Autumn Budget 2021: Business tax

Asset holding companies

A new regime will take effect from 1 April 2022 for qualifying asset holding companies (QAHCs) and certain payments they make. A QAHC is defined broadly speaking as owned at least 70% by diversely-owned funds, or certain institutional investors and mainly carrying out investment activity with no more than insubstantial ancillary trading.

The aim of the new regime is to ensure that investors are taxed broadly as if they invested in the underlying assets invested in by the QAHC and that it pays no more tax than is proportionate to the activities it performs. While the regime for QAHCs is based on existing tax rules, it includes various modifications including:

• Exempting gains on disposals of certain shares and overseas property by QAHCs.
• Allowing deductions for certain interest payments that would usually be disallowed as distributions.
• Disapplying the obligation to deduct a sum representing income tax at the basic rate on payments of interest.
• Switching off the late paid interest rules so that, in certain situations, interest payments are relieved in the QAHC on the accruals basis rather than the paid basis.
• Entry and exit provisions, including the rebasing of certain assets and the creation of a new accounting period when a company enters and exits the regime.

Find out more:

• New tax regime for asset holding companies (gov.uk)

Creative sector tax reliefs

As a major boost to the creative sectors in the UK, various extensions and improvements are being made to the tax relief regimes applicable to these sectors.

Theatre, orchestra, museums and galleries exhibition reliefs

The rates of relief available will be increased temporarily from 27 October 2021 to 31 March 2023. Intermediate rates will then apply for the year to 31 March 2024 before then returning to their pre-Budget levels on 1 April 2024.

The government will clarify some of the rules applicable to these reliefs to ensure they are better targeted and to make it easier for touring museum and gallery exhibition production companies to claim relief for touring.

Museums and galleries exhibition tax relief, which was due to expire in March 2022 will be extended to 31 March 2024. The relief will continue to be monitored in the meantime, with a view to making a long-term decision regarding its future.

Find out more:

• Cultural Relief Rate Rises for Theatre, Orchestra, and Museums and Galleries Exhibition Tax reliefs (gov.uk)
• Theatre, Orchestra, and Museums and Galleries Exhibition Tax reliefs (gov.uk)
• Extension to Museum and Galleries Exhibition Tax Relief sunset clause (gov.uk)

Film and high-end TV tax reliefs

Where a film is initially intended for theatrical release in cinemas but subsequently the intention changes for it to be broadcast or available for stream on TV, the production no longer remains eligible for film tax relief and cannot attract high-end TV tax relief either.

Changes to the qualifying conditions for these reliefs from 1 April 2022 will mean that a film will continue to benefit from tax relief going forward if such a switch in intention takes place during the course of production activities.

Find out more:

• Switch between Film Tax Relief and High-End TV Relief during production (gov.uk)

R&D tax relief reform

Although few details were provided on Budget Day, the Chancellor announced reform of the research and development (R&D) tax relief regime to take effect from April 2023.

The changes to be introduced include expanding qualifying expenditure to encompass data and cloud computing costs, as well as measures designed to ensure that only R&D activity carried out in the UK is incentivised.

The government had consulted on the design of the R&D tax relief regime earlier in 2021 so it is possible that other changes suggested through the consultation process will also be implemented.

Response to accounting changes for insurance contracts

A new accounting standard, IFRS 17, is expected to become mandatory for insurance companies that prepare their accounts under international accounting standards for periods of account beginning on or after 1 January 2023.

IFRS 17 will affect the timing of recognition of insurers’ profits and losses. The transition from existing practice to adoption of IFRS 17 may create large cashflow and regulatory consequences. Therefore, an enabling power is being introduced to allow the government to introduce regulations to allow the effect of the transition to be spread for tax purposes. A consultation on the measure is expected to be launched later this year.

The government will also be given the power to revoke the requirement for life insurance companies to spread acquisition expenses over seven years for tax purposes.

Find out more:

• Response to accounting changes for insurance contracts (gov.uk)
• More ICAEW support on IFRS 17

Hybrid and other mismatches rules

Finance Act 2021 (FA 2021) introduced a number of changes to the hybrid and other mismatch rules to ensure that the regime operates proportionately and as intended. This planned measure makes a change with the same intention and amends a chapter of the legislation that seeks to counter mismatches involving payments to hybrid entities.

This change will deem certain transparent entities to be partnerships and the members of those entities to be partners, thereby ensuring that they do not meet the conditions for triggering a counteraction under this chapter.

Find out more:

• Hybrid and other mismatches (gov.uk)

Corporation tax carried forward loss relief rules and IFRS 16

An amendment is being introduced with retrospective effect for accounting periods beginning on or after 1 January 2019 to ensure that companies adopting IFRS 16 benefit from an exemption from the restriction on carried forward losses when they are in financial distress.

A tax- deductible provision arises when a lessee’s lease becomes onerous (meaning that the cost of meeting the lease exceed the benefits the company will receive in return). If there is a lease renegotiation or a subletting of the property, the onerous lease provision may be partially reversed which would then be treated as a taxable credit.

Without the proposed amendment, the carried forward loss relief rules would restrict the use of any losses arising from the provision to 50% of any profits from the reversal exceeding the company’s deductions allowance.

An exemption from the 50% restriction applies where reversals of onerous lease provisions form part of a corporate rescue. However, owing to the narrow wording of that exemption, it would not apply in cases where companies have adopted IFRS 16. The amendment ensures that the exemption also applies in these cases.

Find out more:

• Amendment to the reform of loss relief rules for corporation tax (gov.uk)

Notification of uncertain tax treatments by large businesses

As previously announced, a new regime is being introduced which will require large businesses with either a turnover of more than £200m per annum or a balance sheet total over of more than £2bn to notify HMRC of positions taken in tax returns that are “uncertain”.

An uncertain tax treatment is defined by reference to two criteria:

1. That a provision has been made in the accounts for the uncertainty; or
2. That the tax treatment applied is not in accordance with HMRC’s known position.

A third criterion, which was included in the draft legislation published in July 2021, is being considered further by the government and may be included later. This criterion is that there is a substantial possibility that a tribunal or court would find the taxpayer’s position to be incorrect in material respects.

A threshold tax advantage of £5m will apply, such that any uncertain amounts where the alternative tax outcome is less than £5m more than the tax included in the relevant tax returns will not need to be notified.

The tax returns to which this regime will apply are corporation tax, VAT, business income tax and PAYE that are due to be filed on or after 1 April 2022.

Find out more:

• Notification of uncertain tax treatment for large businesses (gov.uk)

Diverted profits tax

Diverted profits tax (DPT) has not previously been capable of being the subject of a mutual agreement procedure (MAP) decision between the UK and another territory under the terms of the relevant double tax agreement. This change will ensure that MAP decisions reached after 27 October 2021 can include DPT as, or among, their subject matter. This will make it easier for companies to obtain relief where they suffer DPT in the UK as well as taxation on the same profits overseas.

The DPT rules are also being amended from 27 October 2021 to ensure that relief can be given from the tax where a company makes an amendment to its company tax return so that profits become subject to corporation tax instead.

Finally, amendments are being made to ensure that HMRC cannot issue a corporation tax closure notice in respect of profits subject to a DPT charge until after the review period ends.

Find out more:

• Mutual agreement procedure decisions relating to the diverted profits tax (gov.uk)
• Diverted profits tax - interaction with corporation tax closure notices and amendment to relieving provisions (gov.uk)

Abolition of cross-border group relief

This change removes, for accounting periods beginning on or after 27 October 2021, the possibility that UK resident companies can claim group relief for the losses suffered by their EEA-resident subsidiaries in the same group.

The UK’s cross-border loss relief mechanism, as it is commonly known, has been very difficult for companies to take advantage of, largely because to claim relief in the UK, all other possibilities for use of those losses must have been exhausted. Practically, this only ever applies where there are no possibilities for carrying forward the loss in the subsidiary’s member state or where the subsidiary was liquidated before the end of the accounting period in which the loss arose.

The rules relating to losses of UK permanent establishments (PEs) of non-UK resident companies are also being aligned (whether they are resident in the EEA or elsewhere). For accounting periods beginning on or after 27 October 2021, all non-UK resident companies can only surrender as group 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.

Find out more:

• Abolition of cross-border group relief (gov.uk)

Freeport tax sites

In the Spring Budget 2021, the government announced that following the completion of a bidding process, it would create eight freeports in different regions of England. The current freeports initiative is very much the brainchild of the Chancellor, Rishi Sunak, and forms part of the “levelling up” agenda.

The purpose behind freeports is to encourage businesses to create new hubs of global trade that will transform economic prospects and job opportunities for local communities. Freeports are special economic areas where the normal custom rules do not apply and which allow for duties etc on imports of goods to be suspended or deferred until the either goods enter the domestic market or are re-exported, in the latter case potentially resulting in no customs duty being payable.

In addition, within the wider freeport area, special tax sites of up to six square kilometres may be designated which will provide very generous tax incentives for development and operations within them, including:

• enhanced capital allowances on plant and machinery and structures and buildings,
• stamp duty land tax relief on the purchase of land,
• business rates relief, and
• an employers’ NIC holiday for up to three years on new employees in a freeport zone, up to a £25,000 limit. 

The tax sites bear some comparison with the former enterprise zones, but the reliefs available are far more generous.

It has now been announced that the first designated tax sites will be in Humber, Teesside and Thames freeports. Freeports will be able to begin initial operations from November 2021.

The UK government remains committed to establishing at least one freeport in Scotland, Wales and Northern Ireland but, as yet, no freeports have been designated beyond those announced in England.

Find out more:

• Statement on the designation of freeport tax sites (gov.uk)
• Maps of freeports and freeport tax sites (gov.uk)

Extension of the higher AIA limit

The annual investment allowance (AIA) is a 100% capital allowance that companies and unincorporated businesses can claim in respect of expenditure on eligible plant and machinery.

The higher limit of £1m expenditure per annum, due to expire on 31 December 2021, is being extended to 31 March 2023.

The intention is that the AIA will then revert to its permanent level; of £200,000 on 1 April 2023, the date when the 130% super deduction available on most main rate pool expenditure incurred by companies is also scheduled to expire.

If the annual limit of AIA expenditure does return to £200,000 on that date, transitional rules will apply to businesses with a tax period that spans it.

The extension of the enhanced AIA is most likely to benefit unincorporated businesses and any business purchasing assets with an expected life of at least 25 years or integral features (such as water and electrical systems incorporated into buildings) in 2022 and Q1 of 2023 as the super deduction does not apply to these businesses and types of expenditure.

Find out more:

• AIA extension (gov.uk)

Vehicle taxation: technical amendments regarding vehicle emission certification

Official documentation certifies the level of a vehicle’s carbon dioxide (CO2) emissions for the purposes of capital allowances, company car tax (CCT), and vehicle excise duty (VED). This is represented by a European Union (EU) certificate of conformity, or a UK approval certificate.

Changes are being made to update this documentation to include new certificates of conformity that will be introduced through the new GB vehicle type approval scheme.

For the purpose of capital allowances, this measure will also ensure that the applicable CO2 emission figure from the official documentation will be that certified under the worldwide harmonised light vehicle test procedure (WLTP).

Changes will be made to include the new certificates of conformity alongside existing references to EU or EC certificates of conformity in:

• s268C, Capital Allowances Act 2001,
• Ch 6, Pt 3, ITEPA 2003, and
• Sch1, Vehicle Excise and Registration Act 1994. 

Amendments will also be made to treat the applicable emissions figure as that arising from the WLTP.

Find out more:

• Technical amendments regarding vehicle emission certification (gov.uk)

Tonnage tax reform

Tonnage tax is an alternative method of calculating corporation tax profits that qualifying shipping companies can elect to apply for a prescribed period. Under these rules, a set profit is deemed to be earned for tax purposes by each eligible ship operated by the company by reference to the net tonnage of the ship concerned.

At present, a tonnage tax election is in force for 10 -years from the beginning of the accounting period in which the election is made. This period is being reduced to eight years from 1 April 2022. 

HMRC will also be given the power to admit elections made outside the normal period allowed where there appears to be a good reason to do so.

Complex flagging rules introduced in 2005 will also be removed. In overview, these rules refer to the national shipping registers that vessels are included on and were introduced to encourage shipping operators to register their vessels in EU/EEA member states. This means that eligible companies will now have more freedom to register their ships in other territories and still remain subject to the UK tonnage tax regime.

Finally, rules relating to the taxation of distributions from overseas shipping companies will be amended to remove reference to “control by companies’ resident in EU member states”. As such inter-company distributions are now generally exempt from tax, this change will only have a practical impact in very limited circumstances.

Find out more:

• Tonnage Tax reform (gov.uk)

Migration of company incorporation to the UK

The government is consulting on the introduction of rules which would allow a company incorporated overseas to move its place of incorporation to the UK. This is not possible under existing company law, which means that the UK is behind the curve compared with around 50 countries and jurisdictions around the world.

At the moment, companies and groups need to undertake complex restructuring, such as incorporating a new UK holding company to acquire the shares of the existing overseas company and transferring trades and assets to the UK company as required.

These transactions create additional administration and potentially overseas tax charges on the companies concerned (and potentially UK tax charges on any UK resident shareholders).

The government cites a number of potential economic benefits to making it easier for companies to transfer their place of incorporation to the UK, including increased investment and employment in the UK by the companies themselves and the UK-based businesses servicing them.

Among various other areas, the government is consulting on the tax implications and potential changes of law that would need to be introduced in response to the proposed change in company law. These include:

• determining the tax residence location of companies “re-domiciling” to the UK,
• potential anti-avoidance measures to deal with corporate tax loss importation,
• stamp taxes, and
• VAT issues.

Corporation tax surcharge on banks and building societies

Since 2010, banks and building societies have paid a corporation tax surcharge on any profits in excess of a surcharge allowance. This surcharge ensures that all but the smallest banks pay tax at a higher rate than non-banking companies.

With effect from 1 April 2023, the surcharge will be reduced from 8% to 3%. Consequently, when taken together with the general increase in the rate of corporation tax, which rises from 19% to 25%, on 1 April 2023, banks will pay tax on their surcharge profits at a combined rate of 28%, so an overall increase of 1%.

Surcharge profits are calculated on the same basis as corporation tax, but with some reliefs denied. Groups with banking companies (banking groups) have a surcharge allowance of £25m, which can be assigned to banks within the group. The surcharge is then charged on any surcharge profits that exceed this amount. The surcharge allowance available for banking groups will increase from £25m to £100m from April 2023.

Find out more:

• Amendments to the surcharge on banking companies (gov.uk)

Real estate investment trusts

Subject to meeting certain conditions, a company may notify HMRC that it is to be treated as a UK real estate investment trust (REIT). Consequently, its property rental profits and gains are generally exempt from corporation tax, subject to ongoing conditions such as a requirement to distribute 90% of its exempt profits, which are in turn treated as property rental profits in investors’ hands.

Following consultation in 2020 on the tax treatment of asset holding companies and subsequent to further consultation proposing changes to the REIT regime in December 2020, draft legislation has now been published.

The changes are intended to remove restrictions and administrative burdens no longer deemed necessary, and to enhance the attractiveness of the UK for real estate investment, in particular to institutional investors.

The measure will have effect from 1 April 2022.

Find out more:

• Real estate investment trusts: amendments (gov.uk)

Residential property developer tax

As previously announced, a new tax is being introduced from 1 April 2022 which will apply to groups and companies undertaking residential property development where that activity creates annual profits in excess of a £25m allowance.

Profits are calculated using corporation tax rules, but an adjustment is made to identify only the profits that relate to the residential property development activity. There will also be a restriction in respect of finance costs.

The £25m allowance can be allocated by the group between its companies and profits in excess of this allowance will be taxed at a rate of 4%.

Any tax due will be reported and paid as part of the company’s corporation tax return.

Find out more:

• Residential property developer tax (gov.uk)

Basis period reform

• See "tax administration".

Business rates and online sales tax

The government has published a final review of business rates and has made a number of announcements to help alleviate some of the burdens placed on businesses, especially for businesses in the hospitality sector.

There has been a concern for many years that business rates impacts “bricks-and-mortar” businesses more than online businesses and that this imbalance is fuelling the death of the high street. Before the Budget, there was much speculation that the government might introduce an online sales tax to help fund a reduction in the business rates charge.

The final review makes it clear that there is little appetite in government to consider making radical changes to the underlying structure of business rates. However, a number of changes have been proposed to improve the existing system, including:

• Moving to three-yearly revaluations – currently the aim is for five years but the proposed revaluation for April 2020 was cancelled and will now take place in England in April 2023, moving to a three-year cycle from that date.
• Freezing the business rates multiplier in April 2022 for a second year running. This is the mechanism whereby rates are usually increased annually in line with CPI. While this may not seem significant, the net benefit to business per year over the review period is about £900m per year.
• From April 2023, the introduction of a new relief which will give 100% rates relief for a year on improvements made to an existing property which increase its rateable value. The government will publish a consultation document on how best to implement this relief, which will take effect in 2023.
• Supporting the net zero target by introducing, from 1 April 2023 for a period of 12 years, a targeted business rate exemption for eligible plant and machinery used in onsite renewable energy generation and storage, and a 100% relief for eligible heat networks.
• For the year 2022/23, introducing a new 50% business rates relief for retail, hospitality, and leisure sectors, capped at £110,000. 

And what about an online sales tax? The government announced that it will shortly publish a consultation document outlining the arguments for and against an online sales tax which might be used (perhaps even hypothecated) to reduce business rates. Given that this consultation will be about the merits of such a tax rather than explore the detail of how such a tax might be designed, it looks unlikely we will see any such tax introduced in the immediate future.

National insurance for self-employed individuals

The September 2021 CPI figure of 3.1% is the basis for setting all national insurance limits and thresholds, and the rates of class 2 and 3 national insurance contributions for 2022/23. The class 3 rate is set to increase from £15.40 a week in 2021/22 to £15.85 a week in 2022/23.

The class 4 upper profits limit is aligned with the income tax higher rate threshold which is frozen at £50,270 from 6 April 2021 until 5 April 2026.

The class 4 NIC rate increases from 9% in 2021/22 to 10.25% 2022/23 as a result of the introduction of the health and social care levy (HSCL).