On 20 July 2021, the government published draft legislation for the Finance Bill 2021-2022, consultations, and other documents (L-Day). The draft legislation is open for consultation until 14 September 2021; it will be introduced to parliament after the Autumn Budget, after which it will receive royal assent and form part of the Finance Act 2022.
In this update, we set out the key highlights for UK businesses.
Asset holding companies
The government is introducing a bespoke regime for taxing qualifying asset holding companies (QAHCs). The measures will mean the UK can compete with Luxembourg to attract asset holding vehicles to facilitate the flow of capital, income and gains between investors and underlying investments.
The new regime will include: robust eligibility criteria to limit access to intended users; rules limiting a QAHC’s tax liability to an amount commensurate with its role; and rules for UK investors to ensure that they are taxed, so far as possible, as if they had invested in the underlying assets directly. The regime will take effect from 1 April 2022.
Real estate investment trusts
The government intends to alleviate certain constraints and administrative burdens in the real estate investment trust (REIT) regime in order to enhance its attractiveness for real estate investment.
The amendments include removing the requirement for REIT shares to be admitted to trading in some cases; amending the definition of an overseas equivalent of UK REITs; removing the "holder of excessive rights" charge to corporation tax for certain investors; and changing the rules which ensure a REIT’s business is properly focused on property rental.
The amendments will take effect from 1 April 2022.
Amendments to the hybrid and other mismatches rules
The government is amending chapter 7 on hybrid payee mismatches which, in the context of determining the extent of a mismatch, aims to treat certain non-UK transparent entities as partnerships. The amendment aims to ensure that certain transparent entities constituted outside of the UK (e.g. US LLCs) are afforded the same treatment as partnerships for the purposes of the rules.
Notification of uncertain tax treatment
The government is introducing a new requirement for large businesses to notify HMRC when they have taken an uncertain tax position.
The aim is to ensure that HMRC is aware of all cases where a large business has adopted a treatment that is contrary to HMRC’s known position; a provision is recognised in the accounts to reflect the probability that a different tax treatment will be applied; or it is reasonable to conclude that if a tribunal or court were to consider the tax treatment, there is a substantial possibility that the treatment would be found to be incorrect.
Businesses will only need to notify HMRC where the difference between the position taken in the return and the appropriate comparator (the amount provided for, the amount based on HMRC’s known position, or the potential outcome of litigation) exceeds £5m. This should bring forward the point at which discussions occur in relation to the tax treatment, thereby reducing what the government refer to as the "legal interpretation tax gap".
The changes will have effect for returns within scope that are due to be filed on or after 1 April 2022.
For further information on notification of uncertain tax treatment for large businesses, please see our recent blog post.
Income tax: basis period reform
The government is reforming the way trading income is allocated to tax years, so that businesses’ profit or loss for a tax year is the profit or loss arising in the tax year itself, regardless of their accounting date.
It aims to promote fairness by taxing traders closer to the point at which their profits are generated, removing distortions created by a trader’s choice of accounting date, and abolishing double taxation caused by overlap periods.
On transition to the proposed tax year basis in the tax year 2022-2023, all businesses’ basis periods would be aligned to the tax year and all outstanding overlap relief given.