Legal briefing | |

L Day 2022: Pillar Two implementation and other news


This briefing was updated on 22 July 2022

Today on "L Day" the government has published details of its proposed implementation of OECD BEPS Pillar Two, together with a number of other measures. 

As anticipated, the Pillar Two legislation forms the bulk of the published materials but there were still some interesting nuggets to be found, including, helpful measures to make it easier for some common fund structures to make use of the qualifying asset holding company (QAHC) regime that was introduced in April.

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

Multinational top-up tax

Draft legislation introducing a "multinational top-up tax" was published today. This is part of the UK's implementation of Pillar Two of the OECD's international corporate tax reform plan.

In publishing the draft multinational top-up tax legislation well in advance of the intended effective date, the government has attempted to strike the difficult balance of giving businesses as much certainty as possible whilst many important aspects remain under discussion at an international level. The early publication of the draft multinational top-up tax legislation also gives the UK the opportunity to influence the direction of Pillar Two implementation internationally. The UK views itself as an "international leader" in this regard and has committed to taking forward many of the points raised during the consultation process as part of the OECD Implementation Framework discussions.


In October 2021, international agreement was reached on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy. The two-pillar corporate tax reform plan forms part of the OECD's project tackling base erosion and profit shifting (BEPS).

The main plank of Pillar Two is the Global anti-Base Erosion rules (GloBE rules) that seek to establish a global minimum corporate tax rate of 15% for multinational enterprises (MNEs). The rules will apply to MNEs that meet a €750m turnover threshold test. There will be various exclusions, including for pension funds and for investment funds that are ultimate parent entities of an MNE group (and any holding vehicles used by such funds).

The GloBE rules do not require low tax companies to increase their corporate tax rates to 15% (although they may lead to them doing so). Instead, the way in which a global minimum corporate tax rate will come into effect is via two new rules. The first is the income inclusion rule (IIR). The IRR can result in tax for a parent entity if one of its subsidiaries is subject to taxes which are considered to be too low (a bit like the UK's existing CFC charge). The second is the undertaxed profits rule (UTPR). The UTPR rule might come into play if a parent entity is in a country that has not implemented the IIR. It works by imposing top up taxes on other group entities that meet certain criteria.


  • There will be a two-phase implementation of the Pillar Two GloBE rules into UK law.

  • As previously announced earlier this summer, the IIR will come into force in relation to accounting periods starting on or after 31 December 2023. This is in line with the OECD's target 2023 implementation date for the IIR.

  • Businesses will be relieved to note that there is no straddle period mechanism which would apply the IIR to the portion of earlier commencing accounting periods falling after 31 December 2023.

  • No decision has been made on the timing of the introduction of the UTPR.


A decision is yet to be made on whether the UK will introduce a domestic minimum tax – although as the government notes that there are "strong arguments in favour" of the introduction of this tax, it would not be surprising if the government subsequently decided to introduce a domestic minimum tax. The government has also stated that it is supportive of a qualified domestic minimum tax safe harbour, which would switch off the GloBE rules in respect of a jurisdiction that has introduced a qualified domestic minimum tax. It will be interesting to see if international consensus can be reached in relation to such a safe harbour.

Included in the complex legislation are provisions that determine the width of the exclusions applicable to investment fund structures which we will consider closely and provide an update on in due course.

In the January 2022 consultation, the government consulted on different options for the payment of top-up tax. Businesses will be pleased to learn that top-up tax will be payable in a single annual payment (as opposed to quarterly instalments) and that the payment date will be aligned to the filing date for the information return (15 months from the end of the accounting period, 18 months in the transitional year).

Qualifying asset holding companies (QAHCs)

Today's draft legislation contains some refinements to the tax privileged regime for qualifying asset holding companies (QAHCs) that was introduced in April.

Companies are only eligible for QAHC status if certain conditions are met, including, broadly, that they are at least 70% owned by certain categories of "good" investor (known as "category A investors"), such as most pension funds and charities. Diversely owned investment funds can also be category A investors, but there has been concern that the rules, as currently drafted, are too narrow, thereby excluding certain common fund structures. The L Day proposals include measures to address this, making access to the regime easier for funds in corporate form and for parallel fund structures (essentially, a fund that takes the form of a number of associated vehicles investing together in the same underlying assets) and aggregator funds (essentially, a fund through which different funds hold their interests in the same underlying asset). If enacted, these changes will be welcome news for the asset management sector, enabling more fund structures access to tax efficient UK holding companies.

In addition, the draft legislation includes proposals to tighten up the current anti-avoidance rules targeting those looking to side step the restrictions on ownership by non-category A investors by fragmenting their ownership interests.

R&D Tax Reliefs

Today the Government published legislation to implement the previously announced changes to research and development ("R&D") tax reliefs. These changes will have a significant impact on the approximately 90,000 businesses that currently claim R&D tax reliefs. Whilst for some the changes will be mainly administrative, impacting how they claim relief going forward, for others (in particular businesses who carry out R&D overseas) the changes will have a significant impact on their business model. Businesses that currently carry out R&D overseas and who stand to lose the ability to claim R&D tax reliefs will need to weigh up whether the cost of "onshoring" R&D to the UK outweighs other commercial and practical factors.

The main changes (which apply for accounting periods beginning on or after 1 April 2023) are as follows:

  • R&D relief will no longer be available for overseas R&D unless, effectively, the R&D could not be done in the UK. The legislation sets a very high bar for when relief is available for R&D undertaken outside the UK – examples include where there are geographical reasons (for instance deep ocean research) or legal or regulatory requirements (such as for certain clinical trials) which mean the R&D has to be outside the UK. The fact that R&D is cheaper or there is a better available workforce outside the UK is not enough. The Government hopes this measure will ensure the UK retains the "spillover" benefits of R&D (such as upskilled workers and industrial know-how).

  • R&D relief will now be available (subject to some limitations) for expenditure on datasets and cloud computing. In addition, pure mathematics (which was previously excluded) will now be within the scope of R&D. The expansion of activities for which relief can be claimed is designed to ensure the UK remains a competitive location for cutting edge research.

  • The procedure for claiming R&D reliefs is changing. The claim process will now, for the most part, be online and businesses will need to make a pre-notification to HMRC of any R&D claim they intend to make (within 6 months of the end of the period to which the claim relates), or else their claim will be invalid. Moreover, the claim itself will now need to contain more detail about the breakdown of the costs for which relief is claimed and the R&D activity, and be endorsed by a senior officer in the company. The details of any adviser to the claim will also be included on the claim. These measures are aimed at tackling abuse and improving compliance.
New transfer pricing documentation requirements for UK businesses

The Government has today announced that it will introduce regulations to ensure that large multinational businesses keep transfer pricing documentation in a prescribed format.

The legislation introduced today allows the Government to make regulations regarding the relevant transfer pricing documents required and it is expected that large businesses will be required to:

  1. prepare and maintain a master file containing standardised information relevant for all multinational enterprise ("MNE") group members;

  2. prepare and maintain a local file referring specifically to material transactions of the relevant local taxpayers
    (1. and 2. are in line with the BEPS recommendations regarding transfer pricing documentation); and

  3. complete a questionnaire detailing the main actions they have taken in preparing the local file document.

Failure to comply with these new requirements can automatically lead to the presumption that the taxpayer behaved "carelessly" (meaning they could be subject to a penalty of 30% of the lost revenue) if there is an inaccuracy relating to transfer pricing in their tax returns. This can only be rebutted either by showing the relevant documents or by otherwise proving that they took reasonable care. HMRC will have powers to demand to see the documentation, even if the taxpayer business is not under enquiry.

These measures apply from 1 April 2023.

Improving the data HMRC collects from its customers

HMRC has published a consultation document proposing a number of potential options for improving the range of data which HMRC collects, uses and shares with other government departments, with the aim of improving and supporting more targeted government policy-making. This is sought to be achieved by using the tax system to increase the volume of data shared between HMRC and taxpayers, as well as the quality of that data. The proposal is part of a wider drive to improve HMRC's data collection, usage and exchange owing to the Make Tax Digital project and the Tax Admin Framework review and reform of information powers (HMRC published a call for evidence in March 2021 seeking views on how the tax administration framework could be reformed).

The condoc reflects on the government's data-driven response to the Coronavirus pandemic, which in some instances exposed some of the shortfalls in existing datasets. For the moment, the focus is on improving datasets as regards employees and the self-employed individuals, more particularly gathering more information as regards:

  • the business sector of the self-employed;

  • the occupations of employees and the self-employed;

  • the location of an employment of a business;

  • the hours employees work;

  • dividends paid to shareholders in owner managed businesses; and

  • the start and end dates of self-employment.

The condoc puts forward the position that HMRC (and the wider government), will need enhanced data going forward to drive forward its policy goals (including as part of the wider levelling up agenda) and to react appropriately as the labour market (and wider economy) continues to be subject to fundamental change. The condoc is largely framed in positive terms for both the government and the taxpayer, although inevitably enhanced and improved data could be used to support enhanced HMRC compliance activity. This is alluded to in a number of places in the condoc (albeit still in largely positive terms – the condoc explains that taxpayers can look forward to 'intervention suited to their circumstances'), though this is framed as being an ancillary benefit to HMRC and not as one of the principal driving factors behind the consultation.

More particularly, information-gathering on employee working hours would allow HMRC to more closely monitor compliance with National Minimum Wage and holiday pay legislation (with employer tax cost implications if the employer is found to be in default of these rules), information on the location of self-employed individuals could be used to ensure that those individuals are using the right tax code, in the correct jurisdiction (for example, being subject to a Scottish tax code and paying income tax at higher rates) and more information as regards dividends paid to shareholders in closely-held, owner managed businesses may (though this is not expressly indicated in the condoc) be interpreted as an indication that this will be an area of focus for HMRC policy-making in the future.

More detail on the proposals is awaited - businesses will be keen to ensure that this drive to improve data quality and provision does not unduly increase their administrative and compliance burden.

For further information, please contact

Back To Top