Tax – Corporate Taxation

The Government has gone ahead with its implementation of OECD BEPS Pillar Two, also known in the UK as "multinational top-up tax". It seeks 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, subject to various exclusions including investment funds and pension funds.

The main charging provision, the income inclusion rule, will take effect in relation to accounting periods commencing on or after 31 December 2023. A first draft of the backstop charging mechanism, undertaxed profits rule (UTPR), was published in July 2023. The UTPR is expected to be included in Finance Bill 2024, but it is not yet clear when it will come into force. The UK Government has previously stated that the UTPR will not come into force before 31 December 2024.

The UK has also a domestic top-up tax requiring large groups or standalone entities (again groups or entities that meet a €750m turnover threshold test) to pay a top-up tax where their UK operations have an effective tax rate of less than 15%. Unlike multinational top-up tax, domestic top-up tax will apply to large domestic groups and entities in additional to large multinational groups and entities. This will also take effect in relation to accounting periods commencing on or after 31 December 2023.

The Government recently consulted on changes to the definition of "permanent establishment" and profit attribution rules relating to permanent establishments. The concept of permanent establishment is important because having such an establishment can bring non-resident traders within the UK tax net on their profits deriving from it.

Under the proposals, the UK rules would be more closely aligned with the current position in the OECD model tax convention, including introducing the expanded definition of permanent establishment contained in it. The UK's starting position when negotiating tax treaties would also change to adopt that definition, but its existing treaties would be unaffected. The government has indicated that it is not intending for these proposals to adversely impact the UK asset management sector.

Draft legislation was published in the summer for the merger of the two types of R&D relief (RDEC and SME relief) following consultation earlier this year. Despite publishing draft legislation, the Government has not yet decided whether to proceed with the merger; any such decision would not be announced until a future fiscal event – potentially in the Autumn Statement next week.

As discussed above, the recently enacted Retained EU Law (Revocation and Reform) Act 2023 (REUL) has provided for the sunsetting of some types of retained EU law from 1 January 2024.

As it is based on the EU's VAT Directive, there have been concerns that the UK VAT regime could be disturbed by the sunsetting provisions in REUL. To address these concerns, the Government has recently published draft legislation which provides that certain types of retained EU law will continue to apply in relation to VAT and excise law, including retained general principles of EU law such as fiscal neutrality. The precise impact of the draft legislation on the interaction between retained EU law and post-REUL domestic law will need to be worked through, but it is helpful that the government considers that the draft legislation "ensures that UK VAT and excise legislation continues to be interpreted as Parliament intended, drawing on rights and principles that currently apply in interpreting UK law" and that that will ensure the stability of the VAT and excise regimes and provide legal certainty.

The Government has also recently published draft legislation to address the concern that the 1.5% stamp tax charge arising on the issue or transfer of UK shares to clearance services and depositaries would be reintroduced as a result of certain provisions of EU law ceasing to be part of UK law from 1 January 2024. The draft legislation provides that there will be (i) no SDRT on issues of UK shares to clearance services and depositaries; and (ii) an exemption from stamp duty and SDRT on transfers of shares to clearance services and depositaries where such transfers are part of capital raising transactions.

It is expected that both pieces of legislation will be included within next year's finance act but will have temporary statutory effect through the budget resolution procedure from 1 January 2024 until the time that act receives royal assent.