FB22: Final amendments now passed, including a new tax on energy retailers
Finance Bill 2022 has completed its passage through the House of Commons and is ‘substantively enacted’.
Finance Bill 2022 has completed its passage through the House of Commons......
The Report stage and third reading for Finance (No.2) Bill 2021-22 (here referred to as Finance Bill 2022) took place on 2 February 2022. In advance of the Report stage (the final stage at which amendments to the Finance Bill can be made) the Government proposed several amendments to the Bill. These included amendments to the provisions on Residential Property Developer tax (RPDT), the Qualifying Asset Holding Company (QAHC) regime and basis period reform. New schedules were also proposed in respect of Freeport Tax Site reliefs and a new Public Interest Business Protection tax. All Government amendments proposed were agreed to and added to the Bill. The conclusion of the Report stage and third reading mark the completion of the Bill’s passage through the House of Commons, and it is now ‘substantively enacted’ for IFRS and UK GAAP purposes. Next, Finance Bill 2022 will start its passage through the House of Lords.
Public Interest Business Protection tax
The Government has announced a new ‘Public Interest Business Protection Tax’, applicable to energy retailers in certain circumstances. Legislation to establish this new tax is introduced in Finance Bill 2022. The tax is intended to prevent utility companies (with the potential for the rules to be expanded to other ‘public interest businesses’) from taking steps to monetise large in-the-money hedging commodity contracts, thereby realising a significant gain that is distributed to shareholders but leaving the newly unhedged company in financial difficulties. In such a case there is a risk that customers are transferred under the ‘Supplier of Last Resort’ mechanism with increased cost to the Government and/or customers.
The tax is to be levied at a rate of 75 percent and is applied to the value of the hedging contract (less 10 percent). It would only apply where the relevant hedging assets held by the person and any connected person exceed £100 million. Nevertheless, as the tax is intended to prevent the steps set out above being undertaken in the first place, it is unlikely to be raised in practice. Where the tax is levied and remains unpaid there is a joint and several liability for holding companies and shareholders.
Residential Property Developer Tax
RPDT only applies where a developer has or had an interest in land. Specifically excluded from this are licences to use or occupy. However, a Government amendment was introduced to include certain arrangements where the licensor can direct the sale of the land. This is consistent with HMRC’s stated view in industry briefings that they wish to tax situations where a developer has (or had) such an economic interest that it is equivalent to an interest in land.
RPDT applies from 1 April 2022. HMRC guidance of the application of the legislation is expected to be published in draft during February 2022.
Qualifying Asset Holding Company Regime
Several further Government amendments to the provisions on the QAHC regime were agreed to at the Report stage. The amendments ensure that the legislation reflects the policy intention of the regime.
Of note are the amendments to the provisions that determine whether a particular fund is a ‘qualifying fund’ and therefore whether it can be considered a qualifying or ‘Category A’ investor for the purposes of the regime (broadly a QAHC must be at least 70 percent owned by ‘Category A’ investors). For a fund to be a ‘qualifying fund’, it must meet the diversity of ownership condition; one way in which this can be met is by satisfying a non-close test. The amendments clarify that: (i) a commercial loan to a fund will not constitute an interest in it for the purposes of determining whether that fund is close; and (ii) managers and general partners of limited partnerships that are collective investment schemes will only be treated as having control of those funds as a result of their economic interest in it or their voting rights.
In addition, several of the amendments provide definitions for previously undefined terms to clarify the QAHC regime legislation, including ‘manager’ (in relation to a fund). The remainder of the amendments correct cross-referencing and typographical errors and ensure that the legislation functions as intended.
Freeport Tax Site reliefs
A new clause and schedule were added to Finance Bill 2022 at the Report stage which make provisions about powers to vary the circumstances in which certain reliefs are available in relation to Freeport Tax Sites.
The concept of Freeport Tax Sites was introduced in Finance Act 2021 and the first sites were brought into existence from 19 November 2021. Within these areas, enhanced capital allowances are available at 100 percent for companies investing in plant or machinery for use primarily in Freeport Tax Sites, and 10 percent per annum for qualifying expenditure incurred on non-residential structures and buildings situated within Freeport Tax Sites. Stamp duty land tax relief is also available on certain purchases of land and buildings within Freeport Tax Sites, where the interest acquired is used in a ‘qualifying manner’ and that acquisition is prior to 30 September 2026.
The new provisions, which amend sections 45R and 270BNC CAA 2001 and paragraph 12 of Schedule 6C FA 2003, allow regulations to be used to make amendments to the conditions for the reliefs to ensure that they are only available in the circumstances in which they were originally intended. The power to make these regulations can only be used in relation to a transaction with an effective date on or after the date on which the regulations come into force, therefore it should not be possible for retrospective changes to be made to the relief conditions.
Basis period reform
Basis period reform affects individuals, trusts, partnerships and others subject to Income Tax on trading income. It changes the basis period on which tax is charged from a ‘current year basis’ (the profits of the accounting period ending in the tax year) to a ‘tax year basis’ (the profits arising in the tax year). The new rules will take effect from the 2024/25 tax year, with 2023/24 being the transitional period. The overall impact is to change the underlying profits or losses subject to tax from the 2023/24 tax year onwards and bring forward the time at which tax on such profit is due for payment. Further details are set out in our previous Tax Matters Digest articles published in November 2021 (FB: Update on income tax basis period reform and earlier payment of tax) and August 2021 (Income tax basis period reform and earlier payment of tax).
The purpose of the 2023/24 transition year is to tax profits which would otherwise not be subject to tax and to give relief for profits taxed twice (overlap profit). The legislation as originally drafted may have prevented some traders from claiming certain tax reliefs in full (including enterprise investment scheme relief and double tax relief) due to the order of the Steps of the income tax calculation and the Step in which the tax on transitional profits is included. Following representations, Government amendments have been passed at the Report stage to enable all traders to claim these reliefs to the same extent as would otherwise have been the case.
Other amendments
Further Government amendments were also agreed to in respect of vehicle excise duty and the corporation tax impact of the transition to the new international financial reporting standard for insurance contracts, IFRS 17.
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