Tax Horizon Scanner

Background

The UK’s transfer pricing rules have been a particular focus of HMRC in recent years.

In April 2023, the former Conservative government announced that it was considering reforms to three elements of the UK international tax legislation, including transfer pricing. The aim of the proposed transfer pricing reforms was to clarify, simplify and improve the current rules and the government announced its intention to legislate to achieve this aim in its response to the consultation, published in January 2024.

Subsequently, HMRC published new “Guidelines for Compliance” in September 2024 to help businesses who fall within the scope of the transfer pricing rules to navigate their compliance obligations.

What's next?

The Labour government’s Corporate Tax Roadmap (which was published alongside the Autumn Budget on 30 October 2024) sets out new proposals in relation to transfer pricing. These are to:

• further consult on reforms to the UK’s rules on transfer pricing including the potential removal of UK-UK transfer pricing – this proposal is aimed at reducing the UK compliance burden;
• review the transfer pricing treatment of cost contribution arrangements where the costs and benefits of developing intellectual property are shared by group companies – this proposal is intended to encourage investment in the UK;
• introduce a requirement for multinational businesses in the scope of the transfer pricing rules to report cross-border related party transactions to HMRC – this proposal is an attempt to tackle tax non-compliance; and
• consult on a proposal to lower the thresholds for exemption from transfer pricing - this proposal is intended to align the UK with international peers and manage risks to the UK tax base. Currently, most medium sized enterprises (broadly a business that has no more than 250 staff and either an annual turnover of less than Euro 50m or a balance sheet total of less than Euro 43m) do not fall within the scope of the transfer pricing rules.

The Corporate Tax Roadmap envisages that the government will retain an exemption from transfer pricing for small businesses (being those with no more than 50 staff and either an annual turnover or balance sheet total of less than Euro 10m).

Actions to consider now

Medium sized businesses will potentially be significantly impacted by the proposed expansion of the transfer pricing rules and will want to give detailed consideration to the consultation document. Those businesses should keep a watching brief on the publication of the consultation. No doubt businesses will welcome the opportunity to voice any concerns relating to the expansion of the rules and, in particular, the timing of the expansion since businesses will need time to prepare fully to ensure compliance with the complex rules.

If you would like to discuss the implications of the consultation for your business once the consultation is launched, please get in touch with the TLT Tax team.

Background

Since 23 September 2022, the residential nil-rate tax threshold, being the amount that a purchaser can pay for residential property before becoming liable to SDLT, has been £250,000 and the nil-rate threshold for First Time Buyer’s Relief has been £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 thresholds were announced on 28 November 2022 as temporary increases which would apply to purchases of residential property until 31 March 2025.

The government did not announce an extension to the temporary increases at the Autumn Budget held on 30 October 2024.

What's next

From 1 April 2025, the residential nil-rate tax threshold and the nil-rate threshold for First Time Buyer’s Relief will reduce to £125,000 and £300,000 respectively. This will result in a greater number of residential property purchases falling within the scope of the SDLT charge.

Actions to consider now

At the Autumn Budget the government announced an increase to the higher rates of SDLT payable by purchasers of additional dwellings in addition to an increase in the single rate of SDLT payable by companies and non-natural persons acquiring certain dwellings. It therefore comes as no surprise that the government is keen to see the temporary increase in the residential nil-rate tax threshold and the nil-rate threshold for First Time Buyer’s Relief come to an end.

Businesses involved in the purchase of residential property may wish to consider accelerating property purchases to mitigate the effects of the threshold increases.

Background

Currently, a UK employer is required to account for income tax under the PAYE system in relation to all of the earnings paid by the UK employer to an employee who is non-UK resident if they work for that employer both in and outside the UK. However, since the employee is likely only to be required to pay income tax in the UK in relation to those earnings that relate to their UK duties, this results in an overpayment of income tax.

To address this situation, when a non-UK resident employee works for a UK employer and has both UK and non-UK workdays, the employer may apply to HMRC for a direction (referred to as a section 690 direction) that the UK employer only has to operate PAYE in relation to the proportion of the employee’s earnings which relate to their UK duties.

Currently, the employer is only permitted to operate PAYE on the earnings relating to the employee’s UK duties once HMRC has issued the section 690 direction. This means that the UK employer will be required to account for income tax under PAYE on the employee’s full earnings until the section 690 direction is received.

At the end of the tax year, the employee is required to complete a UK self-assessment tax return to determine the correct tax position. The employee may be required to make an additional payment of income tax to HMRC if the number of UK workdays exceeded the estimate on which the section 690 direction was issued or seek a refund of income tax if the number of UK workdays was less than anticipated.

What's next

The Finance Bill 2025 (once enacted) will introduce a change, from 6 April 2025, to the operation of PAYE where a section 690 direction has been applied for by the employer. The change will mean that the UK employer will be permitted to operate PAYE on a partial basis from the date that the application to HMRC for the section 690 direction is made (and not the later date when HMRC issues the direction). This should provide a cashflow advantage for the employee and minimise the adjustments required at the end of the tax year.

The requirement for the employee to complete a UK self-assessment tax return at the end of the tax year (and to pay to HMRC any underpayment of income tax or seek a refund from HMRC of any overpaid income tax) will remain.

Actions to consider now

UK employers with internationally mobile employees will welcome the proposed changes to the PAYE accounting regime for those employees.

Given that there is often a significant delay between the application to HMRC and HMRC issuing the section 690 direction, as 6 April 2025 approaches, employers intending to apply for a section 690 direction for an internationally mobile employee:

• should take advice regarding the conditions to be satisfied in order for an application for a section 690 direction to be made; and
• may wish to consider deferring the application to HMRC until 6 April 2025 to take advantage of the relaxation.

Background

At the Autumn Budget on 30 October 2024, the government announced a number of measures aimed at increasing revenue from employer NICs including an increase in the rate at which employer NICs are payable.

At the same time, beneficial changes to the Employment Allowance were announced. The Employment Allowance took effect from 6 April 2014 and was intended to provide a relief of up to £2,000 a year per eligible employer against their secondary Class 1 NICs liabilities. Since April 2022, the Employment Allowance has been limited to £5,000 per eligible employer per year.

In April 2020, access to the relief was restricted to those employers who had incurred a secondary Class 1 NICs liability of less than £100,000 in the tax year immediately prior to the year of claim. The aim of the restriction was to focus the allowance at smaller businesses.

What's next

From 6 April 2025:

• the NICs Secondary Threshold, being the earnings after which an employer becomes liable to pay secondary Class 1 NICs on an employment, will be reduced from £9,100 a year to £5,000 a year. This change will be in effect until 5 April 2028 after which date the threshold will increase in line with the Consumer Prices Index;
• the rate at which secondary Class 1 NICs are payable will increase from 13.8% to 15%;
• the maximum Employment Allowance will increase from £5,000 to £10,500; and
• the restriction applying to the Employment Allowance which means that employers who have incurred a secondary Class 1 NICs liability of more than £100,000 in the tax year immediately prior to the year of claim are unable to claim the allowance will be removed.

Actions to consider now

Since the changes to the NICs Secondary Threshold and secondary Class 1 NICs rate do not take effect until 6 April 2025, there is still time for employers to take steps to mitigate the impact of those changes on their business.

Employers may wish to explore alternative ways to remunerate their employees, for example, making use of HMRC tax-advantaged share options or tax-efficient share incentive structures in place of salary increases or annual cash bonuses.

There may also be opportunities for employers to offer salary sacrifice arrangements to employees to access both employee and employer Class 1 NICs savings, for example, these arrangements might be operated in connection with pension contributions and cycle-to-work schemes.

Background

The case of Revenue and Customs Commissioners v Hotel La Tour Ltd involved the sale by Hotel La Tour Ltd (HLT) of its wholly owned subsidiary, Hotel La Tour Birmingham Ltd (HLTB). HLT and HLTB were a VAT group with HLT as the representative member.

HLTB owned and operated a luxury hotel in Birmingham and HLT provided HLTB with management services including the provision of key personnel for the hotel business.

In 2017, HLT sold the shares in HLTB for the net amount of £16,000,000 comprising consideration for the shares and repayment of a loan made by HLT to HLTB less the cost of sale including the fees for professional services (Services). The Services, costing HLT £382,899.51 plus VAT of £76,822.95, were provided by marketing agents, solicitors and chartered accountants.

HLT intended to, and did, use the proceeds of sale to part-fund the development of a new hotel.

HLT sought repayment of the VAT input tax incurred on the Services, but following enquiries (and an internal review), HMRC disallowed the repayment of the input tax on the basis that the Services were used to make a supply of shares on which VAT is not deductible because it is a VAT exempt supply.

The First Tier Tribunal (FTT), relying significantly on the Court of Justice of the European Union case of Skatterverket v AB SKF (SKF) found in favour of HLT, deciding that the VAT on the Services was recoverable because there was a direct and immediate link between the costs incurred and HLT’s taxable business of building and developing and the eventual management of the new hotel.

The Upper Tribunal (UT) agreed with the FTT decision and HMRC appealed to the Court of Appeal.

The Court of Appeal determined that the SKF case established only that input tax incurred in connection with the sale of shares could, in theory at least, be attributed to overheads if (and only if) there was no direct and immediate link established by way of direct attribution to the share sale.

The Court of Appeal held that neither SKF (nor any of the other authorities) displaced the operation of the ordinary VAT rules. Input tax connected with a share sale may have a direct and immediate link either with the share sale or with the taxpayer’s business as a whole. This meant that HLT was prevented from recovering input tax if that input tax had a direct and immediate link with HLT’s exempt supply of shares in HLTB.

It was determined by the Court of Appeal that the inputs incurred by HLT (being the marketing costs, solicitors’ and accountants’ fees) were cost components of, and were directly and immediately linked with, the exempt share sale and therefore the input tax payable by HLT in respect of the Services was irrecoverable by HLT. The Court was not persuaded that the existence of a VAT group between HLT and HLTB at the time of the share sale altered their conclusion and therefore HMRC’s appeal was allowed.

Read the Court of Appeal judgment here.

What's next

The taxpayer was granted permission to appeal to the Supreme Court. The Supreme Court hearing was originally scheduled to be heard between 24 and 26 June 2025, however, those dates were removed from the schedule and new hearing dates are awaited. Based on the original Supreme Court listing, it is expected that the hearing will take place in Spring 2025.

Actions to consider now

The decision of the Supreme Court will be of interest to taxpayers who had been hoping to make additional claims for input tax following the FTT and UT decisions. Businesses contemplating selling a subsidiary should consider the impact of the Court of Appeal decision on their costs of sale and ensure those costs are provided for in their financial planning.

Background

There was concern amongst business owners in the run up to the Labour government’s first budget that significant changes to the rates of CGT might be announced in an effort to more closely align the main rate of CGT with the higher rate of income tax.

Whilst increases in the main rate of CGT for basic rate taxpayers (from 10% to 18%) and for higher and additional rate taxpayers (from 20% to 24%) were announced at the Autumn Budget 2024, the increases, particularly for higher and additional rate taxpayers, were relatively small. Those increases, which apply to disposals made on or after 30 October 2024, are accompanied by anti-forestalling provisions applying to certain unconditional contracts entered into before 30 October 2024 where completion occurs on or after that date.

There was speculation that changes would also be made to BADR and Investors’ Relief including, in the case of BADR, withdrawal of the relief. Whilst both reliefs remain available to taxpayers, increases in the CGT rates applying to both reliefs were announced at the Autumn Budget 2024 together with a significant reduction in the lifetime limit for Investors’ Relief from £10 million to £1 million. That reduction, which took effect for disposals made on or after 30 October 2024, brings it into line with the £1 million lifetime limit which applies to BADR.

It was clear from the Labour party’s manifesto that it would take action in relation to the taxation of carried interest if it was to form a government. Shortly following the 2024 General Election, the Labour government launched a call for evidence on the taxation of carried interest, the focus of which was to consider how the tax treatment of carried interest could most appropriately reflect its economic characteristics. This led to the announcement, at the Autumn Budget 2024, of a short-term increase in the rate of CGT applying to carried interest to be followed by a significant reform of the taxation of carried interest.

Further reading - Autumn Budget 2024: Capital Gains Tax update.

What's next

From 6 April 2025:

• the CGT rate that applies to BADR will increase from 10% to 14%. The rate will increase further to 18% for disposals made on or after 6 April 2026;
• the rate of CGT that applies to Investors’ Relief will increase from 10% to 14%. The rate will increase further to 18% for disposals made on or after 6 April 2026;
• anti-forestalling legislation will apply to both the BADR and Investors’ Relief rate increases; and
• the CGT rate for carried interest will increase to 32% (from 28%).

From April 2026, the taxation of carried interest will be reformed with the result, broadly, that carried interest will be treated as trading profits and subject to income tax and Class 4 National Insurance Contributions. A lower effective rate of income tax is expected to apply to certain “qualifying” carried interest.

Actions to consider now

Business owners and investors considering exiting their business may want to consider selling their assets before the increases to the CGT rates for BADR and Investors’ Relief take effect.

Fund managers expecting to receive carried interest will want to consider how the reforms will impact on them and whether they are likely to benefit from the lower rate of income tax for “qualifying” carried interest. Fund managers may wish to engage with HMRC via the open carried interest consultation which focuses on the conditions for “qualifying” carried interest. The consultation runs until 31 January 2025 and responses can be emailed to: carriedinterest@hmtreasury.gov.uk.

Read the consultation in Chapter 4 of HM Treasury’s “The Tax Treatment of Carried Interest: Call for Evidence Summary of Responses and Next Steps” available here.

Background

In the case of Gunfleet Sands Limited, Gunfleet Sands II Limited, Walney (UK) Offshore Windfarms Limited and Orsted West of Duddon Sands (UK) Limited v HMRC, the taxpayer companies (each members of the same corporate group) carry on the trade of generating and selling electricity from windfarms located on various sites off the UK coastline.

When setting up the windfarms, the taxpayer companies incurred significant expenditure totalling around £48 million on various environmental impact, technical and engineering studies and project management costs (the Expenditure).

Under section 11 of the Capital Allowances Act 2001, capital allowances are available for expenditure “on the provision of plant and machinery”. Whilst HMRC accepted that each taxpayer was entitled to capital allowances on the costs incurred on the fabrication and installation of the wind turbines themselves and on the connector cables connecting the turbines (together the Generation Assets), HMRC’s view was that the Expenditure was too remote from, and not on the provision of, the Generation Assets and did not qualify for capital allowances.

The key question for the First Tier Tribunal (FTT), on appeal by the taxpayers, was whether the Expenditure was “on the provision of” plant and machinery. The FTT considered each of the sets of environmental and technical studies finding that some types of study were qualifying and others were not. Accordingly, the taxpayer companies and HMRC appealed to the Upper Tribunal (UT) against the FTT’s decision in relation to the Expenditure which the FTT found against them on.

In order to determine the key issue, the UT first considered whether each wind turbine and each connected cable were single items of plant (as argued by HMRC) or whether they were collectively an item of plant (as argued by the taxpayers). The UT upheld the decision of the FTT that the Generation Assets at each windfarm were plant. The FTT took the right approach of considering whether there was a single operational function of the Generating Assets (here, generating electricity).

In relation to whether the Expenditure was “on the provision of” plant and machinery, the UT found that the FTT had made a number of errors in relation to approach which were clearly material. Accordingly, the UT remade the decision, determining that:

• a strict and narrow interpretation of the statutory words should be applied;
• the fact that expenditure was necessary before a taxpayer was in a position to provide plant does not make that expenditure “on the provision of plant”;
• design of plant does not constitute provision of plant;
• expenditure on data gathering, even if it constitutes work which forms the basis for advice which could then inform the construction, transportation and installation of plant, or components of that plant, is not expenditure “on the provision of plant”; and
• the studies constituted advice on where, how or when to install plant but were not the actual installation of the plant.

Accordingly, the UT determined that none of the environmental impact or other technical studies qualified as “on the provision of” plant on the basis that expenditure on those studies was not expenditure on the actual making or construction of the plant, its actual installation or actual transport of it.

Read the Upper Tribunal judgment here.

What's next

The taxpayers were granted permission to appeal to the Court of Appeal and the appeal is due to be heard on 4 February 2025.

Actions to consider now

The strict and narrow interpretation of the statutory words adopted by the Court of Appeal means that expenditure which is necessary to enable plant to be constructed may not qualify for capital allowances which may have a significant financial impact on a construction project. Taxpayers will therefore hope that the Court of Appeal reaches a different conclusion to the UT. In the meantime, businesses planning construction projects should carefully consider the impact of this decision at an early stage in their financial projections.