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July 21, 2022
2022-1107

UK Government releases documents for consultation prior to Finance Bill 2022/23

  • The UK Government has released draft legislation for consultation (until 14 September 2022), ahead of potential inclusion in Finance Bill 2022/23.
  • The draft legislation covers both proposals previously announced and proposals not previously announced.
  • Two new consultations were also released along with a number of responses to earlier consultations.
  • This Alert highlights the various proposals.

Executive summary

On 20 July 2022, the United Kingdom (UK) Government released a number of documents for consultation ahead of potential inclusion in Finance Bill 2022/23. The consultation on these Finance Bill measures will run until 14 September 2022. The final contents of Finance Bill 2022/23 will be a decision for the Chancellor at the next Budget.

The Government has also published a number of tax-related consultations and summaries of responses to consultations which have already been conducted.

The documents can be divided into the following categories:

  • Draft legislation to take forward previous announcements
  • Draft legislation not previously announced
  • New consultations and consultation responses

This Alert summarizes the various pieces of legislation.

Detailed discussion

Draft legislation to take forward previous announcements

OECD Pillar 2 reforms

The Government has published draft legislation and a summary of responses to the consultation on the implementation in the UK of the Organisation for Economic Co-operation and Development (OECD) Pillar Two of the Base Erosion and Profit Shifting (BEPS) 2.0 project. The legislation introduces an income inclusion rule (IIR) which in the UK will be known as the multinational top-up tax. This tax will apply to multinational enterprises (with global revenues exceeding €750m in two of the previous four years) for accounting periods beginning on or after 31 December 2023.

The legislation provides details of the calculation of the amount of multinational top-up tax a person must pay for an accounting period and details of various tax administration matters, including information returns, assessments payments and penalties. The consultation response document provides more detail about the specific areas where the Government believes further international engagement is needed as a matter of priority (for example the concept of a Country-by-Country Reporting (CbCR) safe harbor). It is open to resolving some issues domestically where it is necessary to avoid disproportionate and unintended outcomes, provided this does not challenge the common approach or produce risks to the Exchequer or of double taxation to businesses. There will be a later update on the timing and design of the UK's undertaxed profits rules (UTPR) in light of wider international developments. The Government will also continue to consider the introduction of a UK domestic minimum tax.

Transfer pricing documentation: Master File/Local File

Draft legislation will make it a requirement for large multinational businesses (those within the CbCR regime with global revenues of €750m or more) operating in the UK to keep and retain transfer pricing documentation in a prescribed and standardized format, set out in the OECD's Transfer Pricing Guidelines. It also introduces a requirement to complete a summary audit trail, which is intended to be a short questionnaire detailing the main actions undertaken in preparing the local file. It is proposed that the legislation will apply to accounting periods beginning on or after 1 April 2023.

R&D tax relief reforms

Draft legislation will amend the definition of qualifying expenditure to include data and cloud costs. There will be limits on overseas spending on subcontracted research and development (R&D) and externally provided workers, with some limited exceptions. In addition, all claims to R&D reliefs will have to be made digitally, with the costs broken down across qualifying categories and also endorsed by a named senior officer of the company. There is also a new requirement for a claim notification to be submitted not more than six months after the end of the accounting period to which the R&D claim relates (this applies to new claimants and claimants who have not made a claim in the last three accounting periods).

Other legislation published in relation to previous announcements

Other legislation covered includes:

  • Homes for Ukraine Sponsorship Scheme - new and temporary reliefs from the annual tax on enveloped dwellings (ATED) and 15% rate of stamp duty land tax (SDLT) where a corporate entity makes a dwelling available to Ukrainian refugees under the Homes for Ukraine Sponsorship Scheme. Payments that individuals, community groups and businesses receive under this scheme will be exempt from either income tax or corporation tax
  • Improving the administration of the insurance premium tax (IPT)
  • Tax relief in relation to pension net payment arrangements
  • Collective money purchase pension scheme – clarifying legislation to ensure that a collective money purchase pension scheme that is in the process of winding up can make certain types of payments without attracting pension tax charges
  • Relief on disposals of joint interests in land - draft legislation to make changes to the legislation for capital gains tax roll-over relief and private residence relief to ensure that Limited Liability Partnerships and Scottish partnerships which hold title to land are included
  • Tax conditionality - licenses in Scotland and Northern Ireland
  • Air passenger duty reform
  • Aggregates levy reform - draft legislation will make changes to aggregates levy exemptions, by replacing four exemptions for by-product aggregate arising from specific types of construction with one broader, more general exemption. It will also restrict an exemption so that aggregate extracted on a construction site specifically for construction use is taxed in the same way as other construction aggregate

Draft legislation not previously announced

Among the draft legislation not previously announced are the following measures.

Changes to the Qualifying Asset Holding Companies rules

Draft legislation seeks to make limited changes to the Qualifying Asset Holding Companies (QAHC) regime, which went live in April 2022. These changes will ensure that the regime is available to a broader range of investment structures, consistent with the original policy rationale and subject to safeguards. The changes allow an investment fund to be treated as meeting the diversity of ownership condition where it is closely associated with another investment fund that meets that condition. It is also intended that the existing anti-fragmentation rule in paragraph 4 of Schedule 2, Finance Act 2022 will be extended with effect from 20 July so that it also applies where interests are held through one or more QAHCs as well as directly in the company concerned (effectively where a QAHC has entered the regime prior to 20 July 2022 but would on that date cease to meet the ownership condition solely as a result of the extension of the rule, the QAHC can ignore that change in determining if it meets the ownership condition for so long as it remains a QAHC).

Double taxation relief - time limit for claims

Draft legislation to restrict certain claims for double taxation relief has been published and will have immediate effect. No extended time limit claims can be made on or after 20 July 2022 in relation to amounts calculated by reference to the foreign nominal rate of tax, unless the relevant accounting period is under enquiry, or there has been an actual adjustment of UK or foreign tax within the last six years. This change will only affect certain double taxation relief claims in relation to distributions received by UK companies in previous years (principally those arising out of the FII GLO/Prudential Assurance Company Limited judgments).

Other draft legislation published includes:

  • Soft drinks industry levy (SDIL) - draft legislation seeks to ensure that all soft drinks meeting the SDIL sugar content condition that are dispensed from fountain machines are within the scope of the levy.
  • Further tax provisions in connection with the Dormant Assets Scheme. The Dormant Assets Scheme is being expanded to include eligible assets from the pensions, insurance, investment and wealth management, and securities sectors. The Government has therefore published draft legislation to ensure that payments from an authorized reclaim fund are treated for the purposes of income tax as if they were from the pension asset that was initially transferred. It also ensures that where an asset has been transferred to an authorized reclaim fund and its owner was alive at the time of transfer but subsequently dies before the asset has been reclaimed, the owner will be treated for inheritance tax purposes as still owning the original asset.
  • Provisions allowing the transfer of assets between spouses and civil partners that are separating are made on a no gain/no loss basis for up to three full tax years after the parties cease to live together.
  • Taxation of Lump Sum Exit Scheme payments: As announced in the Lump Sum Exit Scheme (LSES) consultation response, this draft legislation provides clarity that LSES payments for those leaving or retiring from farming will be treated as capital in nature and will be subject to capital gains tax, or corporation tax in the case of incorporated entities.
  • An approval regime for aerodromes not customs and excise designated

New consultations and consultation responses

The Government has published two new consultations on:

  • Improving the data HMRC collects
  • Digitalizing Business Rates - connecting business rates and tax data

It has also published summaries of responses to the following discussion documents and consultations:

  • "Preventing and collecting international tax debt"
  • "Helping Taxpayers Get Offshore Tax Right"
  • "IFRS 17 (new international accounting standard for insurance contracts)." Draft regulations will be published and consulted on over Summer 2022. The regulations will be laid during Autumn 2022, to apply to accounting periods beginning on or after 1 January 2023.
  • "ITSA registration for the self-employed and landlords." The Government is not moving forward at this time with the ideas set out in the call for evidence.
  • "OECD Model Rules for Digital Platforms (MRDP)." The Government will publish draft regulations to implement the new reporting rules for an eight-week technical consultation in September. The new rules will apply from 1 January 2024 which means platforms will be expected to collect information from 1 January 2024, with the first reports due by 31 January 2025.

Finally, the Government has advised that it is considering the feedback provided in response to its plans for alcohol duty reform and will respond in the Autumn.

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

Ernst & Young LLP (United Kingdom)

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

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

 

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