The Chancellor was keen to promote the fact that even with the increase in the rate of UK corporation tax from 19% to 25% with effect from 1 April 2023, the UK will still have the lowest rate of corporation tax in the G7. The Government considers that this, along with the announcement that it is going to replace the popular “super-deduction” that is coming to an end this month with a policy of "full expensing", resulting in the UK having the joint most generous capital allowance regime in the OECD, will encourage additional inward investment to the UK and keep the economy very much “open for business”.
Full expensing results in a 100% First Year Allowance, applying from 1 April 2023 until 31 March 2026, with the Government intending to make the policy permanent as soon as it responsibly can. This means that companies will be able to write off the full cost of qualifying main rate plant and machinery (such as warehousing equipment) investment in the year of investment. Companies investing in special rate assets (including long life assets such as solar panels and thermal insulation on buildings) will also benefit from a 50% first-year allowance during this period. Both measures are less generous than the “super-deduction” they replace, which currently allows companies to deduct 130% of investment spending from their taxable profits, but go further than many expected.
R&D Tax Reliefs
There was also a focus on making taxes more competitive in the life sciences and creative industry sectors with the Government announcing that qualifying R&D intensive SMEs will receive additional tax relief from 1 April 2023. The scheme is targeted specifically at loss making R&D intensive SMEs (where qualifying R&D expenditure is worth 40% or more of its total expenditure) and the support will be provided through the existing SME scheme.
From 1 April 2023, the scope of qualifying expenditure for R&D tax relief (under either the RDEC or the SME schemes) will also be extended to include the costs of datasets and of cloud computing in order to incentivise R&D using modern computational approaches. Further, all claims for R&D reliefs will in future have to be made digitally (unless a company is exempt from the requirement to deliver a return online) and, from 1 August 2023, must be accompanied by a compulsory additional information form to provide HMRC with more detail of the claim.
The Government’s consultation on the possible merging of the RDEC and SME schemes closed on 13 March. In order to keep open the option of a merged scheme, the Government will publish a summary of responses and draft legislation on a merged scheme for technical consultation on Legislation Day in July 2023. Any further changes as a part of the ongoing R&D tax reliefs review will be announced at a future Budget, including a final decision on whether to merge the RDEC and SME schemes. In the meantime, the previously announced restriction on some overseas expenditure will now come into effect from 1 April 2024 instead of 1 April 2023 to allow the Government to consider the interaction between this restriction and the design of a potential merged scheme. For more information on the consultation see our previous alert here.
Audio-Visual Tax Reliefs
HM Treasury published a response to the audio-visual tax reliefs consultation, which closed in February. The audio-visual tax reliefs will be reformed into expenditure credits (based on RDEC). Two models will be implemented: one for film and TV expenditure credits, which will be merged into a single scheme (the Audio-visual Expenditure Credit with a headline rate of 34% for films and high-end TV programmes and 39% for animations and children's TV programmes) and one for video game expenditure credits (the Video Games Expenditure Credit with a headline rate of 34%). The audio-visual tax reliefs are being reformed, at least in part, to ensure they can continue to work as intended following the implementation of Pillar 2 in the UK and elsewhere.
Implementation of Pillar 2
On the subject of Pillar 2, there were no surprises. We received further confirmation that the Spring Finance Bill will include revised draft Income Inclusion Rule (IIR) legislation as well as draft legislation in respect of the Transitional Safe Harbour rules and a UK Qualifying Domestic Minimum Top-Up Tax (QDMTT). The UK’s implementation date in respect of the IIR and QDMTT also remains unchanged and will apply in respect of accounting periods beginning on or after 31 December 2023. No further update was given on the UK’s anticipated timeframe for introducing the Undertaxed Profits Rule (UTPR). The latest on this remains what was said in the Autumn Statement – that the Government intends to implement the UTPR, but with effect no earlier than accounting periods beginning on or after 31 December 2024. We will provide a further update once we have had a chance to digest the revised UK draft legislation that’s coming next week and will be giving an update on the UK Pillar 2 position on our 4 April webinar (please see details here).
The UK is not alone and a number of other jurisdictions, including Switzerland, South Korea and the countries in the EU, will similarly implement Pillar 2 with effect from the beginning of 2024. Furthermore, at an international level the OECD continues to provide updates and additional guidance on the application of the rules. It’s important for groups to look at the OECD releases and decide how those might impact on the modelling they may have already done. It’s fair to say that some of the latest guidance expanded the scope of certain provisions, especially those applying to transactions which groups may have entered into since November 2021. In order for multinationals to put their best foot forward in terms of the Pillar 2 impact on their group, the analysis really needs to start today. See here for our alert on the latest OECD Administrative Guidance.
The OECD releases have also included a set of transitional safe harbours giving multinational groups a soft landing over the next few years so as to minimise complexity and calculations required under the rules. The transitional safe harbours apply a simplified effective tax rate test using data multinationals should already be preparing for Country-by-Country Reporting purposes. Groups should spend time looking at these rules to see how many jurisdictions they can apply to in order to minimise some of the initial impact of Pillar 2 applying for the next 3 years. If groups want to avail themselves of the safe harbours, however, there may be some things that require action now to make sure they are available from next year. For more information see our alert here.
Sovereign Immunity Exemption
There was good news in the Budget for sovereign investors as the Government announced its decision that there will be no change to the current sovereign immunity exemption from UK direct taxation. The Government has, since July 2022, been engaged in a consultation stated to modernise and improve the tax treatment of foreign sovereign investors, such as sovereign wealth funds. The Government had proposed:
- That both the principle of, and conditions underpinning entitlement to, sovereign immunity from UK tax - currently based only on case law and common practice - should be comprehensively set out in legislation.
- To narrow the scope of tax exemptions that are currently available to sovereign investors in such a way that, as a practical matter, income and gains arising to sovereign investors from UK real estate and income from any UK trading activities would have been brought within the scope of UK tax.
It was confirmed that the Government has carefully considered the responses to the consultation on sovereign immunity from direct taxation and there will be no change to the current sovereign immunity exemption; it will continue to operate as it does now. The Government welcomed the constructive engagement with sovereign investors during the consultation, and it’s good to see that the Government has taken on board the many thoughtful and comprehensive concerns raised. This is a positive outcome for sovereign investors investing in UK real estate and/ or having a presence in the UK.
Transfer Pricing Documentation
The Government confirmed that legislation will be included in the Spring Finance Bill to enact previously announced changes to transfer documentation requirements. The new rules will require businesses to prepare transfer pricing documentation (a master file and a local file) in accordance with OECD Transfer Pricing Guidelines. This measure will have effect for accounting periods commencing on or after 1 April 2023 for corporation tax purposes. HMRC will continue to consult on a “summary audit trail” requirement which would oblige in scope businesses to complete a questionnaire detailing the main actions they have taken in preparing the transfer pricing local file document. Our prior alert on this topic can be found here.
Office of Tax Simplification
It was also confirmed that the Office of Tax Simplification will close with effect from Royal Assent of the Spring Finance Bill, notwithstanding recent calls to retain it from the House of Commons Treasury Committee. Officials have been given a clear mandate to "focus on simplicity of tax policy design throughout the policy making process and on simplifying existing tax rules and administration".
We may have been expecting further announcements on both the corporate re-domiciliation consultation and the proposed reform of the VAT rules on fund management. There was nothing further on these areas, however. The Government is considering the responses to the VAT reform consultation and continuing to discuss the proposals with interested stakeholders. It will publish its response in the coming months. The consultation seeking views on the introduction of a corporate re-domiciliation regime to support companies seeking to relocate to the UK closed early last year, and whilst some thought it may resurface in the Budget it would now appear to be a long way down the list of priorities.
For further information on UK Budget announcements and to discuss how these may impact on your business, please reach out to your usual contact.