Autumn Budget includes significant changes to corporate tax regime
The UK Autumn Budget 2021, delivered by the Chancellor on 27 October 2021, contains a number of measures that affect companies. Having previously confirmed the 2023 corporation tax rate increase, the Chancellor promised—and delivered—a largely technical budget, including often subtle but not insignificant changes to the UK corporate tax regime. The budget also takes account of the fact that the country is recovering from a “period of unparalleled global economic uncertainty” due to the COVID-19 pandemic so there are measures to “build back better” by investing in strong public services, driving economic growth, leading the transition to net zero, and supporting people and businesses.
This article focuses on the most important measures that will affect businesses.
Corporation tax rate, bank corporation surtax
The Chancellor confirmed that the main corporation tax rate will increase from 19% to 25% as enacted in Finance Act 2021, with a small profits rate of 19% applying where profits do not exceed GBP 50,000, with marginal relief for profits between GBP 50,000 and GBP 250,000.
As anticipated, the Chancellor announced a cut in the UK bank corporation tax surcharge rate from 8% to 3%. In addition, the surcharge allowance—the taxable profits above which banks pay the surcharge—will increase from GBP 25 million to GBP 100 million.
The announcements mean that the combined corporation tax rate for banks above GBP 100 million will rise by 1%, to 28% for accounting periods beginning on or after 1 April 2023.
R&D tax relief
Three major changes to the R&D tax relief legislation will come into effect from 1 April 2023:
- The expansion of R&D qualifying expenditure to include data and cloud computing;
- A restriction or possible prohibition on the inclusion of overseas costs in UK R&D claims; and
- Further targeted anti-avoidance measures to counter abuse of the R&D tax relief regime.
The likely prohibition of overseas costs will particularly impact UK-headquartered multinational groups with development centres located overseas since a large proportion of their qualifying expenditure typically consists of overseas costs. The Chancellor noted that while companies claimed UK tax relief on GPB 48 billion of R&D spending, UK business investment was around half of that, at just GBP 26 billion. However, the change brings the UK R&D regime in line with most R&D regimes worldwide, which focus purely on domestic expenditure.
Conversely, the expansion of qualifying expenditure to include cloud computing and data development costs in R&D claims will be welcomed by many claimant companies, in particular, those that have a digital presence or are active in the financial services industry as these costs represent a significant proportion of their software development spend.
More detail on the above reforms to the R&D legislation and the additional anti-avoidance measures will be released later this year, and all changes will come into effect from 1 April 2023.
Diverted profits tax
Diverted profits tax (DPT) charges tax at the rate of 25% and aims to deter and counteract the diversion of profits from the UK by large groups.
Currently, companies charged to DPT and avoided permanent establishments (PEs) are permitted to amend their corporation tax return during the first 12 months of the review period to enable profits to be taxed at the corporation tax rate of 19%. Amendments to the legislation will extend this period to the entire review period except the last 30 days. The changes will also ensure that an enquiry into the company tax return for the accounting period may not be closed during the review period.
Legislation will also be introduced in Finance Bill 2022 to make DPT one of the taxes for which, subject to the terms of the relevant tax treaty, a mutual agreement procedure (MAP) outcome can potentially be implemented. As a result, a taxpayer may obtain relief from the DPT if it succeeds under a MAP.
The changes will have effect for any DPT review periods that are open as at 27 October 2021 or opened after this date and for any MAP decisions involving DPT that are reached after 27 October.
Cross-border loss relief
As the UK has left the EU, the legislation permitting UK companies to claim group relief (in limited circumstances) for losses incurred in the EEA will be repealed. In addition, legislation that limits the amount of losses that an EEA resident company trading in the UK through a UK PE can surrender as group relief will be amended to align the rules for EEA-resident companies with companies resident elsewhere in the world.
Following the 2015 decision of the Court of Justice of the European Union in the Marks & Spencer case, the group relief provisions were amended to allow cross-border group relief subject to certain conditions to comply with the UK’s obligations as an EU member state.
The group relief provisions currently allow non-UK resident EEA companies to surrender losses as group relief to UK companies in limited specific circumstances. In addition, EEA companies trading through a UK PE can surrender losses of its UK PE only if those losses have not been actually deducted from non-UK profits of any person. Any other non-UK resident company can surrender losses of a UK PE only if it is not possible for those losses to be deducted from non-UK profits of any person for any period.
These changes will apply for accounting periods ending after 27 October 2021, and where a company’s accounting period straddles this date, it will be deemed as separate accounting periods for the purpose of applying these changes.
Hybrids: Transparent entities
A new draft clause will extend the current exemption for partnerships in the hybrid rules to certain other transparent entities, such as U.S. limited liability companies, by deeming members in those entities to be partners for the purposes of the rules. However, this extension should not apply to a transparent entity established in territory that does not charge tax on income.
The extension is expected apply retroactively to 1 January 2017, which will leave some taxpayers in a challenging situation prior to December filing deadlines if the new clause is expected to be beneficial but is not yet within UK tax law.
This clause is the replacement of the change to the definition of a hybrid entity originally included in Finance Bill 2021 before being removed. The draft clause will be included in the Finance Bill 2022.
Notification of uncertain tax treatments regime
The government is pressing ahead with the introduction of a new requirement for large businesses to notify the UK tax authorities (HMRC) where they adopt an “uncertain tax treatment,” with penalties for noncompliance.
The notification requirement will broadly apply to companies and partnerships where annual turnover or balance sheet assets exceed GBP 200 million or GBP 2 billion, respectively. The rules are to be legislated in Finance Bill 2021-22 and will apply to certain returns due to be filed on or after 1 April 2022. Amounts of corporation tax, income tax or VAT via self-assessment or PAYE will be considered “uncertain” if the tax treatment adopted meets one of two triggers:
- Provision has been made in the accounts for the uncertainty; or
- The tax treatment is not aligned with HMRC’s known position.
HMRC notes that a third trigger previously under consultation will be revisited and may be included later. This is where there is a substantial possibility that a tribunal or court would find the taxpayer’s position to be incorrect in material respects.
The aim is to improve HMRC’s ability to identify issues where businesses have adopted a different legal interpretation to HMRC and will largely impact large businesses that do not have open and transparent relationships with HMRC in real time via their HMRC Customer Compliance Manager (CCM).
The proposed financial threshold test appears unchanged; uncertain tax treatments, singular or related, of GBP 5 million or more will be notifiable by large businesses where a trigger is met. HMRC still intends to provide for certain exemptions from the notification requirement, principally where HMRC is already aware of the uncertainty through various mechanisms such as the CCM relationship, IMOC provisions, statutory clearances, etc.
Overall, there remains a movement towards encouraging large businesses to have open dialogue with HMRC around tax uncertainties. It remains clear that HMRC expects strong compliance with the uncertain tax treatment provisions. We expect it will feature in HMRC’s Business Risk Review + process in due course.
An estimated 2,300 large businesses need to consider compliance without delay given many relevant returns will be filed soon after the 1 April 2022 introduction. They need to document/safeguard decisions not to notify and build relevant processes into their overall tax governance approach.
Re-domiciliation of foreign-incorporated companies
The government published a consultation on a UK-redomiciliation regime that would make it possible for companies to move their domicile to and relocate to the UK. The consultation is seeking comments until 7 January 2022.
Currently, a foreign-incorporated company is not able to re-domicile and change its place of incorporation to the UK while maintaining its legal identity as a corporate body. The government intends to change this and is seeking views on a UK re-domiciliation regime. The consultation also considers the merits of outward re-domiciliation that would potentially allow a UK-incorporated company to re-domicile to a foreign jurisdiction.
In addition to the corporate law and regulatory requirements, a number of tax considerations would have to be worked through as part of any change. For example:
- A company is UK tax resident if it is incorporated in the UK or its central management and control is in the UK, subject to being treated as non-UK tax resident by virtue of a double tax agreement. Would re-domiciling a foreign company to the UK automatically make the company UK tax resident or would the central management and control of the company also need to be moved to the UK?
- If the UK tax residence of a company is migrated to the UK, from re-domiciliation, what would be the capital gains and intangible tax base of the company’s assets?
- Currently, when a company migrates its tax residence to the UK from an EU jurisdiction, assets are brought in at their market value. Should this be expanded to non-EU jurisdictions?
The consultation also considers whether there is a need to bring in additional anti-avoidance provisions around the loss importation rules, together with personal taxation changes for the owners of companies, VAT, stamp duty and stamp duty reserve tax, including if an outward re-domiciliation regime is introduced.
The government has announced its first substantive reforms to UK tonnage tax since it was introduced in 2000. Following the UK’s departure from the EU, the Chancellor’s aim is to maintain the UK’s status as a leading country in the maritime industry by creating a more flexible and attractive system that will encourage overseas shipping groups to relocate to the UK.
The main changes to the tonnage tax regime are:
- The complex flagging rules imposed on the UK by the EU will be abolished. Instead, the UK flag will be a more important factor in determining whether a company satisfies the strategic and commercial management requirement for entry into the tonnage tax regime. This is a welcome simplification to the rules for shipping companies already in the regime, especially where these rules may have impacted commercial decisions on flagging in the past.
- The current 10-year exclusion on re-joining the tonnage tax regime will be reduced to eight years. There will be greater discretion to admit companies that missed an election window, if there are good reasons; further guidance on what HMRC will accept as good reasons will be key. The ability to grant an additional election window into tonnage tax remains in place but there is no indication on whether this will be made available to companies that previously qualified and, therefore, would need to rely on an additional election window to enter the tonnage tax regime.
- The guidance on qualifying vessels will take account of developments in technology to allow additional types of vessels to potentially qualify for tonnage tax. This will be combined with a review of existing guidance of HMRC to reflect the importance of investment in decarbonization and pollution control when looking at the qualifying status of vessels.
- The permitted ancillary passenger-related income limit will be raised from 10% to 15%. This should improve administration andessels carrying passengers should benefit from the increased limits, in respect of income such as on-board sales and gambling.
- A further review of whether the scope of tonnage tax will be extended to include ship management activities was announced. In practice, this may assist UK-based operations but many groups prefer to locate their technical management teams abroad. Therefore, the changes may not influence commercial decisions on the location of these activities.
Overall, these changes should make the tonnage tax regime more attractive without any cost to the UK Treasury. A review of existing powers regarding the cadet training commitment was indicated in the announcement and many shipping groups will want to understand these future changes as well before considering their tonnage tax position.
The Autumn Budget 2021 also contains announcements on the following:
- Annual investment allowance (AIA): The temporary increase in the GBP 1 million limit per annum will be extended from 31 December 2021 to 31 March 2023 to align with the end dates of the super deduction and special rate allowance. The AIA is expected to revert back to the permanent level of GBP 200,000 from 1 April 2023.
- Residential Property Developer Tax (RPDT): RPDT will be introduced from April 2022 at a rate of 4% on company profits from residential property development trading activity. This will be treated as an extension to corporation tax and will be payable on group profits from residential property development activity above GBP 25 million. Special rules and exemptions will apply in certain cases.
- New regime for qualifying asset holding companies (QAHCs): The government has published a policy paper on the regime but it does not contain any significant new information beyond the previous consultation documents and the draft legislation for part of the regime published in July 2021. The paper confirms that the QAHC regime will come into effect from 1 April 2022 and the key criteria to qualify as a QAHC.
- Insurance Premium Tax (IPT): Legislation is announced in relation to the location of risk for IPT purposes. The measure is not expected to substantively amend the location of risk criteria; the intent of the legislation will be to ensure that risks located outside the UK continue to remain exempt from UK IPT.
- Loss relief rules for companies adopting IFRS 16: The government is proposing to legislate in Finance Bill 2021-22 changes to the loss relief rules to ensure that companies using IFRS 16 are not disadvantaged. To achieve this, the changes will be retroactive as from 1 January 2019.
- IFRS 17: The government confirmed that it will introduce powers in Finance Bill 2021-22 to issue regulations for insurance companies to allow the spreading of the transitional adjustment for IFRS 17 for tax purposes. The commencement date for IFRS 17 is 1 January 2023, although the government is expected to consult on the design of the rules and the likely timeframe for the spreading period of the transitional adjustment.
- Creative sector: A series of measures were announced to support the creative sector, including the enhancement and extension of tax reliefs available.
BDO’s comprehensive analysis of the provisions in the Autumn Budget can be found here.
HM Treasury - Autumn Budget and Spending Review