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Welcome to the Summer 2024 edition of our bi-annual tax horizon scanner. Read on to find out what tax changes businesses need to prepare for in the coming months.
Introduction of the pillar 2 undertaxed profits rule
What to expect
In July 2023, the UK introduced both a multinational top-up tax (MTT) and qualifying domestic minimum top-up tax (DTT) for accounting periods commencing on or after 31 December 2023. These two separate taxes are the initial stage in the UK’s implementation of the Organisation for Economic Co-Operation and Development’s (OECD) “two-pillar solution” which aims to tackle base erosion and profits shifting worldwide.
The second stage of the UK’s implementation process requires the introduction into UK law of an undertaxed profits rule (UTPR).
When
The UTPR is expected to be implemented in the UK no earlier than for accounting periods beginning on 31 December 2024.
Background
Pillar Two of the OECD’s “two-pillar solution” consists of two main rules, the Global Anti-Base Erosion rules (GloBE rules) and a Subject to Tax Rule (being a treaty-based rule, yet to be enacted in the UK, which applies to interest royalties and certain other payments made between connected parties where such payments have been taxed at a rate of less than 9%).
The objective of the GloBE rules is to impose a 15% effective rate of minimum corporation tax on the profits of in-scope multinational enterprises (i.e. a group where at least one member is not located in the same territory as the others).
Broadly, in order to be “in-scope” of the GloBE rules, a multinational group must have annual revenues equal to or exceeding Euro 750 million in any two of the previous four accounting periods, based on the group’s consolidated financial statements.
The GloBE rules comprise two interlocking measures. The first of these measures is an income inclusion rule, which was implemented in the UK by the introduction of the MTT and DTT in the Finance No. 2 Act 2023. Where an entity’s effective tax rate in a jurisdiction is less than the minimum 15%, a “top-up tax” must be paid (usually by the group’s parent company) to bring the rate up to 15%. The second measure, yet to be enacted in the UK, is the UTPR.
What's next?
The UTPR is often described as a “backstop”, designed to ensure that any “top-up taxes” that are not paid under another jurisdiction’s income inclusion rule, or qualifying domestic minimum top-up tax rule, are brought into charge in the UK.
The proportion of the “top-up tax” chargeable to UK members of the multinational group will be determined by reference to the number of employees and the value of tangible assets located in the UK and in other jurisdictions which have implemented a UTPR.
In the Autumn Statement 2023, the previous government announced that it would introduce the UTPR in the UK for accounting periods beginning on or after 31 December 2024, with legislation included in an upcoming Finance Bill. The new Labour government pledged in their manifesto to support implementation of the OECD global minimum rate of corporation tax. As such, it is expected that the new government will wish to move forward with the implementation of the UTPR in the UK.
In terms of timing, the OECD published consolidated commentary to the GloBE rules issued in April 2024 includes a transitional safe harbour which will apply to the UTPR and will mean, broadly, that an entity which has its ultimate parent company in a jurisdiction that has a statutory corporate income tax rate of at least 20% will be permitted to elect that the UTPR will not apply to it for a specified (short) period. However, choosing to make such an election may impact on the ability of entities in a jurisdiction to elect for other transitional safe harbours applying to the MTT and DTT.
Actions to consider now
Draft legislation amending the Finance No.2 Act 2023 to implement the UTPR was published in July 2023. Therefore UK companies in multinational groups which are within the scope of Pillar Two should consider the impact for their group of implementation of the UTPR in the UK. In particular, companies will need to consider the scope of the proposed UTPR safe harbour and how it interacts with any other of the safe harbours which apply to the existing MTT and DTT.
Scope of the LLP salaried members rules
What to expect
The Court of Appeal will hear HMRC’s appeal in the BlueCrest case which is concerned with the application of the salaried members rules to certain individual members of an LLP.
If the salaried members rules apply to a member of an LLP, that member is deemed to be a “salaried member” and treated as an employee for income tax purposes. This means that payments made to that member by the LLP will be treated as employment income and are therefore subject to income tax (under PAYE) and employee and employer Class 1 NICs.
When
The Court of Appeal hearing is scheduled to be heard on 26 or 27 November 2024.
Background
The salaried members rules were introduced in 2014 and are intended to apply to members of an LLP whose relationship with the LLP is more like an employment relationship than that of a traditional partner in a partnership. Those rules contain three conditions (Conditions A to C) and to fall outside the scope of those rules, a member has to fail any one condition.
The case of The Commissioners for His Majesty’s Revenue and Customs and Bluecrest Capital Management UK LLP (BlueCrest) was concerned with two of these conditions (the parties agreed that Condition C applied to all members):
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Condition A, which is met if a member’s remuneration from the LLP is (a) fixed or (b) is variable, but is varied without reference to the profits or losses of the partnership or (c) is not in practice affected by the overall amount of those profits or losses; and
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Condition B, which is met if a member does not have significant influence over the LLP’s affairs.
BlueCrest was a UK registered LLP (the LLP) which provided investment management services to funds held by members of the BlueCrest Group (of which BlueCrest was a part). Broadly, the 82 individual members of BlueCrest fell into three categories – “infrastructure members” (being those providing support/back office services), “portfolio managers” (being those responsible for managing an investment portfolio and desk heads) and “front office members” (mainly comprised of researchers and technologists).
HMRC determined that BlueCrest was liable to pay income tax and Class 1 NICs in respect of payments made to a significant majority of the members of the LLP. The determination was made on the basis that those members satisfied both Condition A and Condition B.
BlueCrest’s appeal to the First Tier Tribunal (FTT) against the determination was allowed in part.
In relation to Condition A, the FTT decided that all members of BlueCrest met Condition A. This was on the basis that their remuneration from BlueCrest was not variable by reference to the profits or losses of the partnership because the link between the profits and/or losses and the discretionary allocations was insufficient.
The FTT determined that the test of significant influence in Condition B was not restricted to the affairs of the partnership generally but could be over any aspect of the affairs of the partnership. It also held that the influence referred to in that condition was not limited to influence over the management of the partnership business – it could include financial influence or impact, or an ongoing contribution from an operational perspective. The FTT considered what the members of BlueCrest did within the LLP and concluded that:
- the portfolio managers with capital allocations of $100m or more and the desk heads did not meet Condition B – these members had significant influence over the affairs of BlueCrest as a result of the activities that they carried out within the LLP which included managerial as well as financial influence; and
- the front office members, infrastructure members and the remaining portfolio managers met Condition B. This was on the basis that the FTT was unable to determine what financial or other contributions were made by these members to the provision of the external services provided by BlueCrest to the other group members and which comprised a significant element of its overall activities.
HMRC appealed on the basis that no members had significant influence over the affairs of BlueCrest such that Condition B was met by all members. However, BlueCrest cross appealed arguing that Condition A was not met by any of its members.
The Upper Tribunal (UT) upheld the decision of the FTT and dismissed both HMRC’s appeal and BlueCrest’s cross-appeal. It concluded that the FTT had made findings of fact that it was perfectly entitled to make and there was no error of law in its approach to or construction of the legislation or in its application of the legislation to the facts.
What's next
It is our understanding that HMRC requested permission to appeal to the Court of Appeal. This is unsurprising given that HMRC argued for a much narrower meaning of “significant influence over the affairs of the partnership” than was held by the FTT (and the UT) to apply.
The hearing is currently scheduled to be heard on 26 or 27 November 2024.
Actions to consider now
The FTT decision was the first case in which the salaried members rules for LLPs were considered. It is clear from the FTT decision that the facts are highly relevant to the outcome when considering if the salaried members rules apply to any member of an LLP. A lack of objective evidence to support a taxpayer’s argument that the salaried members rules do not apply can also be exceedingly detrimental as shown by the FTT and UT decisions.
LLPs whose members may fall within the scope of the salaried members rules should review their internal record keeping and ensure that processes are in place to record and retain evidence to support any argument that members fall outside the rules. The decision of the Court of Appeal will be of interest to those LLPs.
Proposal to extend capital allowances full expensing to leased assets
What to expect
Labour’s Business Partnership for Growth, launched in February 2024, stated that it would retain the current system of permanent full expensing along with the annual investment allowance.
Given Labour’s support for permanent full expensing, it is possible that the new government will progress the former government’s proposal to extend full expensing to leased assets.
When
Ongoing.
Background
Since April 2023, companies have been able to claim enhanced capital allowances on investments in "main rate" plant and machinery – "full expensing". This means that if a company buys qualifying plant and machinery for its business it can claim:
- 100% capital allowances on qualifying main rate plant and machinery expenditure, meaning that for every pound invested its taxes are cut by up to 25p; and
- 50% first-year capital allowances for special rate expenditure.
These full expensing allowances were introduced as temporary allowances applying only to expenditure incurred from 1 April 2023 to 31 March 2026. However, on 22 November 2023, it was announced in the Autumn Statement that the allowances would be made permanent.
In order to qualify for full expensing allowances, the expenditure must be incurred by a company and the plant and machinery must be new and unused and must not be provided for leasing or hiring (other than in limited circumstances where background plant and machinery is leased with a building).
What's next
In the Spring Budget 2024, held on 6 March 2024, the former government announced that it would seek to extend full expensing to assets for leasing “when fiscal conditions allow” and that draft legislation on an extension of full expensing to assets for leasing would be published shortly.
No timeline for the extension of these allowances to leased assets has been proposed and the draft legislation was not published prior to the general election. It’s not clear from the Labour party manifesto whether they intend to implement the extension of full expensing to leased assets, although it is clear from the Labour Business Partnership for Growth that creating stability for business investment over the longer term is a feature of the government’s investment plan which might suggest that there will be movement on this front.
The Business Partnership for Growth also states that a Labour government would publish detailed guidance on what investment qualifies for each regime to provide much greater clarity to firms looking to invest. The review of the full expensing regime that would be required to produce that guidance would present the government with an ideal opportunity to consider the extension of the existing rules to leased assets.
Actions to consider now
For now, companies can only wait and see what steps the government will take in relation to these capital allowances over the next six months.
IR35 in the context of partnerships
What to expect
The Upper Tribunal (UT) will hear HMRC’s appeal in the Gary Lineker Media case. This was the first case to consider the application of the intermediaries rules (IR35) where the intermediary was, unlike in most of these types of case, a general partnership not a company.
When
The Upper Tribunal is expected to hear HMRC’s appeal on 2 and 3 December 2024.
Background
The issue in the case of Gary Lineker and Danielle Bux t/a Gary Lineker Media and The Commissioners for His Majesty’s Revenue and Customs was whether IR35 applied to income received by Gary Lineker Media Ltd (GLM) for providing the services of Gary Lineker (Mr Lineker) to the BBC and British Telecommunications Plc (BT Sport).
Three contracts were entered into for the provision of Mr Lineker’s services to the BBC and BT Sport:
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a contract between the BBC and “Mr G Lineker and Mrs D Lineker (the Partnership)” which was signed by both Mr and Mrs Lineker as “the Partners of the Partnership”;
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a contract between BT Sport and Mr Lineker and Mrs Danielle Lineker “trading as GLM (Partnership)”.That contract was signed by Mr Lineker for and on behalf of GLM; and
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a contract between the BBC and Mr Lineker and Mrs Lineker, described in the agreement as being “each a Partner and trading as GLM, together the “Partnership””.That contract was signed by both Mr and Mrs Lineker.
HMRC issued determinations on the basis that income tax and Class 1 NICs were due in relation to the engagements with the BBC and BT Sport.
The First Tier Tribunal (FTT) decided that IR35 can apply to arrangements where an individual’s services are supplied to a client through a partnership and that GLM was a partnership between Mr Lineker and Ms Bux (formerly Mrs Lineker). The tribunal also found that each of the BBC and BT Sport contracted with a partnership for the services of Mr Lineker.
However, the tribunal went on to decide that the three contracts were direct contracts between the BBC, Mr Lineker and Ms Bux and between BT Sport, Mr Lineker and Ms Bux on the basis that:
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the effect of the Partnership Act 1980 is that each partner acts “both as principal…and as agent, binding the firm and his partners in all matters under his authority”;
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therefore when Mr Lineker signed the contracts with the BBC and BT Sport, he did so as principal, thereby contracting directly with the BBC and BT Sport.
The result of this conclusion was that IR35 could not apply to the contracts. The FTT went on to clarify that had the contracts been signed only by Ms Bux (and not by Mr Lineker), Mr Lineker’s services would not have been provided under a contract directly between the BBC/BT Sport and Mr Lineker and IR35 would therefore have applied to the arrangements.
What's next
HMRC have appealed this decision to the UT and the hearing is currently scheduled to be heard on 3 and 4 December 2024.
Actions to consider now
There is currently uncertainty as to how IR35 applies in the context of a contract between a partnership and a client. Therefore, large and medium sized businesses who engage services via a general partnership intermediary in these circumstances should be wary about proceeding on the basis that IR35 does not apply to those engagements as the responsibility for accounting to HMRC for income tax and NICs if the IR35 legislation applies lies with the end client. Whilst awaiting the decision of the UT, these businesses should review any engagements with workers via partnerships and assess any IR35 risk.
Abolition of the UK non-doms tax regime
What to expect
The Labour government has repeatedly spoken of its intention to abolish the current remittance basis of taxation which applies to non-UK domiciled individuals (non-doms). Very little detail has, as yet, been provided concerning the scope of those changes, although it is likely that they will go further than the proposals announced by the previous government in the Spring Budget 2024.
If the government intends to implement any changes to these tax rules in accordance with the original timescale proposed by the previous government, it’s expected that details of those changes will be released before the end of the year, perhaps even as part of the Labour government’s first Autumn budget.
When
The previous government intended to replace the existing non-dom rules with a new regime from 6 April 2025 (subject to certain transitional arrangements).
Background
Broadly, the non-dom tax rules allow most individuals who move to live in the UK to elect into a system of personal taxation where their non-UK income and gains are sheltered from UK tax unless they are actually brought into (or ‘remitted’ to) the UK – this is called the remittance basis of tax. This is available for up to a maximum of 15 years, with annual fees introduced from the 8th year.
In the Spring Budget 2024, the former Chancellor announced that it would abolish the remittance basis of tax rules for non-UK domiciled individuals and replace them with a residence-based regime from 6 April 2025.
Under the new residence-based regime:
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new arrivals to the UK would benefit from 100% tax relief on foreign income and gains (whether it is remitted to the UK or not);
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this will only apply for the first four years when they become tax resident in the UK;
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the rules will only apply to people who have been non-UK resident for a full 10 tax years;
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these new rules will apply to anyone who has moved to the UK in the last four years.
The former government also announced that for anyone currently electing for the non-dom remittance basis who has been UK resident for more than four years, there will be a single tax year (2025/26) where they will pay 50% of the UK tax on their offshore income and gains. Additionally, any UK residents who have at any stage claimed the remittance basis will be able to remit their offshore gains and income at a fixed tax rate of 12% for the tax-years 2025/26 and 2026/27. This will not apply to gains or income that arose in offshore trusts.
Additionally, the former government announced an intention to remove most tax advantages for offshore trusts (established by people now living in the UK), but retaining the Inheritance Tax protection of Trusts established prior to 6 April 2025.
No draft legislation was published by the former government prior to the general election.
What's next
The Labour government stated in its manifesto that it would “abolish non-dom status once and for all”. Announcements made by the Labour party shortly after the Spring Budget 2024 indicate that it would also:
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review the proposed transitional arrangements, in particular, removing the transitional arrangement providing for a 50% reduction in the personal foreign income subject to tax in the 2025/26 tax year;
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consider introducing an incentive for non-doms to bring their foreign income and gains to the UK after the 2026/27 tax year; and
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abolish the Inheritance Tax advantages of offshore trusts where the settlor is now UK resident.
Accordingly, it is only a matter of time before the new government turns its attention to the abolition of the non-dom regime – proposals may be announced in the new Chancellor’s first budget.
Actions to consider now
Abolition of the non-dom tax regime in the UK will have a significant impact on internationally mobile employees who currently claim the remittance basis of taxation. Although a timeframe for abolition has not been released by the government, businesses may wish to begin preparing for those changes by identifying key employees likely to be affected by them.
Tackling tax non-compliance in the umbrella companies market
What to expect
The outcome of the former government’s consultation on proposals to tackle tax non-compliance in the umbrella companies market, including the introduction of a statutory due diligence requirement applying to end users in the labour supply chain, has been awaited for some months.
When
Current and ongoing.
Background
In response to substantial growth in the umbrella company market and awareness of tax non-compliance within the umbrella company sector contributing to the wider tax gap, the “Call for Evidence: Umbrella Company Market” was published in November 2021.
The aim of that consultation was to increase the government’s understanding of why businesses and individuals use umbrella companies and to support policy development of any potential interventions to prevent abuse within the umbrella company market.
In June 2023, a summary of responses to the consultation was published, swiftly followed by the launch of a consultation setting out a number of options for preventing tax non-compliance, including:
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the introduction of a statutory, mandatory requirement to undertake due diligence with the obligation sitting with either the end client or an employment business that is in a contractual relationship with and supplies the worker to the end client;
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new HMRC powers to transfer an umbrella company’s tax debt to another party in the labour supply chain, in circumstances where this debt cannot be collected from the umbrella company itself; and
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requiring a party sitting above the umbrella company in the labour supply chain to make deductions of income tax and NICs from the fee paid for the supply of the worker’s services.
What's next
On 18 April 2024, the previous government held a Tax Administration and Maintenance Day at which it was stated that it would “publish a response to its consultation in due course”. It also committed to continue engaging with the recruitment industry and other key stakeholders on the detail of a statutory due diligence regime for businesses that use umbrella companies.
Whilst the Labour party manifesto does not specifically refer to its position on the umbrella company market, it does confirm its intention to change the law to tackle tax avoidance. As such, it’s unlikely that the new government will overlook the umbrella company market as a source of tax avoidance. However, whether a response to the consultation and a decision on a statutory due diligence requirement will be forthcoming in the new government’s first 6 months in office is uncertain.
Actions to consider now
Businesses utilising workers who provide their services via an umbrella company (whether directly or via one or more agencies) will be interested in the outcome of the consultation.
In the meantime, businesses may wish to get ahead of any potential due diligence requirements by determining which of their workers are engaged via umbrella companies and assessing the risks for their business of engaging with those particular umbrella companies in their supply chain.
Stamp duty land tax rate changes
What to expect
The current rates at which non-UK residents pay Stamp Duty Land Tax (SDLT), being 2% higher than those that apply to purchases made by UK residents, are expected to rise by an additional 1%. In addition, the nil rate thresholds applying to purchases of residential properties and purchases by first time buyers are due to return to their lower pre-September 2022 levels.
When
No timeline has been given for the increase in the rate at which non-UK residents pay SDLT. The temporary increase in the nil-rate tax thresholds will expire from 1 April 2025 if no action is taken by the new government before that date.
Background
Since 1 April 2021, a 2% surcharge has been payable on the purchase of residential properties in England and Northern Ireland in circumstances where the purchaser is a non-UK resident and the purchase price is £40,000 or more (Non-UK Resident Surcharge). The Non-UK Resident Surcharge applies in addition to all other residential rates of SDLT (including the higher rates for additional dwellings).
On 28 November 2022, the former government announced measures to temporarily increase:
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the amount that a purchaser can pay for residential property before becoming liable to SDLT by increasing the residential nil-rate tax threshold from £125,000 to £250,000; and
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the nil-rate threshold for First Time Buyer’s Relief from £300,000 to £425,0000.That relief applies if the purchaser(s) of residential property are first time buyers who intend to occupy the property as their main residence and the purchase price is no more than £625,000.
Those measures apply to purchases of residential property between 23 September 2022 and 31 March 2025.
What's next
The new government stated in the Labour manifesto, published in June 2024, that it intends to increase the Non-UK Resident Surcharge by 1%. A date for that increase to take place has not yet been made public, however, it’s fairly likely that this measure will be announced in an Autumn budget.
To add to the uncertainty, we don’t yet know if the increase would take effect from the date of that budget or, possibly, from the beginning of the new tax year.
Unless the government takes action to extend the temporary increases to the residential nil-rate tax threshold and nil-rate threshold for First Time Buyer’s Relief, those increases will expire on 31 March 2025 with the result that a greater number of residential property purchases will fall within the scope of the SDLT charge.
Actions to consider now
Businesses will want to keep a close watching brief on announcements relating to these potential SDLT changes as the new government considers its priorities for taxation. In particular, non-UK resident businesses planning to purchase residential property in the UK may wish to take steps to complete any purchases as soon as possible to take advantage of the current Non-UK Resident Surcharge rate in case the planned rise in the surcharge is announced at an Autumn budget and with immediate effect.
Date published
24 July 2024
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