Autumn Budget 2021: International Tax and subtle but important changes for the post-Brexit economy.

  • Written By: Philip Newbold
  • Published: Thu, 28 Oct 2021 15:02 GMT

In a Budget that was always going to be focussed on post-Covid economic recovery and longer-term fiscal concerns, international tax was not expected to feature more than as a policy footnote.  Developments in company re-domiciliation, diverted profits tax and group relief were announced and are all significant.

Autumn Budget International Business 1920X1080

The UK Government has launched a consultation on plans to allow corporate re-domiciliation.  This would allow companies to move their jurisdiction of incorporation to the UK without the need to create a new legal entity, providing continuity of structures, contracts and operations. Aligning to other common law countries and over fifty global jurisdictions, the aim is to keep the UK as a primary global business and investment centre. While consideration will need to be given to economic substance, particularly when headquarters re-domicile, the intention of this consultation would appear to be to increase the perception and reality of a post-Brexit Britain open for business.

In addition to this, legislation will be introduced to allow a Mutual Agreement Procedure outcome to be implemented in relation to Diverted Profits Tax (DPT). This aims to ensure that double tax treaties are implemented as intended. While indicating that DPT is here to stay, this legislative change may provide certainty to taxpayers.

The Finance Act will also repeal legislation that permits UK companies, in defined circumstances, to claim group relief for losses incurred in the European Economic Area (EEA). It will also amend rules that limit the losses that EEA resident companies trading through a UK permanent establishment can surrender as group relief.

While all important changes, taken as a whole, the theme for international tax in this year’s budget appears tonal as much as legislative: the UK is a business-friendly jurisdiction to operate in with consistent and clear rules.

Proposals affecting diverted profits tax

Legislation will be introduced to allow a mutual agreement procedure (MAP) outcome to be implemented in relation to diverted profits tax (DPT). Amendments are also planned to the DPT legislation in relation to revisions to company tax returns during the DPT review period.

A MAP is an administrative process to help resolve disagreements arising in relation to double taxation and the application of tax treaties.

The types of taxes for which a MAP outcome can be implemented is to be expanded to include DPT. This will allow relief to be given against DPT where it is required to implement a decision reached under the MAP.

Amendments will be made to the legislation to ensure that companies are able to utilise particular DPT reliefs when revising company tax returns during a DPT review period. Changes will also be made to ensure a corporation tax closure notice cannot be issued until the DPT review period ends.

Our comment

Whilst the inclusion of DPT with regards to a MAP outcome is only expected to affect a small number of multinational businesses, it is encouraging to see measures introduced to ensure tax treaties are able to operate effectively.

The ‘fine-tuning’ of the rules relating to closure notices and the amendments to relieving provisions are welcomed to help the legislation function as originally intended.

When will it apply?

MAP decisions reached after 27 October 2021. The relieving provisions will apply from 27 October 2021.

Changes to closure notices will apply from 27 October 2021 and will apply to any application for a closure notice made on or after 27 September 2021.

UK to ease corporate re-domiciliation to align with international competitors

Post-Brexit, in order to maintain and enhance its role as a global investment and business centre, the UK is to make it possible for companies to re-domicile to the UK by moving its place of incorporation here. This will allow continuity of business, reduce administration and negate the need to incorporate a new entity in the UK.

In order to align and compete with other common law global centres such as multiple US states, Canada, Australia, New Zealand, Singapore, and around 50 other jurisdictions, the UK will allow companies to re-domicile to the UK without the need for a new corporate identity. Permitting this re-domiciling will bring new investment and growth opportunities to the post-Brexit UK economy.

Corporate identity, structure, assets, contracts, and intellectual property will remain undisturbed.

The Government is consulting on the regime, including any required changes to tax laws, to facilitate re-domiciliation. Rules currently exist for companies that migrate control to the UK, but these may need to be extended; for example, to prevent importation of foreign losses to offset profitable group entities already within the UK.

Our comment

The Government has not specifically mentioned substance as a requirement. In reality, this may be a challenge. For companies considering re-domiciliation, a key test may be around management and control, for instance if an entity re-domiciles, but certain functions are not transferred with the re-domiciling entity.

The Government has not expressed an intention to allow re-domiciling between the three separate Registrars of Companies within the UK.

When will it apply?

Consultation concludes on 7 January 2022.

Residential property developer tax

The Government confirmed the introduction of a new residential property developer tax (RPDT) that will apply to the profits of companies carrying out UK residential property development (RPD) activities.

Companies carrying out UK RPD activities will be subject to RPDT at a rate of 4% on RPD profits in excess of an annual allowance of £25 million per year, per group. The RPDT will be incorporated within the existing UK corporation tax process with any tax due reported with the company’s corporation tax return.

RPDT will be calculated by first identifying the company's taxable profits that relate to RPD activities and then making prescribed adjustments. No deduction will be permitted, for example, for financing costs and the utilisation of losses will be restricted.

Our comment

The Government had previously announced the introduction of the RPDT, which has undergone a period of consultation since the Spring 2021 Budget. Draft legislation has already been published.

It has been confirmed that the RPDT will not apply to companies that are developing UK residential property for investment purposes: Build-to-Rent (BTR). The potential application to the BTR sector had been debated extensively during consultation. Concerns had been raised about the administrative challenges and the impact for BTR developers that do not realise profits on completion of a development but over a longer time frame.

Whilst the RDPT is intended to target the largest developers, the restriction on deductions for interest and utilisation of losses will inevitably bring many companies within the scope of RPDT. The annual allowance of £25 million is also a group-wide allowance and cannot be carried-forward if not fully utilised in a chargeable accounting period. This may also increase the impact. In addition, the structure of the legislation does not provide any form of 'grandfathering' to mitigate the impact for existing developments that were initiated before the RPDT was announced but will not complete until after the introduction of the rules in April 2022.

When will it apply?

From 1 April 2022

Reform to research & development (R&D) tax relief following consultation

Following a consultation on the R&D tax incentive schemes, two major changes have been announced. First, the expenditure relating to cloud computing and data will be included within eligible spend. Second, the wider scheme is being reformed to better support and incentivise innovation taking place in the UK, and not that undertaken overseas. The full details of these changes are set to be announced in late Autumn.

The Government previously announced its goal to increase spending on R&D to 2.4% by 2027, representing an investment of £22 billion. Reforms to the existing R&D tax relief scheme aims to take the combined public direct and indirect support for R&D from 0.7% of Gross Domestic Product (GDP) to 1.1% of GDP by the end of the current Parliament. Despite the Government investing heavily, and the UK having the second highest spend on R&D in the Organisation for Economic Co-operation and Development (OECD), the investment into R&D by UK businesses is less than 50% of the average in the OECD.

The reform of the existing R&D tax reliefs are therefore designed to benefit and incentivise organisations undertaking R&D in the UK. Full details of the reforms and next steps for the R&D review are still to be published. The headline reforms announced are:

  • Cloud computing and data costs will now be included within qualifying expenditure
  • The Government will seek to better support and incentivise UK activity
  • Measures to tackle abuse and improve compliance

Our comment

The inclusion of data and cloud computing as qualifying expenditure for R&D tax relief is a welcome addition. The software and computer science industries are fast paced and as a result the R&D legislation, which was written over two decades ago, is not always relevant. To reward cutting-edge innovation, the legislation needs to be updated in a timely manner to reflect the dynamic R&D landscape.

The new eligible cost categories of data and cloud computing costs will allow companies to reap increased benefit from their innovation activities.

The Government’s decision to focus R&D tax reliefs on domestic activities will have an impact on many organisations that use foreign entities or globally mobile workers to support their R&D activities, either directly or indirectly. Many workers are choosing to work remotely from locations all over the world for various reasons. Global businesses are also increasingly sharing a workforce across jurisdictions. Local talent and skills are not always available to businesses when required, and so businesses sometimes rely on workers based overseas.

Currently, R&D tax relief is supporting billions of pounds worth of innovation that is taking place in foreign jurisdictions. Removing support for R&D activities conducted overseas is a stance that has already been adopted by a number of other OECD countries such as Australia, Canada, Switzerland, and the United States.

It is not yet clear how much of an effect this will have on businesses. The Government is yet to release detail on how it will refocus the reliefs towards innovation in the UK. While we support additional incentives for R&D taking place in the UK, consideration should also be given to ensuring that R&D tax relief is fit-for-purpose for modern business.

We eagerly anticipate the response to the R&D consultation that took place earlier this year.

When will it apply?

From 1 April 2023.

Other announcements

This section covers other points raised in the Budget that may be of interest, and some previously announced changes.

  • Following the previous announcement in December 2020, the Government confirmed its intention to include legislation in Finance Bill 2021/22 to establish a new tax regime for qualifying asset holding companies from 1 April 2022.
  • The rules allowing for cross border group relief between UK-tax resident and EEA-tax resident companies in the same group will be abolished for accounting periods ending on or after 27 October 2021.
  • The change to international financial reporting standard (IFRS) 17 will affect the timing of the recognition of profits and losses for insurance companies for reporting periods beginning on or after 1 January 2023. Ahead of the change, the Government is proposing legislation to lessen the transitional impacts and allow adjustments to be spread for tax purposes.
  • The Government is planning to amend how the corporate tax loss relief legislation applies to the reversal of onerous lease provisions. The reforms are to ensure that, where leases are accounted for under IFRS 16, companies are not disadvantaged in how their deductions allowance is applied. The changes will apply retrospectively for accounting periods beginning on or after 1 January 2019.
  • The annual investment allowance will now remain at £1 million until 31 March 2023. It was otherwise going to revert to £200,000 from 1 January 2022.
  • The Government announced in July 2021 that it planned to legislate for mandatory disclosure by large businesses of any uncertain tax treatments in their VAT, income tax (including PAYE) or corporation tax returns. The legislation will be effective for returns that are due to be filed on or after 1 April 2022. Taxpayers will only need to notify HMRC where the tax advantage is expected to be over £5 million for a 12 month period. A potential widening of the scope of the proposed rules was announced in the Autumn 2021 Budget to include where there is a substantial possibility that a tribunal or court would find the taxpayer’s position to be incorrect.
  • The Government announced its intention to legislate for tax reporting by UK digital platforms. As part of this, a consultation will be opened shortly on a proposed online sales tax.

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

Ref: NTAJ141021103

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