L-Day 2021

Government publishes draft legislation for Finance Bill 2022 and several consultation responses on L-Day 2021.

Government publishes draft legislation for Finance Bill 2022 and several consultation.....

On 20 July 2021, ‘L-Day’, the Government published draft legislation for Finance Bill 2021-2022 (commonly referred to as Finance Bill 2022), together with explanatory notes and responses to several consultations. Most measures had been previously announced, including the proposed new notification of uncertain tax treatments for large businesses and a new regime for the taxation of asset holding companies. In terms of new policy announcements, the most significant was a proposal to reform basis periods for Income Tax for the self-employed. Notably, however, there was no update on the consultation launched in the spring on the future of research and development (R&D) tax incentives and no new consultation on draft regulations to implement the OECD’s Mandatory Disclosure Rules (MDR), which the Government said it would consult on later in the year at Budget 2021. 

You can find further commentary on some of the key L-Day announcements and the draft Finance Bill 2022 legislation in this edition of Tax Matters Digest as follows:

Image of Sharon Baynham

Director, Tax Policy

KPMG in the UK


In addition to the key announcements noted above, there were a number of other points of note, as set out below.

Hybrid and other mismatch rules

HMRC announced a proposed change to the hybrid mismatch rules (for inclusion in Finance Bill 2022, with retrospective effect from 1 January 2017). If enacted, this change will allow payments made to ‘relevant transparent entities’ to qualify for an existing exclusion from Chapter 7 of the hybrid mismatch rules (in section 259GB(4A) TIOPA), which currently only applies to payments to ‘partnerships’. An entity will only qualify as a ‘relevant transparent entity’ for this purpose if: (a) it is legally constituted in a non-UK territory; (b) all of the entity‘s income or profits are treated (or would be if there were any) as the income or profits of its members for the purposes of a tax charged under the law of that territory; and (c) any such tax that is (or would be) charged on such a member that is resident for tax purposes in that territory is not charged at a nil rate. Where a structure currently involves any payment to a US LLC, overseas trust vehicle or other overseas hybrid entity that is currently subject to counteraction under Chapter 7, it will be necessary to review the proposed drafting carefully to determine whether or not (and to what extent) this new relieving provision may apply to prevent counteraction.

Amendments to the structures and buildings allowance (SBA) statement requirements

Amendments are being made to the SBA allowance statement requirements, to include the date the expenditure is ‘treated as incurred’ for SBA purposes. Under the SBA rules expenditure is normally treated as incurred, and allowances begin to be claimed, on the date the qualifying building is brought into non-residential use. Where qualifying expenditure is incurred on a building after it has been brought into use, that date can be deferred to the first day of the following period. The latter approach is potentially attractive to businesses with large volumes of annual projects across multiple sites, as it avoids the administrative burden of tracking individual payments and applying the restricted apportionment of the 3 percent allowance in the first period. The requirement to confirm the date expenditure was ‘treated as incurred’ within allowance statements removes any confusion regarding the balance of SBA available where there is a change in ownership.

The inclusion of this additional information within allowance statements is further evidence that HMRC expect taxpayers to hold appropriate records to support SBA claims within their tax returns. It is important that businesses retain robust records of their SBA expenditure, to support claims within tax returns during ownership and to evidence the balance to pass on to any future owners. In the absence of this evidence, the seller will be at risk of challenge by HMRC on their current claims and exposed to the potential reduction in sale price to the extent any future purchaser is unable to benefit from the expected tax reliefs.

Tackling promoters of tax avoidance

Draft legislation was published on measures to tackle promoters of tax avoidance. This was accompanied by the Government’s response to the recent consultation on the proposals which was issued following Budget 2021.The draft legislation gives HMRC new powers to present winding-up petitions for companies operating against the public interest, to charge additional penalties on UK entities facilitating the promotion of tax avoidance by offshore promoters, and to seek freezing orders to prevent promoters from dissipating or hiding their assets before paying penalties charged under HMRC’s anti-avoidance regimes. HMRC will also be able to name promoters who promote tax avoidance and publish details of the schemes they promote.

Modernisation of the stamp taxes on shares framework

In July 2020 HMRC initiated a call for evidence on the future of stamp taxes. A year on, HMRC have published a summary of the responses made during this consultation – no indication is given of HMRC’s views. Responses were not consistent in many areas but there appears to be broad consensus that a single, self-assessed digitised tax restricted to UK securities and with all the current stamp duty and stamp duty reserve tax reliefs is the way forward. There was one very consistent response to the consultation which was that the emergency COVID-19 measures which allow documents effectively to be ‘stamped’ by e-mail worked well and should be retained. HMRC note that they have already agreed to that – the stamp duty press machines were retired with effect from 19 July 2021 and all stamping is now electronic. HMRC are setting up a working group to assist them develop their thinking in this area and explore the feasibility and implications of a new digitised tax.

Pensions tax

Draft legislation was published in relation to the following pensions tax changes.

Increase in ‘normal minimum pension age’

On 6 April 2028, the normal minimum pension age (NMPA) will increase from 55 to 57. Any distribution from a UK ‘registered pension scheme’ (RPS) – or, in certain cases, from non-UK pension plans – to a member who has not yet reached the NMPA is normally classified as a non-authorised payment and subject to penal tax charges (up to 70 percent or even more) unless (essentially) the member:

A. Satisfies theill-health conditionwhen the distribution is made;

B. Has an existing ‘protected pension age’ (an unqualified right as at 5 April 2006 to take benefits at a particular age between 50 and 54) and has reached that age when the distribution is made; or

C. Is, on or before 5 April 2023, entitled under the scheme rules to take benefits at a particular age between 55 and 57 and has reached that age when the distribution is made.

The exemptions under (b) and (c) may also (depending on the precise circumstances) apply where a transfer has previously been made to the individual’s current pension scheme from a previous qualifying scheme.

‘Scheme pays’ facility

Members of RPSs – and, in certain cases, non-UK pension plans – will incur an ‘annual allowance charge’ (AAC) if the contributions (defined contribution schemes) or benefit accrual (defined benefit schemes) exceed their available ‘annual allowance(AA).

Where an individual incurs an AAC exceeding £2,000 and certain other criteria are satisfied, they can use the ‘scheme pays’ facility and ask the pension scheme administrators to pay the AAC and make a corresponding reduction to their scheme benefits.

In certain circumstances, an individual can incur an AAC for an earlier tax year due to a retrospective change of facts. It will now potentially be possible for an individual to require the pension scheme administrators to use the scheme pays’ facility to settle such a retrospective AAC (back to 2016/17). Certain adjustments to the relevant reporting and payment deadlines will also be made.

Indirect tax

Responses were published to several VAT consultations.

VAT and value shifting

HMRC have published a summary of the responses to this consultation which was launched in January 2021. This essentially looked at the rules where a bundle of items with different VAT liabilities are sold for a single price that is often less than the price that would be charged for each item if bought separately. HMRC are concerned that some businesses value shift so that more of the single price is attributed to the elements of the bundle that are not standard rated. Only seven responses were submitted but the general view was that the proposals were complicated, unnecessary for most sectors, and disproportionate.

VAT and the Sharing Economy

HMRC have published a summary of the responses to this consultation which was launched in December 2020. On the questions related to the nature of business-to-consumer (B2C) and consumer-to-consumer (C2C) transactions within the Sharing Economy, the potential long-term erosion of the tax base and the need to explore alternatives to the agent-principal VAT rules, HMRC received a range of views which is perhaps not surprising. There is support for some form of technical change to ensure VAT is collected where intended, but while some respondents suggested the Government should take further steps to make Sharing Economy platforms liable, or partly liable, for the VAT due on supplies made by underlying service providers, there were equally strong views to the contrary – again not a surprise.

VAT Grouping – Establishment, Eligibility, and Registration

HMRC have published a summary of the responses to this consultation which was launched in August 2020. In light of the responses to this call for evidence, the Government has decided not to take this any further. The current rules are well established and our ‘whole establishment’ approach to VAT grouping is more attractive than an ‘establishment only’ approach. It is encouraging to see the Government listening to consultation responses and acting on them.