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July 23, 2021

UK publishes draft legislation for Finance Bill 2022

Executive summary

On 20 July 2021, the United Kingdom (UK) Government published draft legislation intended for Finance Bill 2022 along with secondary legislation for separate consultation. The consultation on the Finance Bill measures will run until 14 September 2021. At the same time, updates on consultation documents and other tax policy developments were released alongside a new consultation on the change of basis period for income tax.

This Alert highlights some of the key proposals.

Detailed discussion

Uncertain tax treatments (UTT)
Draft clauses have been published in respect of the proposed requirement for large businesses (companies and partnerships) to notify HM Revenue & Customs (HMRC) of “uncertain tax treatments” in respect of corporation tax, value added tax (VAT) and income tax (including PAYE – Pay As You Earn). The Government’s response to the recent second consultation on the proposed measure was also published on 20 July. In that response, the Government acknowledged feedback from many stakeholders that the proposed definition of UTT, based on seven separate “triggers,” was too wide and could create an onerous administrative burden for businesses.

A key change reflected in draft clauses now published is that the proposed definition of UTT now applies where one of three tests (rather than the previous seven triggers) is met. The first two of these tests are based on previously proposed triggers, and apply where a provision has been recognized in the accounts in respect of a tax treatment (for example under IFRIC 23 in the case of corporation tax); or where a treatment is contrary to the way that it is known that HMRC would interpret the law.

In respect of the second test, the draft clauses specify that HMRC’s “known position” is something which is apparent from HMRC guidance or other published HMRC materials, or from dealing with HMRC. Stakeholders had suggested during the second consultation that, to increase certainty for businesses, HMRC should provide an exhaustive list of published documents which should be consulted for these purposes. It remains to be seen whether HMRC will include such a list in guidance.

The third test, which is new, provides that a treatment is “uncertain” where there is a “substantial possibility” that, if considered by a tribunal or court, it would be found to be incorrect. It appears that this new test may apply widely and may be difficult to apply with certainty.

The draft legislation details the proposed application of the £5m notification threshold, which will apply separately for each of the three relevant taxes, with substantially similar treatments being aggregated for these purposes. Details are also provided of the proposed exemptions: as expected a general exemption applies where HMRC has already been made aware (e.g., through real-time discussions with a Customer Compliance Manager (CCM)) of an uncertainty. The Government has confirmed that it will provide a route for businesses without a CCM to discuss uncertainties with HMRC so as to access this exemption, but no details of this process are provided. Further exemptions are available for certain transfer pricing treatments and (for corporation tax only) certain intra-group transactions.

From an administrative perspective, the documents confirm that notification will be required separately for each tax and aligned to existing return cycles. However, the details of the form that notification will take and the information to be included have not yet been confirmed.

The Government intends that the legislation will apply to returns to be submitted on or after 1 April 2022. Given this timeline, the notification requirement could potentially apply to transactions and treatments arising in the current period, and it is important that, if they have not already done so, businesses begin to prepare for the application of these rules.

Qualifying asset holding companies (QAHCs)
The Government is proposing reforms to enhance the UK’s attractiveness as a location for asset holding companies by introducing new rules for the taxation of QAHCs and some of the payments they make. Not all of the required provisions are included in the draft legislation and measures covering some of the items below, such as stamp duty and stamp duty reserve tax (SDRT), will follow shortly. The new rules are due to have effect for the purposes of corporation tax, stamp duty and SDRT from 1 April 2022 and for income tax and capital gains tax purposes from 6 April 2022.

A QAHC must:

  • Be at least 70% owned by diversely owned funds — these must be managed by regulated managers or certain institutional investors (the percentage test is modelled on the group relief rules but has additional requirements) - or institutional investors (sovereign wealth funds, pension funds, among others) and UK Real Estate Investment Trusts (REITs)
  • Exist to help move capital, income and gains between investors and underlying investments

The regime for QAHCs looks set to be elective and will include:

  • Not treating gains on disposals of certain shares and overseas property by QAHCs as chargeable gains
  • Exempting profits of an overseas property business of a QAHC, where those profits are subject to tax in an overseas jurisdiction
  • Allowing deductions for certain interest payments that would usually be disallowed as distributions
  • Switching off the late paid interest rules so that in certain situations, interest payments are relieved in the QAHC on the accruals basis rather than the paid basis
  • Disapplying the obligation to deduct a sum representing income tax at the basic rate on payments of interest, where those payments are made to investors in the QAHC
  • Allowing premiums paid, when a QAHC repurchases its share capital from an individual, to be treated as capital rather than income distributions where, broadly, these derive from capital rather than income from underlying investments
  • Exempting repurchases by a QAHC of share and loan capital which it previously issued from stamp duty and SDRT

The tax benefits arising from QAHC status apply only in relation to qualifying investment activity. The tax treatment of any limited trading activity or any non-qualifying investment activity that is carried on by a QAHC will not be affected by that company’s status as a QAHC and should be taxable/non-taxable as normal.

In addition, there will be changes to the REIT rules, to reflect the new QAHC rules. The changes are intended to remove certain constraints and administrative burdens which are no longer necessary as a result of the new QAHC regime. They include removing the requirement for REIT shares to be admitted to trading in some cases, amending the definition of an overseas equivalent of a UK REIT, removing the “holder of excessive rights” charge to corporation tax for certain investors, and changing the rules which ensure a REIT’s business is properly focused on property rental. The changes take effect from 1 April 2022.

The provisions introduce a standalone regime with simple exemptions as an overlay on top of the existing UK tax framework. It will therefore be important for taxpayers to work through the entry criteria in further detail. It may well be that these draft rules continue to evolve over the coming months in response to consultation and feedback.

Hybrid mismatches
Following an extensive consultation in 2020, the Government announced a number of proposed changes to the rules for hybrid and other mismatches. One change announced was to amend the hybrids legislation so that the legislation would apply to certain types of entities that are seen as transparent in their home jurisdictions, including United States Limited Liability Companies, in the same way as it does to partnerships. The original amendment in Finance Bill 2021 was not effective and therefore was taken out of the Bill prior to Royal Assent.

To address this issue, changes are proposed for Finance Bill 2022 which do not change the definition of hybrid entity, but instead provide for specific entities to be treated as partnerships in the relevant part of chapter 7 Part 6A of TIOPA 2010. These changes, if ultimately enacted, will have retrospective effect back to 1 January 2017 without the need for an election to be submitted to HMRC.

From an initial review of the legislation, care will be needed to assess the impact of the proposed rules on particular situations, especially given the mandatory retrospective application of the rule.

Change of basis period
The proposed reform of basis periods will be of interest to self-employed traders, partners in trading partnerships, other unincorporated entities with trading income, such as trading trusts and estates, and nonresident companies with trading income charged to income tax.

Draft clauses are accompanied by a new consultation which is open until 31 August 2021. The consultation considers moving from a “current year basis” for income tax to a “tax year basis.” The transition would take place in 2022/23 (with a possible five year spreading of adjustments) and the changes would come fully into effect for 2023/24. A business’s profit or loss for a tax year would be the profit or loss that occurs in the actual tax year itself, regardless of its accounting date.

Currently a taxpayer pays tax based on the year that has passed, at a time when the profit is known. The new rules would mean that taxpayers will have to estimate what their profits will be, potentially before any detailed review can be undertaken. This approach is almost certain to lead to revisions as taxpayers’ best estimates turn out to be wrong. More revisions would seem to imply more work and more complexity – the opposite to what the Government is intending.

In addition, there will be significant challenges to implementing the changes that come with the proposals, especially at a time that businesses are struggling to deal with the pandemic. For some, the changes will add unwelcome complexity at a very delicate time, even if the effect is spread over a number of years.

Other announcements

  • Capital allowances - structures and buildings allowance (SBA): Draft legislation amends the requirements for SBA “allowance statements,” to include the date qualifying expenditure is incurred or treated as incurred when the allowance period commences from this date.
  • Insurance Premium Tax (IPT): Draft legislation seeks to clarify the location of a risk for IPT purposes by placing the criteria into the primary legislation governing IPT.
  • Increasing the normal minimum pension age for pensions tax: Draft legislation will increase the normal minimum pension age from 55 to 57 on and after 6 April 2028.
  • Pension Scheme Pays reporting: information and notice deadlines: Draft legislation also extends the reporting and payment deadline for individuals to ask their pension scheme to settle their annual allowance charges from previous years by reducing their future pension benefits.
  • Plastic packaging tax: Draft regulations were published for comment by 17 August 2021. For more details on the regulations and responses to other indirect tax consultations see the week to 19 July 2021 edition of EY VAT News.
  • Modernization of the stamp taxes on shares framework: In response to the consultation on this, the Government will explore some of the issues identified further and will set up a Working Group of stakeholders.
  • New proposals to address promoters of tax avoidance: Proposed measures include ensuring HMRC can protect its position by freezing a promoter’s assets so that the penalties they are liable for are paid, tackling offshore promoters and the UK entities that support them, closing down companies that promote avoidance schemes, and supporting taxpayers to identify and exit avoidance schemes


For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United Kingdom), London

Ernst & Young LLP (United Kingdom), Birmingham

Ernst & Young LLP (United States), UK Tax Desk, New York

Ernst & Young LLP (United States), FSO Tax Desk, New York

Ernst & Young LLP (United States), Transaction Tax Desk, New York