs to ensure that the new R&D tax relief system is effective and accessible to businesses, both large and small, across the UK’s growth sectors. And businesses need certainty about the availability of tax reliefs when making investment decisions. Rushing through legislation risks this. And if the government doesn’t get it right, cue yet more consultations/more reforms in the near future...
Penny Simmons, Pinsent Masons
REIT changes: the impact on institutional investors
The latest REIT changes show the government is keeping to the programme of reform from the funds review to modernise the REIT regime and generally to make it more accessible.
Arguably, the biggest change concerns institutional investors in REITs. Under the current rules a REIT can pass the ‘non-close’ condition for REIT status (broadly, being widely held) if the only reason it would otherwise fail this test is that the REIT has one or a few institutional investors making it closely held for tax purposes. The government is proposing three significant changes. The first introduces a restriction: some of the currently designated institutional investors will, once the changes are introduced, need to be either non-close themselves or satisfy the genuine diversity of ownership (GDO) condition to qualify. The second loosens the rules by allowing the ‘non-close’ condition to be satisfied by tracing through a body corporate to institutional investors higher up the holding structure. A third change updates the approach to a limited partnership that owns a REIT. These three changes are broadly in line with concepts introduced into the non-resident chargeable gains tax rules and are not unexpected.
A more limited change, but very important for insurance companies, is that insurance companies will be able to have an interest of 75% or more in a group REIT.
There are further REIT changes, such as an adjustment to the calculation of profits in the ‘interest cover test’, which requires a ratio of profits to financing costs of at least 1.25:1 and creates a tax charge where the required ratio is not met.
However, one of the more intriguing comments is the announcement in the policy paper that the REIT’s tax exemption on disposing of a UK property rich company will be extended to the disposal of an interest in a UK property rich CoACS or the proposed new reserved investor fund (or RIF). However, the draft legislation just refers to CoACS, so we need to wait longer for an announcement on the much anticipated RIF tax regime following the post-Budget consultation.
Elizabeth Bradley, Bryan Cave Leighton Paisner
Laudable but...
The idea behind L-day is laudable allowing the draft legislation to be scrutinised and corrected before it hits the statute book, and my first impression is that there are no surprises as to the measures most having been pre-announced in the Budget. There are measures to deal with issues arising out of the Post Office scandal which is to be welcomed. My main concern is the ability to extend HMRC information powers by means of statutory instrument, thus avoiding the need for scrutiny by Parliament.
Philip Ridgway, Temple Tax Chambers
EOT changes
More (did we really need yet more?) anti-avoidance seems to be on the horizon, thinly disguised as an overhaul to refocus on employee ownership and reward.
Eloise Walker, Pinsent Masons
Energy profits levy changes: a lackadaisical approach?
Having announced the energy security investment mechanism (ESIM) on 9 June with almost no detail whatsoever, today’s discussion document identifies some of the questions that need answering. The big question posed is how long after threshold has been triggered should the EPL actually come to an end, whether immediately, after a three-month period or at the next specified time, e.g. next calendar or financial year. The proposal is for the legislated transitional arrangements to apply to a termination triggered by ESIM, which makes sense. The rather lackadaisical approach to navigating and legislating these proposed changes, aimed at shoring up long-term investment in the oil and gas industry, is perhaps driven by the government’s prediction that the ESIM will never actually apply.
Home >Articles > Legislation day: practitioners' views
Legislation day: practitioners' views
Expert comment on aspects of Legislation day 2023.
Pillar Two: implementing the UK backstop
The government has published draft legislation which will implement in the UK the backstop undertaxed profits rule under the Pillar Two global anti-base erosion rules. This follows the introduction of a multinational top-up tax and domestic top-up tax (implementing Pillar Two’s income inclusion rule and qualified domestic minimum top-up tax, respectively) in F(No. 2)A 2023, with effect in relation to accounting periods commencing on or after 31 December 2023. These developments are all in line with the government’s announcements at Autumn Statement 2022 and reflect the government’s ongoing commitment to forging ahead with the implementation of Pillar Two in the UK.
Ben Jones & Rebekka Sandwell, Eversheds Sutherland
Yet more change
My personal favourites from Legislation day have to be the Pillar Two amendments (everyone saw that coming, but it is hilarious that the ink is barely dry on version one before they’re mucking about with it to reflect the OECD’s revised guidance – hilarious that is, unless you’re a business forced to go through the compliance expense of getting ready for version one and now have to re-set, not so funny that. If only the UK had followed other countries and enacted the OECD model by reference!; and the merged R&D draft legislation (which may or may not even be coming in – everyone brace for a lot of headaches and a lot of lobbying).
Eloise Walker, Pinsent Masons
R&D change: a rushed response?
I am struggling to understand how it can be considered a good use of time and resources to draft legislation on a merged R&D tax relief system that the government hasn’t even decided whether to introduce. The UK needs to ensure that the new R&D tax relief system is effective and accessible to businesses, both large and small, across the UK’s growth sectors. And businesses need certainty about the availability of tax reliefs when making investment decisions. Rushing through legislation risks this. And if the government doesn’t get it right, cue yet more consultations/more reforms in the near future...
Penny Simmons, Pinsent Masons
REIT changes: the impact on institutional investors
The latest REIT changes show the government is keeping to the programme of reform from the funds review to modernise the REIT regime and generally to make it more accessible.
Arguably, the biggest change concerns institutional investors in REITs. Under the current rules a REIT can pass the ‘non-close’ condition for REIT status (broadly, being widely held) if the only reason it would otherwise fail this test is that the REIT has one or a few institutional investors making it closely held for tax purposes. The government is proposing three significant changes. The first introduces a restriction: some of the currently designated institutional investors will, once the changes are introduced, need to be either non-close themselves or satisfy the genuine diversity of ownership (GDO) condition to qualify. The second loosens the rules by allowing the ‘non-close’ condition to be satisfied by tracing through a body corporate to institutional investors higher up the holding structure. A third change updates the approach to a limited partnership that owns a REIT. These three changes are broadly in line with concepts introduced into the non-resident chargeable gains tax rules and are not unexpected.
A more limited change, but very important for insurance companies, is that insurance companies will be able to have an interest of 75% or more in a group REIT.
There are further REIT changes, such as an adjustment to the calculation of profits in the ‘interest cover test’, which requires a ratio of profits to financing costs of at least 1.25:1 and creates a tax charge where the required ratio is not met.
However, one of the more intriguing comments is the announcement in the policy paper that the REIT’s tax exemption on disposing of a UK property rich company will be extended to the disposal of an interest in a UK property rich CoACS or the proposed new reserved investor fund (or RIF). However, the draft legislation just refers to CoACS, so we need to wait longer for an announcement on the much anticipated RIF tax regime following the post-Budget consultation.
Elizabeth Bradley, Bryan Cave Leighton Paisner
Laudable but...
The idea behind L-day is laudable allowing the draft legislation to be scrutinised and corrected before it hits the statute book, and my first impression is that there are no surprises as to the measures most having been pre-announced in the Budget. There are measures to deal with issues arising out of the Post Office scandal which is to be welcomed. My main concern is the ability to extend HMRC information powers by means of statutory instrument, thus avoiding the need for scrutiny by Parliament.
Philip Ridgway, Temple Tax Chambers
EOT changes
More (did we really need yet more?) anti-avoidance seems to be on the horizon, thinly disguised as an overhaul to refocus on employee ownership and reward.
Eloise Walker, Pinsent Masons
Energy profits levy changes: a lackadaisical approach?
Having announced the energy security investment mechanism (ESIM) on 9 June with almost no detail whatsoever, today’s discussion document identifies some of the questions that need answering. The big question posed is how long after threshold has been triggered should the EPL actually come to an end, whether immediately, after a three-month period or at the next specified time, e.g. next calendar or financial year. The proposal is for the legislated transitional arrangements to apply to a termination triggered by ESIM, which makes sense. The rather lackadaisical approach to navigating and legislating these proposed changes, aimed at shoring up long-term investment in the oil and gas industry, is perhaps driven by the government’s prediction that the ESIM will never actually apply.
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