Traditionally, we would have the UK Budget and tax consultations released simultaneously. This year has been different: we had the Budget on 3 March and “Tax Day” on 23 March where the Treasury released consultations helping shape future tax policy.
We have listed below areas that we think are of specific interest to those in Financial Services.
- Refinement of earlier consultations on notification of uncertain tax positions
- Possible introduction of more prescriptive transfer pricing documentation and filing requirements
- Reform of securitisation companies’ taxation
- Tax administration framework (including accelerating tax payments)
- Raising standards on tax advice (including clamping down on promoters of tax avoidance)
It is noteworthy that nothing was published in relation to:
- the earlier asset holding company consultations
- the review of the UK funds regime
- the recent IPT consultation
- the VAT grouping consultation (which has now concluded without changes)
However, it is also important to state those areas that have not been addressed. The Treasury Committee published on 1 March 2021: a report entitled “Twelfth Report – Tax after Coronavirus” stating that “the pandemic will leave behind a large increase in the public debt…” and “the public finances are on an unsustainable long-term trajectory”. It is noticeable that Tax Day has not sought to include any of the themes identified including:
- windfall and wealth taxes
- priorities for tax reform (reform of capital taxes, reform of tax treatment of self-employees and employees)
- tax strategy and implication (such a roadmap to provide greater investment certainty).
Transfer pricing documentation
HMRC has issued a consultation document, which is seeking to obtain views on the options for updating the current UK Transfer Pricing documentation requirements. The closing date for comments is 1 June 2021.
This has the potential to cause the most impactful change resulting from this series of consultations. The proposed changes follow significant developments in the field of international tax over the last five years; perhaps most notably is the Base Erosion and Profit Shifting (BEPS) project from the Organisation for Economic Cooperation and Development (OECD).
The Government is considering two key changes:
- Master File and Local File format: The introduction of a requirement for large multinational groups that fall into the country-by-country reporting (CbCR) regime to keep, and produce promptly upon request, transfer pricing documentation in line with the OECD Master File and Local File format.
- International Dealings Schedule (to submit with the Tax Return): The introduction of a new annual filing obligation, whereby certain in scope businesses must include with their annual tax return, details about material cross border transactions with associated enterprises. The government is exploring the idea that all UK businesses in scope of UK transfer pricing legislation would be required to file an International Dealings Schedule providing details about cross border, intragroup transactions where the counterparty is in another territory.
This standardised approach is expected to provide HMRC with information to carry out informed risk assessment and tax enquiries, and is in line with initiatives being taken in many other OECD countries.
From our experience, transfer pricing arrangements for groups in the financial services sector are typically complex, often with large intercompany transaction volumes and transactions that are ‘specialised’ to the sector e.g. quotashare reinsurance, brokerage commissions, asset management services and financing of property acquisitions. The need for transfer pricing arrangements to align with regulatory requirements, adds a further layer of complexity for groups operating within the financial services sector.
For these reasons, it is already imperative that such groups prepare detailed and robust transfer pricing documentation to support the specific facts and circumstances prevailing within their business.
The introduction of a prescribed format for larger groups, in line with the OECD’s Master File and Local File, may provide some very welcome structure to the existing transfer pricing documentation requirements in the UK. It may also provide UK taxpayers with greater certainty over their adherence to local transfer pricing rules (given the explicit content requirements). In its announcement, HMRC notes that most groups within the CbCR regime will routinely be creating a Master File i.e. providing HMRC with a copy should not impose a significant additional burden.
With regards the International Dealing Schedule, the Government intends to explore materiality limits to exclude some transactions from reporting requirements and reduce potential administrative burdens. Transactions could be excluded according to materiality by size or nature. Although this will inevitably become a significant additional compliance requirement for multinational groups, such thresholds may act to limit the extra administrative burden on the taxpayers in scope.
Notification of uncertain tax treatment by large businesses
As had been previously announced, the introduction of the uncertain tax position legislation has been delayed for 12 months to allow for further refinement along with a second consultation on the matter.
This consultation has now been released and responses are due by 1 June 2021.
The measure is designed to reduce the ‘legal interpretation tax gap’. It seeks to have large businesses provide HMRC with details of any tax matters where there is a potentially contentious treatment.
Some of the consequences that will require businesses to disclose to HMRC their uncertain tax position include:
- a treatment different from HMRC’s known position or established industry practice
- where the financial statements require a provision in respect of a probable different tax treatment expected to be applied
- where professional advice has been taken that is not subject to Legal professional privilege and which is either contrary to other professional advice or is not followed for determining the tax treatment.
Some key takeaways from the second consultation are:
- the consultation indicates that it will continue to apply to those businesses that are required to publish a tax strategy or fall within the Senior Accounting Officer regime
- there is a proposed reduction in the scope of taxes covered so it will now only cover Corporation Tax, Income Tax (including PAYE) and VAT
- the threshold has been proposed to be increased from £1m to £5m
From these items, it is clear there is a general move to limit the burden on business while still introducing the rules.
The wording of the consultation indicates that it could apply to returns filed after April 2022, so it is likely that companies will be impacted by this imminently as the accounting periods will commence shortly.
Reform of securitisation companies
This consultation requires responses by 3 June 2021. The Government wants the UK to keep pace with the evolving nature of the capital markets, and to maintaining the UK’s position as a leading financial services centre. The consultation covers four areas:
- Retained securitisations: this is where the originator (usually the business that transfers its assets to a securitisation company) acquires more than 50% of the securities issued by the note-issuing company, for example on a short-term basis. The Government wants to test its understanding and determine what changes would benefit retained securitisations, for example where originators acquire the notes for later release to the market or as eligible collateral for Bank of England term funding.
- Types of assets that can be securitised: presently this includes certain financial assets and derivatives but excludes those related to shares or land. The Government is asking whether the scope of assets within the Regulations should be expanded.
- Minimum note issuance threshold for the note-issuing company: the Government is asking, whether the current £10 million minimum threshold per capital market arrangement should be changed, for example, to cater for smaller issuances following an initial issuance.
- Stamp Duty and SDRT exemptions for loan capital to securitisation arrangements and to Insurance Linked Securities (ILS) arrangements. The Government is seeking to understand whether these exemptions lead to undue cost and complexity, and therefore is asking:
- whether the current wording of the loan capital exemption leads to securitisations being implemented outside the UK?
- whether such uncertainty limits the application of the loan capital exemption to transfers of pools of loan assets?
- what characteristics of notes issued by insurance special purpose vehicles (ISPVs) create uncertainty about the exemption and whether this affects ILS arrangements commercially?
The tax administration framework and timely payments
Following publication in July 2020 of the Government’s 10-year vision for the UK’s future tax administration system, two calls for evidence have now been released that seek to explore how the legislative framework can be simplified and brought up to date for the 21st century.
The background and context to both is the recognition of how the UK’s current system is in part very old (dating back to 1970), in part designed for a country that operated quite differently from today and overall is not seen as fit for the future digital age. Many examples are given to highlight the frictions this can bring for individuals and businesses alike when engaging with HMRC and the tax system, as well as the frustrations and confusions that can follow from having quite starkly different requirements existing across different taxes.
HMRC are therefore asking broad ranging and fundamental questions about potential wholesale reform of the tax administration framework – addressing the ways that taxpayers enter and exit the tax system; the way that tax liabilities are calculated, assessed and paid; the way that technology can be enabled alongside better use of tax data and information; all while ensuring effective sanctions and safeguards exist to promote taxpayer compliance.
Both calls for evidence close for comments on 13 July 2021. Having nearly four months to comment is welcome given the wide-ranging issues to be considered. The stated aims for these reforms will be to have a digital tax system that is flexible, fair and improves taxpayer experience. Equally, the intention for both reforms is to align with ongoing efforts to digitise the tax system, accelerate payments of tax to become more real-time and further reduce the tax gap. Getting the balance right across all these aims will be hugely important to businesses large and small.
Clamping down and tackling promoters of tax avoidance
There was further confirmation that the Government would like to clamp down on tax avoidance, and sees measures targeting those seen as "promoting" tax avoidance schemes as a route to do this. There is a second consultation seeking to refine the one that finished last summer. This falls within the wider tax landscape with an increasing shift away from tax avoidance and towards "managing risk" and paying an appropriate level of tax. It is clear that the Government intends to use professional advisors to assist with this.
Tax treatment of Superfunds
The Treasury will review the appropriate taxation framework for Superfunds (which collect and run defined benefit pension schemes). This will be alongside an appropriate regulatory structure. The announcement states “...the current tax regime in place should not be assumed as being appropriate for Superfunds...”, which suggests that significant changes could be on the way, although we do not know when, nor whether these will be positive changes.
Residential Property Developer Tax
The Government has stated its intention to introduce a new tax in 2022 on the “largest residential property developers”. Details are still awaited as to who this would impact, however, the stated purpose of the tax is to raise £2bn over a decade to help pay for the costs of cladding remediation.
A consultation will be published in the coming months and the outcome could add significant costs to the development of residential property for large groups.
This has effectively introduced yet further areas of uncertainty over the next 12-24 months for the Real Estate sector, despite the stated aims of the Government to provide more certainty for businesses.
Dormant Asset Scheme expansion
The Government has announced its intention to legislate to include a wider range of assets across the insurance and pensions, investment and wealth management, and securities sectors within the scope of the Dormant Assets Scheme. Changes are proposed to be made to both capital gains tax and pensions tax legislation. The scheme is designed to reunite people with their funds, the existence of which they may not be aware, and where that is not possible to put the funds to good social uses and causes.
Business Rates review
HM Treasury have issued an interim report on its review of business rates. The report summarised the responses to the Government’s previous call for evidence.
There were also significant measures undertaken following the onset of the COVID-19 pandemic, however, a more fundamental review of the entire business rates system is still to be undertaken, with the full report due in Autumn 2021.
The taxation of trusts: a review
The Treasury has concluded that there is “no desire for comprehensive reform of trusts at this stage”. This view is taken is from consultation on the taxation of trusts review in 2018 and 2019. This area will remain subject to further review.