Spring 2021: Reshaping UK‘s tax landscape

In his Budget of 3 March, the Chancellor of the Exchequer, set out HM Government’s post-Brexit medium-term tax and spending plan, as the UK economy showed early signs of recovery from the pandemic disruption. This was followed by the inaugural “Tax Day” on 23 March, where Chancellor Sunak announced more than 30 tax policies and consultations with the stated aim to modernise UK tax administration and policy development. Two important consultations dealing with Transfer Pricing (TP) documentation and Uncertain Tax Treatments were announced as part of the “Tax Day” measures.

The UK government must balance the need for short-term investment incentives for businesses with longer-term tax increases to fund the gaping budget deficit. The headline corporation tax rate is to increase to 25% from April 2023 (currently 19%).

UK REITs

As part of an initiative to promote UK funds, HM Government has been consulting on changes to the UK REIT regime. The changes are designed to make the UK REIT regime more attractive and simpler. UK REITs are exempt from UK tax on income and capital gains arising on qualifying UK property rental business. The increase in the main corporate tax rate to 25%, has further increased the attractiveness of UK REITs. UK REITs are required to distribute a minimum of 90% of their qualifying profits to unitholders as dividends (referred to as property income distributions, or “PIDs”). PIDs are normally paid after deduction of WHT at the basic rate of income tax (20%), which the UK REIT pays across to HMRC on behalf of the unitholder. Certain classes of unitholders, such as UK charities and pension funds, are eligible to receive gross PIDs.

UK funds review consultation

In January 2021, the HM Treasury requested stakeholders to provide tax, regulatory and other input as part of its broader review of the UK funds regime. The aim of the wholescale review is to make the UK a more attractive location to set up, manage and administer funds, and which in turn will support a wider range of more efficient investments better suited to investors’ needs.

In response, the Investment Association (IA), UK’s main funds trade body, has called for the abolishment of taxes on funds, in order for the UK to be able to compete as a global hub for fund management. The IA has highlighted that complicated tax rules in the UK deter international investors from investing in UK funds compared with the favourable tax regimes elsewhere that fully exempt funds from taxes.

TP documentation consultation

The consultation launched on Tax Day seeks to fully align UK’s approach with that of OECD BEPS Action 13 requirements and to introduce an additional obligation to lodge an annual schedule reporting TP data on intra-group cross-border transactions. An international dealings schedule being proposed will be in addition to the master and local file requirements.

Presently, the TP documentation obligations in the UK are non-specific, requiring such records to be kept as are sufficient for a complete and accurate tax return to be lodged. The new proposals for larger businesses will require additional TP information to be maintained in standardised formats which are to be promptly furnished to HMRC upon request.

Reporting of Uncertain Tax Treatments consultation

On Tax Day, HM Government published the second round of its consultation on the reporting of uncertain tax positions, together with a response document to the original consultation from March 2020. The latest consultation round includes important changes to the scope and design of the original measures, including an increase in the de-minimis threshold. These welcome changes provide for greater clarity and limit the scope of the reporting. The measures are scheduled to be included in the 2021/22 Finance Bill and shall apply to returns to be lodged after April 2022.

If you wish to discuss these topics, please contact: Hansuke, London

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