Consulting on further regulatory changes to support pensions investment in long-term, productive assets
Following recommendations from the Taskforce for Innovation, Growth and Regulatory Reform and the Productive Finance Working Group, the government will consult before the end of the year on further changes to the regulatory charge cap for defined contribution auto-enrolment pension schemes to enable pension savers to benefit from better growth in their long-term investments. The consultation will specifically consider amendments to the scope of the cap to better accommodate well-designed performance fees and enable investments into the UK’s most productive assets, while continuing to protect savers.
Asset Holding Companies Tax Regime and Real Estate Investment Trusts: Amendments
Following two consultations, the government is introducing a new framework for the taxation of companies that are used by funds and institutional investors to make their investments – asset holding companies (AHCs). These new rules, which cover the taxation of AHCs as well as payments made by AHCs (including changes to the remittance basis), will help to build the UK’s strengths as an asset management hub by enhancing the Autumn Budget and Spending Review 2021 and attractiveness of the UK as a location for AHC establishment.
As a reminder, QAHC must be at least 70% owned by diversely owned funds, or certain institutional investors, and mainly carry out investment activity with no more than insubstantial ancillary trading.
The aim of QAHC is to provide an intermediate holding company where the underlying investors are taxed as if they owned the underlying asset and the QAHC itself is taxed only on the profits appropriate to the activities they perform.
Targeted changes are also being made to the tax rules for Real Estate Investment Trusts (REITs). In particular, the changes for REITS will:
- Remove the requirement for REIT shares to be admitted to trading on a recognised stock exchange in cases where institutional investors hold at least 70% of the ordinary share capital in the REIT
- Amend the definition of an overseas equivalent of a UK REIT so that the overseas entity itself, rather than the overseas regime to which it is subject, needs to meet the equivalence test
- Remove the ‘holders of excessive rights’ charge where property income distributions (PIDs) are paid to investors entitled to gross payment
- Amend the rules requiring that at least 75% of a REIT’s profits and assets relate to property rental business (the ‘balance of business test’) to disregard non-rental profits arising because a REIT has to comply with certain planning obligations, and to ensure the items currently specified as excluded from the profits part of the test are disregarded in all parts of the test
- Introduce a new simplified balance of business test so that, if group accounts for a period show that property rental business profits and assets comprise at least 80% of group totals, a REIT will not have to prepare the additional statements which would be required to meet the full test
These tax changes for AHCs and REITs will take effect from April 2022.
Corporate Re-domiciliation
The government intends to make it possible for companies to re-domicile and therefore easier to relocate to the UK and is seeking views on how best to do this. This will allow companies to take advantage of the UK’s infrastructure and skills, while promoting jobs, innovation and investment in the UK. The consultation Paper issued with the Budget can be found here.
Tax & Industry Update - Technical Summary
While the Autumn Budget was clearly aimed to give rather than take, there are a few tax changes which businesses and individuals should be aware.
Research & Development (‘R&D’) tax relief reform
R&D reliefs will be reformed to bring data and cloud costs into qualifying expenditure. Relief will be focused on UK spending.
These changes will take effect from April 2023. Further details of these changes and next steps for the review will be set out in due course.
Annual investment allowance
The temporary increase in annual qualifying expenditure was due to come back down to £200,000 from 1 January 2022. The higher £1m limit is extended for 15 months to 31 March 2023
Review of VAT on management fees
It has been confirmed that there will be a review of the VAT treatment of fund management fees. At the moment the manager of a non-UK fund can potentially recover more VAT on its costs than the manager of a UK fund can do so. If this anomaly is altered positively it would encourage new funds to be set up in the UK rather than abroad.
Basis period reform for the self-employed and partnerships
Currently, individuals who are self-employed or members of partnerships pay income tax based on their profits for the accounting year which ends in each tax year. From 2024/25 this will change so that they are subject to tax on profits which arose during the fiscal year, regardless of accounting date. A transition from the current basis will take place during 2023/24. Affected individuals who don’t currently pay tax on profits for years ending 31 March or 5 April may wish to seek advice on how this will affect their January and July tax payments.
Capital Gains Tax on residential property disposals
Effective today, anyone selling a UK residential property where a liability to capital gains tax arises, now have 60 days from completion to pay the tax due. Previously, the time limit was 30 days.
Increase in tax rates for dividend income
From 6 April 2022 the rates of Income Tax applicable to dividend income will increase by 1.25%. The dividend ordinary rate will be set at 8.75%, the dividend upper rate will be set at 33.75% and the dividend additional rate will be set at 39.35%. Companies may wish to make dividend payments before 6 April 2022 in order to take advantage of the lower rates currently in force.
Increasing Normal Minimum Pension Age
The government will legislate in Finance Bill 2021/22 to increase the earliest age at which most pension savers can access their pensions without incurring an unauthorised payments tax charge, the normal minimum pension age, from 55 to 57. This increase will have effect from 6 April 2028.
Discovery assessments
Having lost a number of recent tax cases HMRC are clarifying when they can issue “discovery” assessments to recover the tax owed where higher rate child benefit, gift aid or pension charges have not been assessed. This measure does not change this policy but makes a technical clarification to clarify the law to provide legal certainty and maintain the status quo. This has an element of retrospective application.
The measure also confirms that individuals chargeable on these to these income tax charges need to notify HMRC. This part of the measure is introduced with prospective effect.
The most likely impacted are those not currently taxed under self-assessment. However, with allowable pension contributions now as low as £4,000 for high earners care is needed by all taxpayers.
Notification of uncertain tax treatment for large businesses
Large businesses will be required to notify HMRC where they have adopted an uncertain tax treatment that HMRC is not already aware of through its ongoing customer compliance relationship. Amounts of Corporation Tax, Value Added Tax or Income Tax (via Self-Assessment or PAYE) will be classified as uncertain where a provision is made in the accounts for the uncertainty, and the tax treatment applied is not in accordance with HMRC’s known position.
The measure will apply to the Corporation Tax, Value Added Tax and Income Tax returns (via Self-Assessment and including amounts collected via PAYE) of large businesses that are due to be filed on or after 1 April 2022, and businesses will only be required to notify HMRC only if the tax advantage exceeds a £5million threshold.
Abolition of cross-border group relief
The legislation that permits UK companies in certain circumstances to claim group relief for losses incurred in the European Economic Area (EEA) will be repealed. Amendments will also be made to remove separate rules for EEA-resident companies so that all non-UK resident companies can only surrender as group relief losses of a UK PE if it is not possible for the loss to be deducted from non-UK profits of any person for any period. The changes will apply for accounting periods ending after 27 October 2021.
Taxation of securitisations and insurance-linked securities
This measure introduces a power enabling HM Treasury to make Stamp Duty and Stamp Duty Reserve Tax (SDRT) changes in relation to securitisation and insurance-linked securities (ILS) arrangements by secondary legislation, and will have effect from Royal Assent to Finance Bill 2021-22.
Economic Crime (Anti-Money Laundering) Levy
Economic Crime (Anti-Money Laundering) Levy will be established on entities that are regulated for AML purposes. The levy will first be charged on entities that are regulated during the period from 1 April 2022 to 31 March 2023 (the first levy year). The amount payable will be determined by reference to their size based on their UK revenue from periods of account ending in that year.
Please contact Daniel Kerry (Daniel.Kerry@throgmorton.co.uk) or your usual tax contact at Throgmorton if you have any questions.
