Sign up for tax alert emails    GTNU homepage    Tax newsroom    Email document    Print document    Download document

October 28, 2021

UK Chancellor delivers second Budget of 2021

Executive summary

In delivering the second United Kingdom (UK) Budget of this year, the UK Chancellor’s tax announcements on 27 October 2021 had a distinctly low-key feel, at least from a tax policy perspective. The biggest tax change in the UK Budget scorecard was the Health and Social Care Levy, something already enacted, and it is the changes announced in the Spring Budget (particularly the six percentage point rise in corporation tax and the freezing of income tax thresholds) that will have the biggest tax impacts going forward.

The Chancellor did continue progress on the building blocks of recovery from the pandemic with measures such as a further temporary extension to the Annual investment Allowance, additional reliefs from Business Rates (some of which are time-limited), a consultation on the re-domiciliation of business to the UK and an extension of research and development (R&D) tax relief to cover cloud computing and data costs. At the same time, he took a number of opportunities to showcase how the Brexit freedoms allow the UK to focus its tax incentives on operations in the UK (with an immediate change to the rules on cross-border group relief, the modernization of the UK tonnage tax regime and promised measures to narrow the territorial scope of R&D tax relief to apply it more to UK spending).

What the accompanying documents did contain was the promise of a number of technical changes, some of the detail for which will be forthcoming either with the Finance Bill on 4 November (Finance Bill 2021-22) or at a “Tax Administration and Maintenance Day” sometime later this year. Included in those technical changes are revisions to the proposals for large businesses to notify uncertain tax treatments to Her Majesty’s Revenue and Customs (HMRC) (in particular the apparent removal of the third trigger – which would have applied where there was a substantial possibility that “a tribunal or court would find the taxpayer’s position to be incorrect.” More detail can be found in the Tax Management and Administration section below.)

Detailed discussion

Business taxes

R&D tax reliefs

The Government previously consulted on the scope of qualifying expenditures which companies can include in R&D tax credit claims to ensure the credits remain well targeted and reflect modern R&D processes.

The Government has confirmed in the Autumn Budget that the qualifying expenditure categories will be expanded to include data and cloud computing costs.

However, it was further announced that the Government intends to refocus relief for R&D carried out overseas but funded by the UK. There is no detail as to what this will mean in practice.

Both the expansion of the expenditure categories and the apparent narrowing of the territorial scope of R&D tax relief will be legislated for in Finance Bill 2022-23 and take effect from April 2023. There is no real detail as to how changes will be made nor what steps might be taken to “target abuse and improve compliance,” though more detail is promised later this year. 

This modernization of the R&D expenditure categories to include cloud computing and data is long overdue and will be welcomed by many companies. Keeping the rules of the R&D regime current to reflect how businesses operate is vital to the continued success of the credit.

However, this announcement is overshadowed by the proposed restriction on relief for the cost of R&D carried out outside the UK. The inclusion of overseas R&D has been a long-established feature of the UK regimes which is attractive to multinationals setting up R&D centers within the UK. Further details will be released in late Autumn so companies will have to wait to see what impact this will have. It will be interesting to see how overseas activities will be defined, as a wide definition could have a serious impact on key UK industries developing global centers of excellence and expertise within the UK.

Capital allowances: Annual investment allowance

The Annual Investment Allowance (AIA) of £1m, which has been in place since January 2019, has been extended for a further 15 months to 31 March 2023. The AIA was due to revert to £200k on 1 January 2022 but has now been extended to align it with the super-deduction regime which was introduced in the March Budget.

Capital allowances: Other measures

Amendments will be made to the structures and building allowances (SBA) legislation to bring it in line with changes to the SBA statement requirements which were announced earlier in 2021. Technical changes will also be made to capital allowances, as well as company car tax and vehicle excise duty, in relation to vehicle emissions.

Corporate domicile

The Government announced at Autumn Budget that it intends to enable the re-domiciliation of companies to make it possible for companies to move their domicile to and relocate to the UK. It has launched a consultation setting out its proposals and asking for views on a number of questions, including the benefits of enabling companies to re-domicile and the tax implications that need to be considered.

It is welcome news that the Government will consult on facilitating a corporate law re-domiciliation regime, thereby bringing the UK into line with most European and global counterparts. Such a regime should allow taxpayers, including those who may wish to access the UK asset holding company regime, to migrate both their tax and corporate law residency to the UK in a more straightforward and comprehensive manner.

Cross-border group relief

The Government has announced that it will legislate in Finance Bill 2021-22 to abolish cross-border group relief (CBGR) and amend the rules on loss surrender for UK permanent establishments (PEs) of companies in the European Economic Area (EEA).

The measure repeals the legislation that permits UK companies in certain circumstances to claim group relief for losses incurred in the EEA, which was required under European Union law and which the UK no longer needs to abide by.

The legislation will also limit the amount of losses that an EEA resident company trading in the UK through a UK PE can surrender as group relief, to align the treatment of EEA companies with countries elsewhere in the world. As a result of the change, all non-UK resident companies will only be able to surrender relief losses of a UK PE if it is not possible for the loss to be deducted from non-UK profits of any person for any period.

This measure will have effect for company accounting periods ending on or after 27 October 2021, and where an accounting period straddles this date, there are deemed to be two separate accounting periods for these purposes.

Corporate loss restriction rules

The Government has concluded that changes to the way leases are accounted for under IFRS 16 mean that companies in financial distress are denied the exemption from the corporate loss restriction for carried-forward losses that are set against profits arising from lease renegotiations. Legislation will be included in Finance Bill 2021-22 to amend the loss restriction legislation, which was originally introduced in F(No 2)A 2017, to ensure that the legislation continues to work as intended for companies in these circumstances. The changes will have retrospective effect from 1 January 2019.

Hybrid and other mismatches

Following public consultation, a number of changes were introduced to the legislation for hybrid and other mismatches in the Finance Act 2021. Subsequently, the Government decided that further engagement was required in respect of one specific change (relating to transparent entities) in order to ensure that it operated as intended and withdrew that change. The Government has confirmed that legislation will now be introduced in Finance Bill 2021-22 to implement that specific change.

Online sales tax

As widely speculated in the run up to the Budget, 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.

A consultation will be published shortly in order for the Government to understand more fully the impact on businesses, consumers and retailers and to determine whether an online sales tax should be introduced.

Bank surcharge rates

The Chancellor has confirmed a decrease in the bank surcharge from the current 8% to 3% from April 2023. Taking account of the 25% corporation tax rate from April 2023, the total rate of tax payable by banks on their profits will increase to 28% - a 1% increase compared to the current 19% corporation tax and 8% bank surcharge.

The Government will also increase the surcharge allowance from £25m to £100 million. This measure will have effect from 1 April 2023.

In his Budget speech, the Chancellor referred to the allowance increase as a measure to help challenger banks. However, in fact the increase from £25m to £100m may take many banks (including non-UK banks) out of the scope of bank surcharge, not just those which are thought of as “challengers.”

Insurance companies

The Government has announced that legislation will be introduced in Finance Bill 2021-22 to give it the power to make regulations in response to the new International Financial Reporting Standard for insurance contracts (IFRS 17), so that the impact on insurance companies of transition to the new standard can be spread for tax purposes. The regulations will also give the Government the power to revoke the requirement for life insurance companies to spread acquisition expenses over seven years for tax purposes. A consultation to inform the changes will be published later this year.

Asset management

It was announced in December 2020 that the Government intends to introduce a regime for the taxation of qualifying asset holding companies (QAHCs).

There were no specific announcements at the Autumn Budget on this proposed regime, other than to confirm that the measure will form part of Finance Bill 2021-22 and will be effective from 1 April 2022. Updated draft legislation is continuing to be discussed with stakeholders with a view to being released shortly and forming part of the upcoming Finance Bill.

An updated Tax Information and Impact Note provides indications of revisions to the previously issued draft legislation, but we will comment further once the amended legislation is available.

Real Estate Investment Trusts

Following on from the consultation on Asset Holding Companies (see above), the Government has published draft legislation making changes to the real estate investment trust (REIT) regime. The draft clauses make a number of changes to the conditions which must be met in order for a company or group to qualify as a UK REIT.

The requirement for the REIT company/group principal to be listed has been removed where the REIT is effectively wholly owned by institutional investors.

Where relevant, this could reduce the running costs of REIT structures. We note that draft legislation refers to a 99% holding requirement, although the Policy Paper comments refer to a 70% threshold – confirmation will be sought from HMRC on this point.

In addition, the relaxation of “Holder of Excessive Rights” rules for certain investors in REITs can allow for simplified holding structures for captive/“private” REITs.

There have also been simplifications for ongoing reporting requirements – the Balance of Business tests will be simplified where a REIT’s property business activities represent at least 80% of its profits and assets.


At Budget in March 2021, the Chancellor announced the locations of eight chosen freeports - special economic zones with tax incentives to help stimulate regional growth – in England.

On 29 October, the Government will lay secondary legislation to designate freeport tax sites. The first tax sites will be in Humber, Teesside and Thames, and those freeports will be able to begin initial operations from November.

After designation, businesses in these freeport tax sites will be able to benefit from a number of tax reliefs, including enhanced capital allowances, an enhanced rate of structures and buildings allowance, business rates relief, National Insurance contributions (NIC) relief and stamp duty relief.

The Government will also legislate in Finance Bill 2021-22 to introduce additional elements to the Value Added Tax (VAT) free zone model for freeports as well as excise penalties. That legislation will take effect from 3 November 2021.

Residential property developer tax

The Government has published its response to the recent consultation on the design of the new residential property developer tax (RPDT), which is to be introduced from April 2022. It has also confirmed that the tax will be charged at a rate of 4% on profits from residential property development activity, to the extent that they exceed an annual allowance of £25m. Build to Rent assets and certain communal housing – such as care homes and purpose-built student accommodation – are to be excluded from the scope of the tax.

The Government has confirmed that the administration and collection of RPDT will be aligned with that for corporation tax, with no separate registration being required. Legislation for RPDT is expected be included in Finance Bill 2021-22, with the tax applying from 1 April 2022.

Economic crime levy

The Budget confirms that following consultation last year and the publication of draft clauses in September, legislation will be included in Finance Bill 2021-22 to establish an Economic Crime (Anti-Money Laundering) Levy to fund anti-money laundering and economic crime reforms. Entities subject to the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 will pay the levy as a fixed fee based on the size band they belong to, as determined by their UK revenue for the relevant accounting period. Small entities (with UK revenue less than £10.2 million) are exempt.

The fixed fees will be confirmed in the Finance Bill on 4 November but will range from £5,000 to up to £250,000 for very large entities.

The levy will first be charged during financial year 2022-23 and amounts will be payable following the end of each financial year.

Tonnage tax reform

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 outside the normal period allowed for election where there appears to be a good reason to do so. This will not affect the existing power of HM Treasury to provide (by order) for further periods during which Tonnage Tax elections may be made.

The proposed legislation will remove the flagging rules introduced in 2005 and simplify the rule which, subject to conditions, includes dividends or other distributions of overseas shipping companies in relevant shipping profits.

HMRC will review its guidance to reflect the significance of flagging vessels in the UK and UK investment in decarbonization and pollution control when they assess which companies can participate in the regime. HMRC will also review its guidance on what vessels and operations qualify for the regime to take account of developments in technology and the shipping market since the tax was introduced. Finally, following a review aimed at smoothing administration, HMRC practice guidance will raise from 10% to 15% the permitted limit for qualifying secondary (ancillary, passenger-related) income. These tax changes will take effect in April 2022.

As well as reviewing the powers covering the training commitment in the regime, the Government will also review whether to include ship management within scope of tonnage tax, and whether the existing limit that can be claimed in capital allowances by organizations leasing ships to tonnage tax participants remains appropriate.

Creative and cultural tax reliefs

In order to support certain sectors that have been significantly impacted by the restrictions brought in as a result of COVID-19, the Chancellor announced several changes to some of the UK’s creative and cultural tax reliefs.

  • The amount of tax relief available under theater tax relief, orchestra tax relief and museums and galleries exhibition tax relief will increase from 27 October 2021 until 31 March 2024. The relief will initially double, but then taper back to normal levels from 1 April 2024.

  • Museums and galleries exhibition tax relief had been due to expire in March 2022, but this has been extended to 31 March 2024. The Government says the relief will continue to be monitored through this period, with a view to making a long-term decision regarding its future.

  • The Government will legislate in Finance Bill 2021-22 to introduce changes to better target the cultural reliefs and ensure that they continue to be safeguarded from abuse.

  • To reflect the changing nature of film distribution, film productions qualifying for film tax relief that change during production to instead meet the criteria for high-end television tax relief (i.e., where the intention for theatrical release changes to an intention to broadcast), will be able to continue claiming film tax relief. This measure will have effect from 1 April 2022.

Tax management and administration

Notification of uncertain tax treatments (UTT) by large businesses

The Government has confirmed that, as had previously been announced, it will legislate in Finance Bill 2021-22 to introduce a new requirement for large businesses to notify HMRC when they take a tax position in their returns for VAT, corporation tax, or income tax (including PAYE – Pay As You Earn) that is uncertain.

Businesses will need to notify HMRC where the tax advantage is expected to be over £5m for a 12-month period and one of the triggers applies (subject to certain exemptions).

The latest announcement confirms that only two triggers will apply when the UTT regime comes into force from 1 April 2022: that 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 (as stated in the public domain or in dealings with HMRC).

A third trigger – which would have applied where there was a substantial possibility that "a tribunal or court would find the taxpayer’s position to be incorrect" – appears to have been removed. However, the announcement states that the Government will continue to consider this third trigger for potential inclusion in the rules at a later stage.

It is important to note that during the recent consultation, many stakeholders were concerned about the subjective nature of the third trigger and will welcome the news that, for the time being at least, this trigger will not form part of the regime. However, it remains to be seen whether the Government will re-introduce it.

Diverted profits tax: Interaction with corporation tax closure notices and amendment to relieving provisions

Draft legislation, which takes effect from 27 October 2021, has been published to extend the time period in which companies that have received a diverted profits tax (DPT) charging notice are able to amend their corporation tax returns during the DPT charging notice period. The period is extended from the first 12 months of the review period to any time up until the last 30 days of the review period.

Such amendments can be made so far as they remove taxable diverted profits and ensure that these profits are subject to corporation tax rather than DPT. In addition, the draft legislation clarifies that such amendments will take effect on the date of the amendment and not the date on which HMRC issues a corporation tax enquiry closure notice.

Additionally, HMRC will be precluded from issuing a corporation tax enquiry closure notice where a DPT charging notice review period is ongoing. This change applies from 27 October 2021 but will also impact any application to the First-tier Tribunal for a closure notice made on or after 27 September 2021, where the Tribunal issues a direction on or after 27 October 2021 which requires HMRC to issue a closure notice.

The change and clarification regarding corporation tax return amendment timing and effect and its interaction with DPT is very welcome. This rectifies and puts into legislation a matter which EY UK previously raised with HMRC.

The legislative change preventing the issuance of a closure notice appears to be in response to the First-tier Tribunal decision in Vitol Aviation and Ors on 27 September 2021, where HMRC was directed by the Tribunal to issue closure notices to give effect to adjustments which were the subject of DPT charging notices. It is unclear how many taxpayers would be affected by the application of this restriction to closure notice applications made on or after 27 September 2021, i.e., a month before the draft legislation was issued, but this appears to introduce an unwelcome element of retrospective legislation.

Mutual Agreement Procedure decisions relating to the diverted profits tax

It has been announced that legislation will be introduced to confirm that effect can be given to the outcome of an application for relief from DPT under Mutual Agreement Procedure (MAP) in accordance with a relevant Double Tax Treaty.

This legislation has not yet been published in draft form, but will be introduced in the Finance Bill 2021-22, and is expected to have effect in relation to any MAP decisions involving DPT issued after 27 October 2021.

Although the detail of the proposed legislation is yet to be seen, this change seems to confirm that DPT can be subject to a MAP process which is an important and welcome clarification for companies affected by this issue.

Next steps

On 4 November 2021, the UK Government will publish Finance Bill 2021-2022, providing the detail on tax measures to be implemented now. If the Government follows the timetable for Autumn Budgets set out in 2017 (when there was a proposal to move to one fiscal event per year), we may see Royal Assent to the Finance Bill in the first quarter of 2022.

As a reminder, some of the draft legislation for the Finance Bill has previously been released for consultation – this includes draft clauses relating to the notification of uncertain tax treatments regime, and the new residential property developer tax.

In addition, we expect a “Tax Administration and Maintenance Day” with further announcements before the end of the year (perhaps on similar lines to the Tax Policy and Consultations Day that followed the UK Spring Budget earlier this year).


For all the latest Budget developments, visit our dedicated webpage here.

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

Ernst & Young LLP (United Kingdom), London

Ernst & Young LLP (United Kingdom), Manchester

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


The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.


Copyright © 2024, Ernst & Young LLP.


All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.


Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.


"EY" refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.


Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct Opt out of all email from EY Global Limited.


Cookie Settings

This site uses cookies to provide you with a personalized browsing experience and allows us to understand more about you. More information on the cookies we use can be found here. By clicking 'Yes, I accept' you agree and consent to our use of cookies. More information on what these cookies are and how we use them, including how you can manage them, is outlined in our Privacy Notice. Please note that your decision to decline the use of cookies is limited to this site only, and not in relation to other EY sites or Please refer to the privacy notice/policy on these sites for more information.

Yes, I accept         Find out more