July 21, 2022
UK Government releases documents for consultation prior to Finance Bill 2022/23
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:
This Alert summarizes the various pieces of legislation.
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:
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:
New consultations and consultation responses
The Government has published two new consultations on:
It has also published summaries of responses to the following discussion documents and consultations:
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.
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