November 9, 2021
UK Autumn Budget 2021 | Considerations for Japanese groups operating in the UK
On 27 October 2021, the United Kingdom (UK) Chancellor of the Exchequer, Rishi Sunak, presented the UK Government’s Autumn Budget. With much-improved independent economic forecasts to support him, he promised to build a “stronger economy for the British people” – a new post-COVID economy with a “new age of optimism.”
The UK Chancellor’s speech highlighted some of the new freedoms that Brexit gives the UK in terms of tax policy and a number of the measures announced would not have been possible during the UK’s membership in the European Union. Referring to the tax increases in the UK Spring (March) Budget 2021 (including the April 2023 increase of UK corporation tax from 19% to 25%, which will take the UK rate above the 20% Japanese Controlled Foreign Company (JCFC) trigger rate threshold), the Chancellor said that while he does not like tax increases, they were necessary to help the UK economy recover from the COVID-19 pandemic and he still intends to reduce taxes before the end of the current Parliament in 2024.
We have highlighted below some of the key announcements impacting Japanese groups; further insight and commentary is available at our Budget webpage. We will also discuss the measures in more detail in our Budget webcast which can be viewed on-demand.
For Japanese groups, the new measures likely to be of broadest interest across a variety of industries include:
The UK Tax Desk Team, based in Japan, can help businesses understand and manage the impact of these measures on operations, including the measures introduced in the UK Spring Budget 2021.
Research and development (R&D): From April 2023 the scope of R&D tax relief will increase to include data costs and cloud computing. In addition, the UK R&D tax relief regime will refocus on specifically incentivizing R&D activity and investment taking place in the UK. The Government also plans to improve compliance and tackle abuse of the R&D tax reliefs.
Notification of uncertain tax treatment (UTT): The UTT rules will come into force in April 2022 with only two triggers regarding a UTT, where 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. Trigger three (where there is a substantial possibility that a tribunal or court would find the taxpayer’s position to be incorrect) has currently been removed.
Annual Investment Allowance (AIA): The £1m AIA on new capital expenditure will be extended until March 2023.
Bank surcharge: The bank surcharge will reduce to 3% from April 2023, meaning banks will pay 28% (including 25% corporation tax) from 2023 (compared to 27% in total currently). There will also be a £100m allowance for smaller banks before the surcharge is applied.
Tonnage tax: The tonnage tax regime will be amended to reward companies flying the Red Ensign (the UK’s merchant shipping flag). The lock-in period will be reduced from 10 years to 8 years and HMRC will have more discretion to admit companies into the regime.
Residential Property Developer Tax (RPDT): The RPDT will be levied at 4% for developers with profits over £25m.
Corporate re-domiciliation: A new consultation has been launched on corporate re-domiciliation, to make it easier to relocate to the UK.
Cross-border group relief (CBGR): The Government will legislate in Finance Bill 2021-22 to abolish CBGR in the UK for losses incurred in the European Economic Area and other related loss reliefs from 27 October 2021.
Loss relief: With retrospective effect from 1 January 2019, the loss relief rules will be amended to ensure that the legislation works as intended for companies adopting IFRS16.
Diverted profits tax (DPT): Applicable from 27 October 2021, new provisions will be introduced allowing taxpayers to amend their company tax returns and bring taxable diverted profits into charge to corporation tax during the DPT review period. In addition, from 27 September 2021, HMRC can no longer issue a corporation tax closure notice in respect of profits subject to a DPT charge until after the review period ends.
Mutual Agreement Procedure (MAP) and DPT: For MAP decisions reached after 27 October 2021, HMRC may now implement MAP decisions relating to DPT.
Asset Holding Companies (AHCs): Introduction of a new regime effective from 1 April 2022 for the taxation of qualifying AHCs. A qualifying AHC must be at least 70% owned by diversely owned funds, or certain institutional investors.
Real Estate Investment Trusts (REITs): Targeted changes to the UK REIT regime effective from 1 April 2022 will be introduced designed to make the regime more attractive.
Hybrids: The changes to the hybrid and other mismatches rules announced earlier this year in relation to transparent entities will be included in Finance Bill 2021-22.
Business rates and stamp taxes
Stamp Duty and stamp duty reserve tax (SDRT) in relation to securitization and insurance-linked securities (ILS) arrangements will be amended.
The Chancellor confirmed that business rates will be retained but will be subject to reform to make them simpler and fairer, being the reviews will happen every three years (rather than five), there is a new 100% relief for business improvement, and also a 50% temporary COVID relief, capped at £110k.
Online sales tax: The Government is continuing to explore a UK-wide online sales tax, the revenue from which would be used to reduce business rates for retailers.
Employment and personal taxes
Apprenticeships: The Government is increasing apprenticeship funding to £2.7bn by 2024-25, the first increase since 2019-20. As part of this, the Government is continuing to meet 95% of the apprenticeship training cost for employers that do not pay the Apprenticeship Levy and delivering system improvements for all employers.
National Living Wage (NLW)/ National Minimum Wage (NMW): The will increase to £9.50. The NMWfor young people and apprentices will also rise.
Capital gains tax (CGT): From 27 October 2021, the deadline for UK residents to report and pay CGT after selling UK residential property will increase from 30 days after the completion date to 60 days. For non-UK residents disposing of property in the UK, this deadline will also increase from 30 days to 60 days. When mixed-use property is disposed of by UK residents, the requirement to report within the 60-day window will only apply to the residential element of the property gain.
National Insurance: The Government confirmed it will use the September Consumer Price Index figure of 3.1% as the basis for uprating National Insurance limits and thresholds, for 2022 to 2023. However, this excludes the Upper Earnings Limit and Upper Profits Limit which will be maintained at 2021 to 2022 levels.
VAT and other indirect taxes
Air passenger duty (APD):From April 2023, there will be a new lower rate of APD on UK domestic flights. There will also be a new “ultra-long haul” rate for flights over 5,500 miles (£91 for economy flights).
Alcohol duties: Planned increases to current alcohol duties will be cancelled. From 2023, alcohol duties will be reformed to make the regime simpler - the system will only have 6 main bands (compared to 15 currently) and rates will be based on how strong the drinks are. The special rate for sparkling wines will end. In addition, there will be a new draught relief for alcohol duty, which means that draught beer and cider will attract 5% less in alcohol duty.
Plastics packaging tax: The Government is making technical changes to the PPT rules which come in from 1 April 2022 to ensure “the tax operates as intended, that the UK complies with international agreements and that HMRC has the appropriate framework to administer the tax.”
Freeports: Legislation will be included in Finance Bill 2021-22 to implement changes to the VAT rules for these designated freeports from 3 November 2021.
The Budget did not contain many fundamental changes to overall tax law. However, the number of significant measures introduced which aim to support the UK economy’s recovery following a turbulent period since the outbreak of the COVID-19 pandemic will need to be properly managed by Japanese groups operating in the UK. In particular, the combination of incentives available in the UK (such as the increased scope of the UK’s R&D relief regime and the previously introduced super-deduction regime for investment) coupled with the upcoming increase in the UK corporation tax rate to 25% provide an opportunity for Japanese groups to consider their operating structure in Europe. EY’s UK Tax Desk Team based in Japan can help businesses understand and manage the impact that the recent changes may have on operations.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Co., UK Tax Desk, Tokyo
Ernst & Young LLP (United Kingdom), International Tax and Transaction Services, London