AUTUMN BUDGET 2021

Introduction

I won our office Budget sweep by correctly predicting the amount of the increase in the National Living Wage. Some had not seen the leak and now think I must have friends in high places. But, with all these leaks, the Budget now feels like a soap opera with new episodes each day. I am guessing today must have been the real Budget, as we would not be producing this summary otherwise. The Welsh Budget will be in December, but I am sure that will be entirely free of leaks. I am tempted to leak this weekend’s football results, but I am told these really must be kept secret until 5 pm on Saturday. That must be why they are called the classified results.

By the way, if this introduction should finish abruptly in mid-sentence, it is not a technical glitch. It will be that the Government has just put COVID Plan B into operation with immediate effect. Not really of course, we all know that will not happen until after the COP26 jamboree. COP26? I think that was an HMRC leaflet when I were a lad.

Today’s event was billed as a Budget and Spending Review, and from the Chancellor’s speech it sounded more like the latter than the former. As always though, there is much more to be found in the accompanying documentation. The capital allowances annual investment allowance seems to be a Budget perennial now, but the extension of the £1 million limit to March 2023 will be welcomed nonetheless. So will the changes to the cultural tax reliefs; one cannot help but feel that theatres etc have not previously been given too much in the way of assistance since the pandemic struck. Sometimes a Budget can also be notable for what it does not do, and in this respect it is a relief to see capital gains tax rates and pensions tax relief unchanged.

Of interest to me is the decision to legislate to reverse the decision in HMRC v Wilkes, so that HMRC can raise valid discovery assessments to collect an amount of tax due where there is not an amount of assessable income; this case concerned the High Income Child Benefit Charge, but there are other tax charges that would have been affected by Wilkes. HMRC is appealing the decision, but clearly wants to insure against defeat.

So onwards to the detailed proposals. As always, the intention is to summarise the key points and not to attempt to cover everything announced today, or indeed in the last few days.

Business Tax

Residential Property Developer Tax

The government had previously announced a new residential property developer tax as part of its measures to address unsafe cladding on high-rise buildings. It will apply with effect from 1 April 2022 to the relevant profits arising on or after this date of companies undertaking residential property development activities. It was confirmed in the Budget that the tax will be charged at 4% on profits exceeding an annual allowance of £25 million.

See Overview of tax legislation and rates (Oct 2021)), para 1.40 Residential Property Developer Tax: consultation and Residential Property Developer Tax.

Basis period reform

As announced in the summer, the Government is to legislate in Finance Bill 2022 to reform the basis period rules for self-employed individuals and partners. A business’s profit or loss for a tax year will be the profit or loss arising in the tax year itself, regardless of the accounting date of the business. On transition, all basis periods will be aligned to the tax year and all outstanding overlap relief given. The draft legislation published on 20 July 2021 will be revised to incorporate suggestions following consultation, including more flexible use of overlap relief in the transitional year and provisions to reduce the impact of transition profits on allowances and benefits. The principal change from the summer announcement though is that the reform will take place one year later than originally planned. The new rules will now come fully into force on 6 April 2024, with 2023/24 being the transitional year.

See Overview of tax legislation and rates (Oct 2021)), para 1.4 and Basis period reform.

Capital allowances

The annual investment allowance (AIA) had previously been increased temporarily from £200,000 to £1 million, but this was due to end on 31 December 2021. The increase will now extend for a further 15 months until 31 March 2023 for both income tax and corporation tax. As always when the AIA changes, there will be transitional rules to determine the AIA available for accounting periods spanning the date of change, now 1 April 2023.

See Overview of tax legislation and rates (Oct 2021)), para 1.23 and Annual Investment Allowance extension.

Legislation will be included in Finance Bill 2022 to amend the capital allowances legislation to allow for vehicles certified through a new comprehensive vehicle type approval scheme (due to be introduced in 2022) when determining the level of a vehicle’s CO2 emissions. Similar amendments will be made to company car tax and Vehicle Excise Duty (VED). For capital allowances, the legislation will also confirm the applicable CO2 emissions figure to be used as that arising from the Worldwide Harmonised Light Vehicle Test Procedure. For capital allowances and company car tax, the legislation will take effect following Royal Assent. For VED, it will have effect for licences taken out on or after 3 November 2021.

See Overview of tax legislation and rates (Oct 2021)), para 1.24 and Technical amendments regarding vehicle emission certification.

Research & Development

From April 2023, R&D tax reliefs will be reformed to support modern research methods by expanding qualifying expenditure to include data and cloud costs. These changes will be legislated for in Finance Bill 2023 and take effect from April 2023.

Further details of these changes and next steps for the review will be set out in due course.

See Overview of tax legislation and rates (Oct 2021), para 2.9.

Corporate loss relief

Legislation will be introduced (to apply retrospectively for accounting periods beginning on or after 1 January 2019) to ensure that companies adopting IFRS 16 continue to benefit from the exemption from the loss carry forward restriction for companies in financial distress.

These changes will allow companies that are required to adopt IFRS 16 to benefit from an increase in the deductions allowance where they enter into lease renegotiations to avoid insolvency. This will ensure that companies accounting under both the pre-existing accounting standards and IFRS 16 will, in substance, benefit from the same treatment.

See Overview of tax legislation and rates (Oct 2021), para 1.22 and Amendment to the reform of loss relief rules for Corporation Tax.

Cross-border group relief

For accounting periods ending on or after 27 October 2021 the existing beneficial cross border group relief rules relating to EEA-resident companies are repealed. This is as a result of the UK’s exit from the European Union. Group relief rules relating to EEA-resident companies are to be brought into line with those for non-UK companies resident elsewhere in the world so that all non-UK resident companies can only surrender as group relief losses of a UK permanent establishment if it is not possible for the loss to be deducted from non-UK profits of any person for any period.

Transitional arrangements will apply for accounting periods which straddle this date

See Overview of tax legislation and rates (Oct 2021), para 1.16 and Abolition of cross-border group relief.

Diverted profits tax

Two changes relating to the administrative aspects of the diverted profits tax were announced, both of which will have effect from 27 October 2021. First, DPT will now be included as a tax covered by the UK’s double taxation treaties and so mutual agreement procedure (MAP) outcomes will be able to be implemented for companies who have sought relief from DPT under this procedure. The interaction between the DPT review period and company tax return enquiries will also be rationalised. This will be achieved by extending the time period in which a company tax return can be amended where there is a DPT review from the first 12 months of the DPT review period to the whole of the review period, other than the final 30 days. It will also not be possible for a closure notice for an enquiry into a company tax return to be given until the end of the DPT review period.

See Overview of tax legislation and rates (Oct 2021), paras 1.14, 1.15, Mutual Agreement Procedure (MAP) decisions relating to the Diverted Profits Tax and Diverted Profits Tax - interaction with Corporation Tax closure notices and amendment to relieving provisions.

Real Estate Investment Trusts (REITs)

From 1 April 2022, changes will be introduced in relation to the tax rules applying to REITs including some of the conditions that determine whether a company qualifies to be a UK REIT. The underlying objective of this measure is to alleviate certain constraints and administrative burdens to enhance the attractiveness of the UK REIT regime for real estate investment. Key changes include:

• removal of the requirement for REIT shares to be admitted to trading on a recognised stock exchange in cases where institutional investors hold at least 70% of the ordinary share capital in the REIT
• amending the rules requiring that at least 75% of a REIT’s profits and assets relate to property rental business (the ‘balance of business test’) to disregard non-rental profits arising because a REIT has to comply with certain planning obligations, and to ensure the items currently specified as excluded from the profits part of the test are disregarded in all parts of the test
• introduction of a new simplified balance of business test so that, if group accounts for a period show that property rental business profits and assets comprise at least 80% of group totals, a REIT will not have to prepare the additional statements which would be required to meet the full test

Creative Industries

A range of measures were announced in relation to the three “cultural” tax reliefs (Theatre Tax Relief (TTR), Orchestra Tax Relief (OTR), and Museums and Galleries Exhibition Tax Relief (MGETR)).

From 27 October 2021, there is a temporary increase in the rate of the three cultural tax reliefs, as follows:

• TTR and MGETR ― rates will increase to 45% (for non-touring productions) and 50% (for touring productions) respectively. From 1 April 2023, the rates will be 30% and 35%, and rates will return to 20% and 25% on 1 April 2024
• OTR ― rates will increase to 50% for expenditure taking place from 27 October 2021, reducing to 35% from 1 April 2023, and returning to 25% from 1 April 2024

In addition, other provisions confirm that legislation will be introduced such that:

• From the date of Royal Assent to the Finance Bill 2022, the MGETR relief will be available until 31 March 2024 - this relief was due to expire in March 2022
• From 1 April 2022, film productions qualifying for Film Tax Relief (FTR) that change during production to instead meet the criteria for High-End Television Tax Relief (HETV) will be able to continue claiming FTR without losing their right to access tax relief, which will benefit film productions in the longer term

See Overview of tax legislation and rates (Oct 2021), paras 1.10–1.13, Cultural Relief Rate Rises for Theatre, Orchestra, and Museums and Galleries Exhibition Tax reliefs, Extension to Museum and Galleries Exhibition Tax Relief sunset clause and Switch between Film Tax Relief and High-End TV Relief during production.

Bank surcharge

For accounting periods beginning on or after 1 April 2023, the bank surcharge rate will be reduced to 3% (from 8%) and the surcharge allowance will be increased to £100 million (from £25 million). Where a company's accounting period straddles 1 April 2023 the period will be split on a time apportionment basis for the purposes of the allowance and the reduced rate.

A review of the surcharge was announced at Spring Budget 2021. When this rate change is taken alongside the increase in the headline rate of corporation tax from 19% to 25% from April 2023, banks will be taxed at a combined rate of 28% on their profit.

See Overview of tax legislation and rates (Oct 2021), para 1.8 and Amendments to the surcharge on banking companies.

Asset Holding Companies (AHCs)

From 1 April 2022, a new tax regime for qualifying AHCs and some of the payments they make will be introduced. The regime will apply to certain AHCs that are used in a range of collective and institutional investment structures to hold investment assets. It will also apply to investment funds, institutions and individuals that invest in these structures.

The broad intention behind this regime is to ensure UK competitiveness as a location for asset management and investment funds. It operates so that investors are taxed broadly as if they had invested in the underlying assets and the intermediate holding companies pay no more tax than is proportionate to the activities they perform.

The regime will exempt from tax:

• gains on share disposals & overseas, property disposals
• profits of an overseas property business of a qualifying AHC, where those profits are subject to tax in an overseas jurisdiction

In addition, the following provisions will be modified:

• the late paid interest rules so that, in certain situations, interest payments are relieved in the qualifying AHC on the accruals basis rather than the paid basis
• the deeply discounted securities rules for corporates so that, in certain situations, the discount arising on any such security issued by the qualifying AHC is relieved on the accruals basis rather than the paid basis
• the transfer pricing exemption for small and medium-sized enterprises and adjustment of the participation condition to ensure the transfer pricing rules apply appropriately in relation to a qualifying AHC
• the deduction regime for interest payments so that deductions for certain interest payments that would usually be disallowed as distributions (along with necessary consequential changes to the hybrids rules) are allowed and in certain circumstances the obligation to deduct a sum representing Income Tax at the basic rate on payments of interest is disapplied
• the buy-back of share capital rules so that when a qualifying AHC repurchases its share capital from an individual, premiums paid will be allowed to be treated as capital rather than income distributions. In addition, repurchases by a qualifying AHC of share and loan capital which it previously issued will be exempt from Stamp Duty and Stamp Duty Reserve Tax (SDRT)
• the remittance regime so that certain amounts paid to qualifying remittance basis users by a qualifying AHC are able to be treated as non-UK source, reflecting the underlying mix of UK and overseas income and gains
• CGT and accounting provisions in relation to entry and exit from the regime, including the rebasing of certain assets and the creation of a new accounting period

The regime will also include administrative provisions and provisions to guard against potential for abuse or avoidance.

See Overview of tax legislation and rates (Oct 2021), para 1.9 and New tax regime for asset holding companies (AHCs).

Tax administration

Capital gains tax reporting and payment window

At present, UK residents disposing of UK residential property have to report gains and pay CGT within 30 days after completion. A similar window applies to non-residents disposing of property in the UK. These windows will each increase to 60 days with effect for disposals that complete on or after 27 October 2021.

When mixed-use property is disposed of by UK residents, the legislation will at the same time be amended to clarify that the 60-day window only applies to the residential element of the property gain.

See Overview of tax legislation and rates (Oct 2021)), para 1.41 and Capital Gains Tax payments on property disposal time limit extension.

Discovery assessments

The Upper Tribunal case of HMRC v Wilkes ([2021] UKUT 150 (TCC)) reported on 30 June 2021 established that HMRC cannot raise a discovery assessment to collect tax due as a result of the High Income Child Benefit Charge (HICBC). This is because the HICBC amount is an amount chargeable to income tax and not, as currently required by the discovery legislation, an amount of income which ought to be assessed to income tax. Whilst it is known that HMRC are appealing the decision in Wilkes, legislation will be included in Finance Bill 2022 to put beyond doubt that HMRC can raise valid discovery assessments in these circumstances. This will have immediate and retrospective effect except that it will not apply retrospectively to individuals who submitted an appeal to HMRC on or before 30 June 2021 on the basis of the arguments considered by the Upper Tribunal (including those whose appeal was stood over by the Tribunal pending the final outcome of the litigation).

The legislation will apply equally to tax chargeable where there is insufficient income to cover Gift Aid relief and to certain pensions tax charges, to ensure that HMRC can recover all of these charges via discovery assessments.

The legislation will also make some minor technical changes, but without retrospective effect, to ensure that the requirement for an individual to notify chargeability to income tax in these circumstances operates as intended.

See Overview of tax legislation and rates (Oct 2021)), para 1.44 and Discovery assessments.

Increasing independent representation on the Office of Tax Simplification (OTS) Board

The government will legislate in Finance Bill 2022 to increase the maximum independent representation on the Office of Tax Simplification (OTS) Board by two members, to a total overall membership of ten. The conclusions of HM Treasury’s Review of the OTS will be published in due course.

See Overview of tax legislation and rates (Oct 2021)), para 1.50.

Introduction of public notice powers for non-duty tariff changes

The government will legislate to amend the Taxation (Cross-border Trade) Act 2018 so that technical updates to tariff legislation, which do not alter the rate of an import duty, will be made by public notice instead of by regulations. This measure will ensure routine technical changes to the UK’s tariff schedule will be implemented more quickly. The measure will have effect from the date of Royal Assent to Finance Bill 2022.

See Overview of tax legislation and rates (Oct 2021)), para 1.48 and Introduction of public notice powers for non-duty tariff changes.