Legal briefing | |

Asset holding companies and other news

Overview

Will the UK be the new Luxembourg? Today on "L Day" the government has published details of its proposed new asset holding company regime, together with a raft of other measures. As ever, the government continues to attempt to tread the difficult line between making the UK a more attractive place to do business whilst clamping down on tax avoidance.

You can read all the highlights of the today's measures below.

Asset holding companies

The government has today published details of a new tax privileged regime for asset holding companies (AHCs) to come into effect from next April (2022). The introduction of a new regime has been expected, as the government has consulted widely with industry as to how to create a vehicle that will allow the UK to compete with rival jurisdictions (most notably Luxembourg) as an AHC location, but we now have a good idea of what it will look like.

Promisingly, the reliefs available for qualifying AHCs look fairly generous (for example, a very simple and wide-ranging exemption from capital gains on most shares and overseas land) and investors will welcome any change to the rules that allow returns to be more easily extracted in capital form. However, there is some complexity around the eligibility criteria which may need to be refined and, at this stage, there are a variety of important points that the government is still considering. Therefore, we will be reviewing the proposals in detail, to assess the extent to which they achieve the aims intended by government and the goals of the asset management industry (which are not necessarily the same), and looking to provide feedback to the government as to where improvements can be made.

We will be hosting training events on the new rules in due course: in particular, we will be asking "if you had a blank piece of paper to start structuring – where might an AHC prove useful?" We'll be using these events to talk about credit strategies, private equity holding companies and separate managed accounts among other things. You can register in advance for these with us and we will send you details as soon as the dates are finalised.   

The AHC proposals form part of a wider review of the UK funds regime that the government is currently conducting. As part of that wider review a comprehensive review of the REIT regime is being undertaken. However, in advance of that review being completed, the government has today announced a batch of changes to the REIT regime that are to have effect from next April. Reforms include the introduction of an ability to have unlisted REITs in cases where one or more institutional investors hold at least 99% of its ordinary share capital and some limited relaxations of the "balance of business" test.  We will be working through the wider practical implications on the interaction of the UK REIT and AHC proposals and shall follow up separately with further thoughts on this and, of course, also on their combination with new Professional Investor Fund once we have more details.

The AHC proposals form part of a wider review of the UK funds regime that the government is currently conducting. As part of that wider review a comprehensive review of the REIT regime is being undertaken. However, in advance of that review being completed, the government has today announced a batch of changes to the REIT regime that are to have effect from next April. Reforms include the introduction of an ability to have unlisted REITs in cases where one or more institutional investors hold at least 99% of its ordinary share capital and some limited relaxations of the "balance of business" test. Read more on the amendments to the REIT regime

A further aspect of the UK funds review is a review of the VAT treatment of fund management fees that was announced last March. However, in contrast to the AHC and REIT regime proposals, this seems to be in the slow lane, with nothing published to date.

Read the policy paper on Taxation of asset holding companies in alternative fund structures.

Read the policy paper on Real Estate Investment Trusts: amendments.


Register your interest in joining our webinar on asset holding companies:

Notification of uncertain tax treatment

A response to the government's second consultation on the introduction of a new requirement for large businesses to notify HMRC of uncertain tax treatments, together with draft legislation, has been published. This measure is intended to give HMRC advance information of differences in tax treatment and help them to close the "legal interpretation tax gap" (estimated to be worth £4.9bn in 2020).

A notification will be required if any of the following three triggers arise:

  • The taxpayer adopts a tax treatment that differs from HMRC's known position;

  • A provision has been recognised in the accounts of the taxpayer to reflect the probability that a different tax treatment will apply to the transaction to that adopted; or

  • There is a substantial possibility that a court or tribunal would find the treatment adopted to be incorrect.

Large businesses are companies, groups or partnerships that have a UK turnover exceeding £200m and / or a UK balance sheet exceeding £2bn.

The threshold for notification has been increased from £1m to £5m. There is also an exemption for tax neutral intra-group transactions, and a limited exemption for uncertain tax treatments arising from a choice of transfer pricing methodology. 

The notification requirement will apply to returns due to be filed on or after 1 April 2022, with the notification due on the same date as the return. 

The increase in the notification threshold and the abandonment of some of the initially proposed broad triggers – such as the novel tax treatment and equivalent transaction triggers - is welcome. However, as currently drafted, the new rules may still have an onerous impact on large businesses and further clarity is much needed. In particular, guidance on the meaning of "substantial possibility" in relation to the third trigger will be crucial.

Read the policy paper on Large businesses: notification of uncertain tax treatment.

Promoters of tax avoidance schemes

A series of legislative changes, which are designed to strengthen HMRC's hand against "the most persistent and determined" promoters and enablers of mass-marketed tax avoidance arrangements, have been published.

The published changes introduce:

  • A power for HMRC to seek freezing orders to prevent promoters from dissipating assets that could otherwise be used to pay penalties imposed under the DOTAS (Disclosure of Tax Avoidance Schemes), POTAS (Promoters of Tax Avoidance Schemes) and DASVOIT (Disclosure of Avoidance Schemes for VAT) rules;

  • A new additional penalty for UK entities involved in facilitating the promotion of a tax avoidance scheme by an offshore promoters;

  • A new power for HMRC to petition for the winding up of companies involved in the promotion of tax avoidance schemes, where those companies are operating against the public interest; and

  • A power for HMRC to publish information about promoters of tax avoidance scheme at an earlier point than would be the case under existing law, enabling HMRC to give details of particular schemes and those promoting them when it first becomes aware of them.

While these changes should not be of concern to the vast majority of tax advisers and their clients, they demonstrate HMRC's determination to increase its powers to disrupt the activities of a small minority of promoters and enablers of aggressive tax avoidance schemes and to inform and educate taxpayers about the risks of participating in those schemes.

Read the policy paper on New proposals to clamp down on promoters of tax avoidance.

Basis period reform

HMRC has published proposals to change the way trading income is allocated to tax years, with effect from tax year 2023-24. At present, self-employed taxpayers allocate trading income to tax years using 'basis period rules'. Under these rules, trading income for a tax year is usually based on the profits for a period of accounting ending in that tax year. This can lead to complexities for businesses that do not draw up their accounts to the end of the tax year. The new proposals would remove the basis period rules and provide for the profits of a tax year to be the profits arising in that tax year, regardless of a business's accounting date. This reform should align trading income with other types of income for individuals and bring the payment of tax closer to the time profits are earned.

Read the policy paper on Income Tax: basis period reform.

Modernisation of stamp taxes

The government has published a response to its wide-reaching call for evidence on the modernisation of stamp taxes. The response document notes that there is widespread support for the reform of stamp taxes and the potential digitisation of stamp duty. The government regards the permanent adoption of the COVID-19 electronic stamp duty procedures as an interim step towards digitisation. It will now move forwards by exploring the feasibility of replacing stamp duty and SDRT with a single self-assessed tax on shares. 

Read the consultation on Modernisation of the Stamp Taxes on Shares Framework: summary of responses.

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