With thanks to our colleagues in BDO UK.
CT rate increase to 25% confirmed, reduction in UK bank corporation tax surcharge
Bank surcharge reduced to 3% - corporation tax rate increase to 25% confirmed
The Chancellor confirmed that the main corporation tax rate would increase to 25% as enacted in Finance Act 2021.
As anticipated, the Chancellor also announced a cut in the rate of the UK bank corporation tax surcharge from 8% to 3%. In addition, the surcharge allowance, the taxable profits above which banks pay the surcharge, will increase from £25m to £100m.
The announcements today will mean that the combined corporation tax rate for banks above the new surcharge allowance of £100m will rise by 1% to 28%. The changes will have effect for the accounting periods beginning on or after 1 April 2023.
The corporation tax rate rise announced in the March Budget combined with the surcharge would have meant banks paying a combined corporation tax of 33% on profits over £25m. The surcharge, which came into effect on 1 January 2016, applies a corporation tax surcharge on the taxable profits of banks. It applies to banks, including building societies, which are within the charge to UK corporation tax, meet certain definitions of a bank and have annual profits relating to banking activities over £25m.
Extension of the Annual Investment Allowance to 31 March 2023
The temporary increase in the limit of Annual Investment Allowance (AIA) of £1 million per annum will be extended from 31 December 2021 to 31 March 2023 to align with the end dates of the super-deduction and special rate allowance.
This measure will benefit businesses investing in qualifying plant and machinery in the period to 1 April 2023. It will particularly help those businesses that are not eligible for the super-deduction which is only available to companies subject to corporation tax. It enables the cost of qualifying expenditure on plant and machinery, up to the limit of £1 million, to be offset against taxable profits in the year of expenditure.
The AIA is expected to revert back to the permanent level of £200,000 from 1 April 2023. Transitional provisions will apply where businesses have a chargeable period that spans the date of reversal to the AIA limit by apportioning the periods before and after the change in rates. The transitional rules will need to be considered to ensure opportunities to maximise the AIAs available are not overlooked.
Technical amendments regarding Vehicle Emission Certification
Technical amendments have been made to the certification process for determining cars capital allowances, company car tax (CCT) and vehicle excise duty (VED) treatments which are based on the level of a vehicle’s carbon dioxide (CO2) emissions.
The documentation for certifying level of CO2 emissions has been represented by a European Union certificate of conformity or a UK approval certificate. Following the UK’s withdrawal from the EU, European certificates have no longer been automatically recognised for vehicles for use on roads in Great Britain (GB). Since January 2021, a provisional GB approval scheme has been in operation.
During 2022, this provisional approval scheme will be replaced with a comprehensive approval scheme with new certificates of conformity for these purposes. An update to the official approval documentation recognised for determining the level of CO2 emissions for these purposes will be introduced via a new GB vehicle approval scheme.
For the purposes of capital allowances, the amendments will also ensure the CO2 emission figure from the official documentation will be certified under the Worldwide Harmonised Light Vehicle Test Procedure (WLTP).
The amendments will update relevant legislation to ensure that for capital allowances, CCT and VED purposes, the new certificates of conformity will be the basis of determining the level of a vehicle’s CO2 emissions.
Significant changes to R&D tax reliefs from April 2023
Three major changes to the R&D tax relief legislation will come into effect from 1 April 2023. These are:
- the expansion of R&D qualifying expenditure to include data and cloud computing
- a restriction or possible prohibition on the inclusion of overseas costs in UK R&D claims
- further targeted anti-avoidance measures to counter abuse of the R&D tax relief regime
The likely prohibition of overseas costs will particularly impact UK-headquartered multi-national groups with development centres located overseas as typically a large proportion of their qualifying expenditure consists of overseas costs.
Indeed, the Chancellor noted that while Companies claimed UK tax relief on £48bn of R&D spending, UK business investment was around half of that, at just £26bn. However, the change brings the UK R&D regime in line with most R&D regimes worldwide which focus purely on domestic expenditure.
Conversely, the expansion of qualifying expenditure to include cloud computing and data development costs in R&D claims will be welcomed by many claimant companies. In particular, those who have a digital presence or are active in the financial services industry as these costs represent a significant proportion of their software development spend.
More detail on the above reforms to the R&D legislation and the additional anti-avoidance measures will be released later in the Autumn and all changes will come into effect from 1 April 2023.
If you are likely to be affected by the R&D regime changes announced in the budget please get in touch with your local BDO contact.
Residential property developer tax
Residential Property Developer Tax (RPDT) will be introduced from April 2022 at a rate of 4% on company profits from residential property development trading activity. This will be treated as an extension to corporation tax and will be payable on group profits from residential property development activity above £25m. Special rules will apply where a group is a participant in a joint venture and interest will not be deductible in computing chargeable profits. Exemptions will apply where residential property development activity is undertaken for charitable purposes and for some types of communal dwellings such as care homes.
Businesses developing residential property as investment assets for letting will not currently be exposed to the charge, although it could be extended to them in the future.
Development by charities and subsidiaries of charities will also be excluded which should mean that most types of social housing development will not be subject to RPDT. Development of some communal dwellings such as care homes and purpose-built student accommodation will also be excluded.
As RPDT will only apply to companies, it will be administered as part of the corporation tax system with the same filing and payment dates but will, to some extent, operate as a separate tax calculated as part of the annual corporation tax return. Profits for RPDT will be as calculated for corporation tax purposes but with the exception that interest will not be deductible. A separate calculation will, therefore, be required of the level of profits chargeable to RPDT. This calculation will need to determine a just and reasonable apportionment of profits where amounts are derived from activities other than chargeable residential property development activity to identify those profits within the scope of RPDT.
Special rules modelled on the rules for corporation tax will apply to losses with relief being limited to losses arising for RPDT purposes from April 2022.
Each group will have an allowance of £25m of profits which will not be subject to the charge. However, where a group participates in a joint venture, special rules will apply to reduce the level of allowance available to the group to reflect its share of amounts not taxed within the joint venture vehicle.
Redomiciling companies consultation
Consultation on re-domiciliation of foreign incorporated companies
Currently, a foreign incorporated company is not able to re-domicile and change its place of incorporation to the UK while maintaining its legal identity as a corporate body. The Government intends to change this and is seeking views on a UK re-domiciliation regime. The consultation also considers the merits of outward re-domiciliation which would potentially allow a UK incorporated company to re-domicile to a foreign jurisdiction.
Together with the corporate law and regulatory requirements, there are a number of tax considerations which would have to be worked through as part of any change. For example:
- A company is UK tax resident if it is incorporated in the UK or its central management and control is in the UK, subject to being treated as non-UK tax resident by virtue of a double tax agreement. Would re-domiciling a foreign company to the UK automatically make the company UK tax resident or would the central management and control of the company also need to be moved to the UK?
- If the UK tax residence of a company is migrated to the UK, from re-domiciliation, what would be the capital gains and intangible tax base of the company’s assets?
- Currently, when a company migrates their tax residence to the UK from an EU jurisdiction assets are brought in at their market value. Should this be expanded to non-EU jurisdictions?
The consultation also considers whether there is a need to bring in additional anti-avoidance provisions around the loss importation rules, together with personal taxation changes for the owners of companies, VAT, stamp duty and stamp duty reserve tax including if an outward re-domiciliation regime is introduced.
The deadline for responses is the 7 January 2022. You can find more information here.
Diverted profits tax
Diverted profits tax (DPT) charges tax at the rate of 25% and aims to deter and counteract the diversion of profits from the UK by large groups.
Currently companies charged to DPT and avoided permanent establishments are permitted to amend their corporation tax return during the first 12 months of the review period to enable profits to be taxed at the CT rate of 19%. Amendments to the legislation will extend this period to the whole of the review period except the last 30 days. The changes will also ensure that an enquiry into the company tax return for the accounting period may not be closed during the review period.
Legislation will also be introduced in Finance Bill 2022 to make DPT one of the taxes in respect of which, subject to the terms of the relevant treaty, a Mutual Agreement Procedure (MAP) outcome can potentially be implemented.
The changes will have effect for any DPT review periods which are open at 27 October 2021 or are opened after this date and for any MAP decisions involving Diverted Profits Tax which are reached after 27 October 2021.
Abolition of cross border loss relief
As the UK has now left the EU, the legislation permitting UK companies to claim group relief in limited circumstances for losses incurred in the EEA will be repealed. In addition, legislation that limits the amount of losses that an EEA resident company trading in the UK through a UK PE can surrender as group relief will be amended to align the rules for EEA-resident companies with companies resident elsewhere in the world.
Following the judgment in Marks & Spencer (C 446/03), the group relief provisions had been amended to allow cross-border group relief subject to certain conditions in order to comply with the UK’s obligations as an EU member state.
The group relief provisions currently allow non-UK resident EEA companies to surrender losses as group relief to UK companies in limited specific circumstances. In addition, EEA companies trading through a UK PE can only surrender losses of its UK PE if those losses have not been actually deducted from non-UK profits of any person. Any other non-UK resident company can only surrender losses of a UK PE if it is not possible for those losses to be deducted from non-UK profits of any person for any period.
These changes will apply for accounting periods ending after 27 October 2021, and where a company’s accounting period straddles this date, it will be deemed as separate accounting periods for the purpose of applying these changes.
Hybrids: Transparent entities
A new draft clause extends the current exemption for partnerships within Chapter 7 of the Hybrid rules to certain other transparent entities, such as US Limited Liability Companies, by deeming members in those entities to be partners for the purposes of Chapter 7.
However, this new extension should not apply to a transparent entity established in territory that does not charge tax on income.
The extension is expected to have retrospective effective back to 1 January 2017. This will leave some taxpayers in a challenging situation prior to December filing deadlines, if the new clause is expected to be beneficial but is not yet within UK tax law.
This clause is the replacement of the change to the definition of a hybrid entity originally included within Finance Bill 2021 before being removed. The draft clause will be included in the Finance Bill 2022.
Tonnage Tax
The Government has announced its first substantive reforms to UK tonnage tax since it was introduced in 2000. Following the UK’s departure from the EU, the Chancellor’s aim is to maintain the UK’s status as a leading country in the maritime industry by creating a more flexible and attractive system that will encourage overseas shipping groups to relocate to the UK.
The main changes announced were:
- The complex flagging rules imposed on the UK by the EU from 2005 will be abolished. Instead, the UK flag will be a more important factor in determining whether a company satisfies the strategic and commercial management requirement for entry into tonnage tax. This is a welcome simplification to the rules for shipping companies already in the tonnage tax regime, especially where these rules may have impacted commercial decisions on flagging in the past.
- The current 10-year exclusion on re-joining the tonnage tax regime will be reduced to 8 years. There will be greater discretion to admit companies who missed an election window, if there were good reasons. Further guidance on what HMRC will accept as good reasons will be key.
The ability to grant an additional election window into tonnage tax remains in place but there is no indication as yet on whether this will be made available to companies that previously qualified and would therefore need to rely on an additional election window to enter tonnage tax.
- The guidance on qualifying vessels will take account of developments in technology, to allow additional types of vessels to potentially qualify for tonnage tax. This will be combined with a review of existing HMRC guidance to reflect the importance of investment in decarbonisation and pollution control when looking at the qualifying status of vessels.
- The permitted ancillary passenger-related income limit has been raised from 10% to 15%. This should improve not only administration but also vessels carrying passengers should benefit from the increased limits, in respect of income such as on-board sales and gambling.
- A further review of whether the scope of tonnage tax will be extended to include ship management activities was also announced. In practice, this may assist UK-based operations but many groups prefer to locate their technical management teams abroad. Therefore, changes may not influence commercial decisions on the location of these activities.
Overall, the above changes should make the tonnage tax regime more attractive without any cost to the Treasury. A review of existing powers regarding the cadet training commitment was also indicated in the announcement and many shipping groups will want to understand these future changes as well before considering their tonnage tax position.
Business rates reform
While business rate reform for businesses in England was announced during the Budget, we await to see if the NI Executive will announce extensions for NI rate relief.
Contact us for further information or advice.