Other measures for businesses

In addition to the key measures discussed elsewhere in this edition of Tax Matters Digest, the Chancellor made a number of other announcements in the Budget that will have an impact on businesses. These include pensions tax changes, a new consultation on the re-domiciliation of foreign corporations to the UK, abolition of cross-border group relief, changes to the UK Tonnage Tax regime and air passenger duty rates.

Employment and pensions

Employment issues

The previously announced 1.25 percentage point increase to employer’s National Insurance Contributions, to fund health and social care prior to the introduction of the separate Health and Social Care Levy, comes into force from 6 April 2022. As anticipated, the National Living Wage/National Minimum Wage will be increased so that employees aged 23 years and over will be entitled to £9.50 per hour for pay periods starting from 1 April 2022.

On benefits-in-kind, the van benefit charge and fuel benefit charges for cars and vans will rise in line with the Consumer Price Index from 6 April 2022. A new Scale-Up visa will launch in Spring 2022 to help eligible growth businesses recruit key overseas talent who meet certain language requirements and have a salary of at least £33,000.

The income tax personal allowance and higher rate threshold remain frozen and the additional rate threshold remains at £150,000. Whilst the personal allowance is available to all qualifying UK taxpayers, Scottish and Welsh taxpayers are subject to tax on non-savings and non-dividend income based on rates, and for Scottish taxpayers bands, set by the Scottish and Welsh Parliaments. These will be announced in the Scottish and Welsh Budgets in December 2021. 

Pension tax relief for low earners in Net Pay Arrangements

The take home pay of individuals with taxable income below the personal allowance can be affected by the method of tax relief operated by their pension scheme. In summary, employees contributing to Relief at Source (RAS) schemes receive a 20 percent top-up on their pension contributions, even if they pay no, or a lower rate of, income tax. In contrast, employees contributing to a Net Pay Arrangement (NPA) scheme receive relief at their marginal rate, which for those with taxable earnings at or below the UK personal allowance is nil. To address this anomaly, the Government will introduce direct top-up payments for affected NPA scheme members. These will start to be paid from 2025/26 in relation to contributions made in 2024/25 onwards.

Public sector pensions and taxation of the McCloud case remedy

Aspects of the 2015 public sector pension reforms were found in the McCloud case to give rise to unlawful age discrimination. The Public Service Pensions and Judicial Offices Bill will, when enacted, amend the pension provision of affected individuals with effect from 1 April 2015. Legislation will also be introduced to ensure that the pensions tax framework applies as intended to these changes. Broadly, compensation payable will not be taxable, and affected individuals will not be taxed on any retrospective breaches of their pension savings limits due to the McCloud case remedy.

Tax compliance

Notification of uncertain tax treatments

Following a long period of consultation, the Government confirmed that it will legislate in Finance Bill 2021-22 to introduce a new requirement for certain large businesses to notify HMRC when they take an ‘uncertain’ tax position in their returns for VAT, corporation tax, or income tax (including PAYE). Such businesses will need to notify HMRC where the tax advantage is expected to be over £5 million for a 12-month period in tax returns due to be filed on or after 1 April 2022. This is intended to address the legal interpretation part of the tax gap.

In a policy paper published alongside the Budget, HMRC confirmed uncertainty is to be defined by reference to two ‘triggers’ (broadly that a provision has been made in the accounts for the uncertainty, or that the position taken by the business is contrary to HMRC’s known interpretation (as stated in the public domain or in dealings with HMRC)). The Government has also committed to further consideration of a potential third trigger previously proposed in draft legislation (where there is a substantial possibility that a tribunal or court would find the taxpayer’s position to be incorrect). 

Diverted Profits Tax (DPT) - interaction with Corporation Tax (CT) closure notices and amendment to relieving provisions

HMRC say this measure, that will have effect for any DPT review periods which are open at 27 October 2021 (or are opened after that date), ensures that taxpayers can use relieving provisions to amend their company tax returns and bring taxable diverted profits into charge to CT during the DPT review period, and that the interaction between DPT review periods and what happens when a CT enquiry is closed, functions as intended. 

This announcement appears to be a swift response to the recent decision in Vitol Aviation Ltd v HMRC in which the taxpayer was successful in persuading the First-tier Tribunal (FTT) to direct HMRC to issue CT closure notices even though a DPT review period had not expired (being 15 months after the issue of a DPT Charging Notice). HMRC had argued before the FTT that their policy was not to issue a closure notice during a review period in which a company could make amendments to its return. Legislation will be introduced in Finance Bill 2021-22 to specify that HMRC cannot issue a CT closure notice in respect of profits subject to a DPT charge until after the review period ends.

International tax measures

Government consultation on corporate re-domiciliation regime

A consultation on the re-domiciliation of foreign corporations to the UK has been opened. The proposal would allow a foreign company to change its country of incorporation to the UK while maintaining its legal identity as a corporate body. This would bring the UK in line with jurisdictions where the ability to re-domicile already exists, such as Canada, New Zealand, Singapore, Cyprus, Belgium and certain US states, including Delaware. With no need to establish a new UK company, the Government considers that the administrative complexity of relocating to the UK would be reduced, continuity of business operations would be maximised and some of the tax complexities that can currently arise (e.g. indirect transfer taxes of subsidiaries) could also be addressed.

The aims of changing the regime include encouraging investment in the UK, supporting and developing the UK’s capital markets and expanding and enhancing the UK’s innovation base. The Government is seeking views on a number of other questions, including eligibility criteria and the tax consequences of re-domiciliation (including anti-avoidance measures) and how it will interact with the corporate residence (i.e. tax residence by virtue of central management and control) of foreign companies.

The Government is also considering whether to establish an outward re-domiciliation regime to enable companies to shift their place of domicile to a foreign jurisdiction. This would bring the UK in line with a number of its peer jurisdictions.

The consultation closes on 7 January 2022.

Abolition of cross-border group relief

Following the UK’s exit from the European Union (EU), the Government is bringing the group relief rules relating to European Economic Area (EEA) resident companies into line with those for non-UK companies resident elsewhere in the world. Sections 111-128 CTA 2010 are to be repealed with the result that EEA resident companies will no longer be able to surrender losses as group relief to UK companies. In addition, sections 107 and 188BI CTA 2010 will be amended to remove the separate rules for EEA resident companies so that all non-UK resident companies can only surrender as group relief losses of a UK Permanent Establishment if it is not possible for the loss to be deducted from non-UK profits of any person for any period. These changes will apply to accounting periods ending after 27 October 2021. Where a company’s accounting period straddles this date, it will be deemed to have separate accounting periods for the purpose of applying these changes. The changes broadly restore the group relief rules to what they were before separate rules were introduced for EEA-resident companies in order to comply with EU law.

Mutual Agreement Procedure (MAP) decisions relating to DPT

A measure was introduced allowing for relief against DPT where necessary to give effect to decisions under the MAP in respect of relevant treaties. The measure will impact a very small number of taxpayers but is necessary to ensure the UK can meet its commitments under treaties.

Hybrid and other mismatch rules

As discussed in this previous edition of Tax Matters Digest, on 20 July 2021, HMRC announced a proposed change that (if enacted) will allow payments made to ‘relevant transparent entities’ to qualify for an existing exclusion from Chapter 7 of the hybrid and other mismatch rules that currently only applies to payments to partnerships. In particular, this change is expected to allow the exclusion to apply to payments made to a US LLC. Documents published as part of Autumn Budget 2021 confirm the Government’s intention to introduce this change in Finance Bill 2021-2022, with retrospective effect from 1 January 2017. However, a revised policy paper now notes that the new measure will also deem certain hybrid entities to be ‘payees’ for the purpose of considering the relevant counteractions in Chapter 7. Insofar as this new change affects partnerships, it will have effect from Royal Assent of Finance Bill 2021-22. No revised draft legislation has been published at this stage. Once it is published, potentially affected groups will need to review the revised draft legislation carefully, to determine the impact on their structure. In particular, the impact on payments made to partnerships that currently apply the exclusion, and payments made to US LLCs, should be considered.

Capital allowances

Vehicle taxation: technical amendments regarding vehicle emission certification

The rate at which capital allowances are given for vehicles is determined by the CO2 emissions which the vehicle produces. The emissions figure used to calculate this is based on a certificate applied for by the manufacturer specifying the CO2 emissions for the certain type of vehicle. Historically this could be either an EU certificate of conformity or a UK approval certificate, but following the UK’s withdrawal from the EU, a new provisional scheme has been introduced whereby manufacturers must apply for separate GB type approval, and a new comprehensive scheme will be introduced during 2022. In addition, a new process for measuring CO2 emissions (the Worldwide Harmonised Light Vehicle Test Procedure) will replace the previous test procedure (the New European Driving Cycle). This measure represents changes to the capital allowances legislation to reflect the changes to the approval documentation required and the relevant CO2 test procedures.

The measure will have effect from the 2017 to 2018 tax year (in relation to income tax and Capital Gains Tax) or for accounting periods ending on or after 4 November 2017 (in relation to Corporation Tax), although it is not yet clear whether and how this retrospective implementation might impact claims made in prior periods.

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

Further to the publication of draft legislation in July 2021, it was confirmed in the Budget that 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.

Miscellaneous other measures

New UK Asset Holding Company (AHC) regime

The Government has confirmed that the next Finance Bill will include legislation for a new AHC regime to take effect from 1 April 2022. As discussed in our recent article in Tax Matters Digest, the AHC regime is intended to increase the competitiveness of the UK as a holding company location for investment funds and institutional investors. The regime seeks to address barriers which have prevented the wider use of UK vehicles. It will be available to ‘qualifying’ asset holding companies (QAHCs), which must be established primarily for investment activities and be at least 70 percent owned by diversely held funds and/or institutional investors. The QAHC regime includes an exemption from tax on gains on disposals of most shares and overseas property and an exemption from withholding tax on interest payments. It is also expected to contain special rules for profit related debt instruments and repatriating capital returns. The introduction of the regime is very welcome and forms the first part of a broader strategy for UK investment management with the intention of maintaining and developing the UK’s position as an international financial centre.

Real Estate Investment Trusts (REITs)

The Autumn Budget included some welcome amendments to draft legislation published in July 2021 regarding a number of proposed changes to the UK REIT regime. The listing requirement for shares to be admitted to trading on a recognised stock exchange will now be removed for a UK REIT where at least 70 percent of the shares are held by institutional investors. The removal of the listing condition had originally been proposed only for UK REITs that are at least 99 percent owned by institutional investors. In addition, where the institutional investor is a limited partnership there is no longer a requirement for the partnership to meet the Genuine Diversity of Ownership condition. Both of these amendments should mean that a large number of institutionally owned UK REITs will now be able to de-list as well as making the REIT regime more attractive for new entrants. The original draft legislation was felt to be too narrow and was therefore likely only to have applied to a very small number of UK REITs in practice.

Reform of the UK Tonnage Tax regime

The Government announced a package of measures to reform the UK Tonnage Tax regime from April 2022, with the aim of helping the UK shipping industry grow and remain competitive globally. A number of the measures will introduce welcome simplifications to the administrative requirements of the regime, including the removal of the need to consider whether a vessel is flagged in an EU member state in order to qualify for the regime. The Government also announced that guidance on what vessels and operations qualify for the regime will be reviewed to take into account changes in the shipping industry since the regime was introduced in 2000, reflect UK investment in decarbonisation and pollution control, and increase the use of the UK flag.

Amendment to the reform of loss relief rules

Welcome amendments have been proposed to the carried forward loss restriction rules which will apply retrospectively with effect for accounting periods beginning on or after 1 January 2019. The aim of the amendments is to provide an exemption for companies in financial distress that use International Financial Reporting Standard (IFRS) 16, enabling them to obtain full relief for carried-forward losses that offset profits arising from lease renegotiations to avoid insolvency. These amendments should extend existing exemptions which are currently only available in specific circumstances where there is an onerous lease reversal under non-IFRS accounting standards. It is not clear at this stage in which exact situations the extended relief may apply, however we understand it is intended to offer the same level of relief to IFRS and non-IFRS companies. The draft legislation due to be included in the upcoming Finance Bill should clarify the position.

IFRS 17 (Insurance Contracts)

IFRS 17 (Insurance Contracts) is expected to become mandatory for accounting periods from 1 January 2023. The Government has introduced legislation allowing it to create regulations such that the transitional impact of IFRS 17 can be spread for tax purposes, reducing the impact of the transition on insurers’ taxable profits or losses. Impacts on life and non-life insurers preparing accounts under IFRS are likely to vary depending on the nature of their transitional adjustment and tax profile, and there will be an opportunity to make representations via a consultation which will be launched in due course.

Indirect tax

Air Passenger Duty (APD)

The Government has announced new APD rates from 1 April 2023. The first lower band is for flights within the UK. For the tax year 2023 to 2024, the rates for domestic flights will be £6.50 for those travelling in economy class, £13 for those travelling in all other classes, and £78 for those travelling on aircraft with an authorised take-off weight of 20 tonnes or more with fewer than 19 seats. The second is a new higher band for ultra long-haul flights for destinations with capitals located more than 5,500 miles from London. The economy rate for the ultra long-haul band will be set at £91, £4 greater than the long-haul band, £200 for those travelling in all other classes and £601 for those travelling on aircraft with an authorised take-off weight of 20 tonnes or more with fewer than 19 seats.

The Chancellor said the reductions in the rates for UK flights were to boost regional airports and help people stay connected – in that case it is perhaps puzzling that these changes are not being implemented sooner. An increased tax charge for really long flights is also on trend with the green message – if you want to fly more than 5,500 miles from London in a heavy private jet you will need to find a significant extra sum to pay the APD.

Alcohol Taxation

The Chancellor announced during his speech a simplification of alcohol duties and two new reliefs. These follow an earlier alcohol duty review. In terms of simplification it is proposed to reduce the number of rates and calculate duty rates based on alcohol strength. This will also remove what are considered anomalies such as sparkling wine being taxed at a higher rate compared to non-sparkling wine. In terms of new reliefs it is proposed to extend small producer relief to other products and a relief for certain draught beer and cider. A consultation has been released by the Treasury and the new rates are planned for 1 February 2023. Current alcohol duty rates have been frozen.