The Lowdown on L Day

Yesterday was L day in the UK. "Legislation Day" never grabs the headlines like an Autumn budget or Spring Statement and with the current Conservative Leadership battle in full swing it may have fallen under the radar even more than usual.

That doesn’t mean it isn’t important.?Whilst the papers are full of promises from Conservative Leadership candidates to reverse the Health and Social Care Levy, shave a few percentage points off VAT or to reverse the planned corporation tax increase, this particular L-Day contains some significant draft legislation – in particular the implementation of Pillar Two and Transfer Pricing documentation.?

The multinational top-up tax

The first of these, which the government refers to as the ‘multinational top-up tax’, is draft legislation to implement Pillar Two of the OECD’s BEPS 2.0 project in the UK, and has been hotly, and fearfully, anticipated. Pillar Two establishes a global minimum tax of 15% for multinational enterprises with a turnover of at least €750 million.?The UK has become something of a first mover now it has issued draft legislation to implement Pillar Two in the UK.??The sheer complexity of the rules will likely send tax advisers and affected businesses into a tailspin as they pore over the detail over the next weeks, months (and I daresay years).?

Alongside the draft legislation the government also issued a summary of the consultation responses and over 200 pages of explanatory notes.???It will take some time to digest all of the legislation but for a summary of the key points see KPMG’s global alert

The path ahead is not without challenges.?Across the globe there is still a lot of political uncertainty as to when and if different countries will implement Pillar Two.?There remain significant areas of policy and administration that still need to be agreed multilaterally at the OECD, and nobody expects that to be easy.?

As businesses work through the rules they are likely to find themselves in the uncomfortable position of having to assess the impact of the global minimum tax on their business when the rules will still be moving, creating significant amounts of uncertainty.??

Taxpayers need to use their time wisely and ensure Pillar Two is a priority workstream, impacts are properly assessed, monitored and communicated and that system enhancements are in place to comply with the rules, and that financial statement disclosures are considered in good time.

Transfer Pricing

The second key update was on Transfer Pricing documentation.?We were expecting detailed legislation but instead the draft Finance Bill includes a clause allowing the new rules on transfer pricing documentation to be made by regulations?

It seems we may have to wait a little longer to see the detail of the rules and the accompanying HMRC guidance, although we still expect them to closely align to the OECD master and local file requirements.?This means we will also need to wait to see more detail on the summary audit trail which is the UK’s bespoke add-on to the master/local file content.

The new rules will affect accounting periods commencing on or after 1 April 2023 but businesses

would be well-advised to adopt the requirements earlier.?

Transfer pricing remains an area of focus for HMRC in their enquiries and there have been long-standing concerns about the standard of some TP documentation.?In the five-year period from 2015/6 through 2019/20 HMRC brought in over ￡6bn in additional tax from TP compliance activities.?It is an area therefore where taxpayers would be well-advised to spend some time ensuring their TP documentation is good.?

Even those companies not large enough to be in scope of this latest legislation should take note of these document requirements.?HMRC view the requirements mandated for the largest groups as best practice and encourages all businesses subject to TP to take this approach.?

More on this from Phil Roper: https://www.dhirubhai.net/posts/philip-roper-b0744747_new-transfer-pricing-documentation-requirements-activity-6955529473429487616-_ZhY?utm_source=linkedin_share&utm_medium=member_desktop_web

Research and Development

L-Day also saw draft legislation on R&D tax relief which has been widely trailed.?The main changes are to data and cloud costs within qualifying expenditure for R&D purposes.?The changes also, as expected, limit relief for overseas spending on subcontractors and externally provided workers in order to focus the reliefs on UK activity.?Further changes tackle abuse of the R&D relief regime by?requiring all claims to be digital claims, requiring taxpayers to provide advance notice to HMRC of a claim, and to include cost breakdowns and descriptions endorsed by a senior officer of the company.

See Carol Johnson's summary here

https://www.dhirubhai.net/posts/carol-johnson-35434216_draft-rd-tax-legislation-the-government-activity-6955893585846145024-Ha0q?utm_source=linkedin_share&utm_medium=member_desktop_web

Other matters

The government also issued draft legislation reducing domestic Air Passenger Duty by 50% and adding a new ‘ultra-long-haul’ charge.?Other draft legislation makes changes to the Qualifying Assets Holding Company regime to ensure it is available to a broader range of investment structures.

Noticeably absent was any legislation on alcohol duty reform where the government is still considering feedback to the consultation.

The publications were also silent on the on-line sales tax, although the general view was that we wouldn’t hear anything until Autumn Budget.?It will be interesting to see if this becomes a topic during the summer hustings for the Conservative Leadership, where tax policy for once is very front and centre.