Budget: Other tax measures
Measures include multinational and domestic top up taxes, changes to REIT and QAHC rules, and updates on landfill tax consultations.
Other notable tax measures
In addition to the key measures discussed elsewhere in this edition of Tax Matters Digest, the Chancellor made a number of other notable announcements in the Budget that will have an impact on taxpayers. These include confirmation of previously announced multinational top-up tax and domestic top-up tax, and transfer pricing documentation requirements for large businesses; measures concerning Real Estate Investment Trusts (REITs), Qualifying asset holding companies (QAHCs) and investment funds; an update on the rates of air passenger duty and alcohol duty; and a new stamp duty land tax (SDLT) exemption for social housing providers in relation to people fleeing conflict. Budget day also saw the publication of the conclusions of two consultation documents on landfill tax in England and Northern Ireland.
International tax for large businesses
Multinational top-up tax and domestic top-up tax
As announced at Autumn Statement 2022, the UK Government will legislate in the Spring Finance Bill 2023 (expected on Thursday 23 March) to implement the globally-agreed G20-OECD ‘Pillar 2’ 15 percent minimum tax for large multinational groups. ‘Large’ groups for this purpose are broadly those with consolidated global revenues exceeding €750 million per annum and the new rules will take effect for accounting periods beginning on or after 31 December 2023.
The UK’s implementation of Pillar 2 will require large UK headquartered multinationals with foreign operations having an effective tax rate of less than 15 percent in each jurisdiction to pay additional tax up to that level. The measure would also apply to non-UK headquartered groups with UK members that are partially owned by third parties or where the headquartered jurisdiction does not implement the Pillar 2 framework (many other jurisdictions have announced their intention to implement similar rules on roughly the same timetable).
In addition, there will be a UK domestic top-up tax which will require large groups, including those operating exclusively in the UK, to pay a top-up tax where their UK operations have an effective tax rate of less than 15 percent (this will apply in precedence to, and instead of, the multinational top-up tax).
As this new legislation will involve sourcing wide ranging data inputs to feed into complex calculations and reporting obligations and the effective date is rapidly approaching, multinational groups have little time to ensure their teams are upskilled, systems are fit for purpose and impacts are assessed and communicated to stakeholders in good time.
Transfer pricing (TP) documentation
As previously announced, the Government will legislate in Spring Finance Bill 2023, with supporting regulations, to introduce new mandatory transfer pricing documentation rules for UK members of large multinationals for accounting periods beginning on or after 1 April 2023. ‘Large’ for this purpose means those groups subject to Country-by-Country Reporting requirements: broadly those with consolidated global revenues of at least €750 million per annum. Documentation must be prepared in advance of filing the relevant Corporation Tax return. The documentation itself need not be filed routinely, but affected companies must submit a Master File and UK Local File(s) within 30 days of a request from HMRC. The analysis must cover material cross-border controlled transactions in accordance with the requirements of the OECD Transfer Pricing Guidelines. Domestic UK transactions need not be included unless the transactions involve companies elected into the UK Patent Box or subject to oil and gas ring fence taxation.
Under the new measures HMRC will have broader information powers in relation to transfer pricing and failure to comply with the documentation requirements will lead to a rebuttable presumption that a TP-related inaccuracy is careless (which may result in penalties being assessed). In addition, HMRC will continue to consult on the introduction of a Summary Audit Trail, which will provide HMRC with additional information on the steps undertaken by a UK business in preparing its TP documentation. HMRC can be expected to continue to focus on the quality and reliability of TP documentation and to request supporting evidence.
Corporate interest restriction changes
A number of minor modifications are planned to the Corporate Interest Restriction rules, which include a mixture of clarifications, administrative changes, and relieving provisions. The overall tax impact to the Government of these changes is expected to be negligible. Examples include a slightly closer alignment of the calculation of interest for companies compared with groups, changes to the worldwide group composition for entities that are held for sale, and new penalties for failing to file amended interest restriction returns for changes.
Chargeable gains anti-avoidance
New legislation at s28A TCGA 1992 will apply to assets disposed of and acquired under an unconditional contract entered into on or after 1 April 2023 for companies and 6 April 2023 for individuals. This removes potential avoidance opportunities by ensuring HMRC can assess tax due in circumstances where more than four years pass between an unconditional contract being signed and completed. The new rule will apply where the contract is completed more than one year after the end of the accounting period in which the contract is signed for companies, or, more than six months after the end of the tax year. It operates by modifying the application of various self-assessment provisions so that the relevant notification periods and assessment and claim time limits operate by reference to the accounting period or tax year when the asset is conveyed or transferred rather than the accounting period or tax year in which the contract was signed.
Alongside the Budget the Government has published the conclusions of two consultation documents on landfill tax in England and Northern Ireland. The first considered the ‘landfill tax trap’: how to encourage and compensate businesses willing to redevelop brownfield sites but are deterred by the landfill tax cost on removed material. Landfill Tax previously allowed relief for contaminated land remediation and this proposal seems to reintroduce this, albeit in the form of a claim rather than relief from the tax. Secondly, HM Treasury has also issued its response to a consultation on many aspects of landfill tax, considering whether exemptions on quarry filling and discounts for water fulfil the environmental objectives of the tax. The response considers a range of points, including whether the current rate of landfill tax on Qualifying Material may be too low and therefore not encourage better use of this waste and how landfill tax fraud, evasion and waste crime will interact with upcoming environmental regulatory reforms.
Further work and subsequent consultations are likely. In summary, however, producers of waste are likely to see landfill tax increases where exemptions, discounts and lower rates of landfill tax will no longer be applicable, but remediators of contaminated land may be encouraged by the future introduction of claims to offset some of the costs of the tax.
Real Estate Investment Trusts (REITs), Qualifying asset holding companies (QAHCs) and investment funds
Real Estate Investment Trusts (REITs)
The Government will legislate in the Spring Finance Bill 2023 to amend the REIT regime, with measures intended to enhance its competitiveness. The amendments will relax the requirement for a REIT to own at least three properties, where a REIT owns at least one commercial property worth £20 million or more. The rule for disposals of property within three years of significant development work will also be amended to ensure that this rule operates in line with its original intention and is not compromised by the effects of inflation. The changes should also help to reduce administrative burdens for certain partnerships investing in REITs by allowing the payment of a property income distribution to a partnership to be made partly gross and partly with tax withheld. The distribution will be permitted to be paid gross to the extent that it is the income of partners that would be entitled to gross payment if they held an interest in the REIT directly. The changes to the three-year development rule will take effect in relation to disposals made from 1 April 2023. The other changes will take effect from Royal Assent to Spring Finance Bill 2023.
Amendments to the Genuine Diversity of Ownership (GDO) Rules
The Government will make changes to the GDO condition in the QAHC, REIT and non-resident capital gains (NRCG) rules, which should broaden the application of the condition. Under current law, the GDO condition must be applied to each entity within a fund structure in isolation. This can mean that a particular entity does not satisfy the GDO condition, despite the fact that it forms part of a wider arrangement which, taken as a whole, would meet the relevant requirements. The changes being made by this measure provide that, for the purposes of the QAHC, REIT and NRCG rules, where an entity forms part of multi-vehicle arrangements, the GDO condition can be treated as satisfied by the entity if it is met in relation to the multi-vehicle arrangements. The definition of multi-vehicle arrangements encompasses a group of entities which form part of a wider fund structure where an investor would reasonably regard their investment to be in the structure as a whole. This change should help clarify the position of feeder and parallel fund vehicles. The changes should take effect from Royal Assent to the Spring Finance Bill 2023.
Amendments to the Qualifying Asset Holding Company (QAHC) regime
The changes announced are generally targeted changes designed to ensure the regime applies to the intended entities and activities, many of which had been proposed in advance of the Budget. They include: allowing certain entities that would be collective investments schemes if they were not a body corporate to satisfy the definition of a ‘qualifying fund’; allowing an election for a QAHC to hold listed equity securities provided it is taxable on dividends received from such securities; ensuring the QAHC gains exemption applies to derivatives over qualifying shares as intended; and tightening up of the ‘anti-fragmentation’ rule that applies in determining whether a QAHC satisfies the Category A investor ownership condition. The separately announced changes to the GDO, covered above, are also a welcome extension and clarification of those funds which meet the definition of qualifying fund. These changes will generally take effect from Royal Assent with earlier effective dates for a small number.
Investment funds: Introducing an elective accruals basis for the carried interest rules
Legislation will be introduced in the Spring Finance Bill 2023 to allow carried interest participants to make an irrevocable election for carried interest to be taxed on an accruals instead of an arising basis. This may be relevant to individuals who provide investment management services to funds and receive carried interest. The changes should help carried interest participants manage claims for double taxation relief where tax is payable on carried interest in more than one jurisdiction. We expect this change to primarily be of interest to UK resident carried interest participants who are also subject to US tax. Further details are awaited on the calculation methodology and consequences of accrued amounts not subsequently arising.
Alcohol duty rates to rise but new Draught Relief to be increased
Although the public finances assume a retail price index (RPI) increase to alcohol duties each February, in practice rates have often been cut or frozen in recent years and the current rates have remained frozen since Autumn Budget 2020, with the last extension of the freeze (up to 1 August 2023) being announced on 19 December 2022 to ‘give certainty to businesses’. The Government has now announced that in Spring Finance Bill 2023 it will increase the duty rates under the revised structure on all alcoholic products produced in, or imported into, the UK in line with the RPI. It will also increase the new Draught Relief (which will be introduced as part of the Alcohol Duty reforms previously announced in September 2022) from 5 percent to 9.2 percent for qualifying beer and cider products, and from 20 percent to 23 percent for qualifying wine, spirits based and other fermented products. These changes will take effect from 1 August 2023.
The increase in Draught Relief, which will apply to certain qualifying products under 8.5 percent ABV that are intended to be sold on draught, is intended to “support the hospitality industry by ensuring the duty on an average pint does not increase from 1 August” and the announcement refers to “the vital role pubs play in our communities as well as in acknowledgement that pubs are supervised settings less associated with alcohol harm”. As always, whether the benefit of the increased relief will be felt by the customer remains to be seen. As excise duty is not accounted for at the bar pump, the draught ‘relief’ (providing a reduced duty differential of, for example 85p per litre of alcohol on all draught alcoholic products less than 3.5 percent ABV) will provide potentially a very small win for consumers per pint, but (on volumes sold) an option for increased profit within the pub and hospitality industry. Although the duty rate on draught beer will be lower than on beer bought in supermarkets as a result of the changes, pub prices are still likely to rise overall to compensate for the RPI linked duty increases on non-draught wines and spirits, and other increasing costs.
There are also practical considerations as to how this will be monitored.
New domestic and ultra-long-haul Air Passenger Duty bands to be introduced, from 1 April 2023
The Government has a number of environmental objectives in place under its Journey to Net Zero strategy which aims to decarbonise all sectors of the UK economy to meet its net zero target by 2050. As part of this at the Autumn Budget 2021, following a consultation in 2020, it was confirmed that the Air Passenger Duty (APD) reform would be legislated for in Finance Bill 2023. The measure will introduce a new domestic band for APD for flights within the UK set at a reduced rate of £6.50 (generally Economy Class seats) instead of falling within the £13 Band A short haul rate (0-2000 miles) so may represent a reduction in air fares. The reduced rate for the new ultra-long-haul band, covering destinations with capitals located more than 5,500 miles from London, will be set at £91, (£200 for the seats with more leg room) which may lead to an increase in cost for long haul passengers. The rates for the short and long-haul bands will increase in line with the RPI as forecast at the Autumn Budget 2021, which is a freeze in real terms. The measure will take effect from 1 April 2023.
Stamp duty land tax (SDLT) exemption for social housing providers
Registered providers of social housing are exempt from SDLT on a purchase of land in England and Northern Ireland if that purchase is funded with the assistance of specific qualifying public subsidies. With effect from 15 March 2023 funding allocated to local Authorities under section 31 of the Local Government Act 2003 to help secure housing for people fleeing conflict will qualify and hence purchases from this date subsidised by this funding will be exempt from SDLT.