United Kingdom - Spring budget includes Pillar Two and transfer pricing documentation announcements

17 March 2023

The UK spring budget presented by the Chancellor on 15 March 2023 focuses on delivering the government’s growth plans. The Chancellor announced a raft of measures, including the extension of some business tax reliefs (BDO in the UK has broken down the announcements from the spring budget, with an in-depth analysis of corporate tax, personal tax, indirect tax, employment tax and other notable measures here, and for predictions for the spring budget, see the article in the February 2023 issue of Corporate Tax News). Several announcements also were made that will be of interest to multinationals, including the following:

  • Corporation tax rate: The Chancellor reaffirmed that the main rate of corporation tax of 19% will increase to 25% on 1 April 2023 and that the small profits rate (i.e., applicable to businesses with annual profits of GBP 50,000 or less) will be set at 19% for the fiscal year beginning on 1 April 2024. Businesses with profits between GBP 50,000 and GBP 250,000 will pay a marginal tax rate between 19% and 25%. Most UK members of multinational groups will pay tax at the higher rate.
  • Pillar Two: The government confirmed the introduction of the new multinational top-up tax to be levied on UK parent companies in a multinational enterprise group, which will implement the UK Pillar Two legislation issued in draft form on 20 July 2022 (for prior coverage, see the article in the July 2022 issue of Corporate Tax News). The draft legislation did not include the introduction of a domestic top-up tax. The government has now announced that the domestic top-up tax will be levied on UK members in a domestic or multinational enterprise group to ensure that any top-up tax due on UK profits is collected in the UK. The multinational top-up tax will be charged where a UK parent member holds an interest in entities in another jurisdiction and the group’s profits arising in that jurisdiction are taxed below the minimum 15% rate; the amount brought to charge will be that required to achieve a 15% minimum rate. No additional tax will arise in respect of jurisdictions where the group’s profits are taxed at 15% or more. These measures will have effect in respect of in-scope groups’ accounting periods beginning on or after 31 December 2023.
  • Transfer pricing documentation: As announced on 20 July 2022, legislation will be included in Spring Finance Bill 2023 (and accompanied by regulations) to require large multinationals operating in the UK (i.e., those with global revenues of EUR 750 million or more) to prepare a master file and a local file in accordance with the OECD transfer pricing guidelines. This measure will apply to accounting periods beginning on or after 1 April 2023. The UK tax authorities will continue to consult on the introduction of a summary audit trail, a document that would detail the steps undertaken by a UK business in preparing its transfer pricing documentation.
  • R&D relief: The Spring Finance Bill 2023 will include language to ensure that the patent box deduction formula refers to “applicable rate” rather than the “main rate” of corporation tax to ensure that claimants subject to the small profits rate of 19% will receive the correct amount of relief. The changes will take effect for accounting periods commencing on or after 1 April 2023.
    ​Reform of R&D tax reliefs has been underway for several years and is becoming an iterative process with new changes taking effect from April 2023 and previously announced changes delayed until 2024:
    • Draft legislation to prevent companies from claiming R&D relief in the UK for project work undertaken overseas was released in 2022 and was due to take effect for accounting periods beginning on or after 1 April 2023. This change has now been delayed until April 2024 when the government plans to combine both the current R&D tax relief schemes into a single comprehensive regime.
    • Changes to the R&D relief rates announced in the Autumn Statement 2022 are due to take effect from April 2023. The changes meant that loss-making companies were expecting to see their effective rate of subsidy through the repayable R&D credit fall from 33.4% of costs to just 18.6%. The Chancellor has now announced that where such loss-making businesses have qualifying R&D expenditure of more than 40% of their total annual costs, they will be able to claim a repayable credit of 27% of their costs. Therefore, while these R&D-intensive businesses will still lose some funding support as from April 2023, the impact will be less than previously feared.

Jonathan Hickman
BDO in United Kingdom