UK Budget 2021: Update for international businesses

Chancellor Rishi Sunak today delivered his first Budget since the conclusion of Brexit. The Budget was delivered through the lens of the COVID pandemic but begins to set out the government’s vision for a post-Brexit UK on the global stage.

We outline the top implications for international businesses.

Increased Corporation Tax.

The headline announcement is an increase in the headline rate of Corporation Tax on company profits from 19% to 25% from 2023. This rate will apply to businesses with profits over £250,000. Whilst this is a significant increase, the Government is keen to point out that the UK would still have the lowest rate of the G7.

Increase in Diverted Profits Tax.

The UK Diverted Profits Tax (DPT) is designed to deter large multinational enterprises with business activities in the UK from entering into artificial or contrived arrangements to divert profits from the UK. The rules apply where either steps are taken to avoid a UK permanent establishment or through arrangements between connected entities. Where the DPT applies, profits are currently taxed at the DPT rate of 25% as opposed to the headline Corporation Tax rate. When that the headline rate increases to 25%, the DPT rate will increase to 31% so that it continues to provide the same deterrent.

Freeports.

The Budget announced the creation of eight Freeports in the UK in part to mitigate some of the issues that have arisen from Brexit but also as part of a plan to boost the economy.

Essentially, a Freeport allows goods to be physically imported into the country but without any UK duty or VAT being charged, until and only if the goods leave the Freeport and enter free circulation in the UK. Import declarations are also simplified. If the goods are re-exported before entry to the UK market, no UK VAT or duty is payable.

Other tax benefits from the UK Freeports include:

• Enhanced Capital Allowances (100% on all qualifying spend on plant and machinery);
• Enhanced Structure and Buildings Allowances;
• No SDLT on property purchases or leases; and
• Employer’s National Insurance Contributions (Social Security) holiday on wages paid to employees within the Freeport.

Repeal of EU Interest & Royalties Directive provisions.

Now that the UK has left the European Union, technical changes have been made in order to reinstate an obligation to withholding income tax on certain payments of interest and royalties made to connected companies in EU member states. It should be noted, however, that the UK

has a wide range of double tax treaties which may reduce withholding in any event, although applications to tax authorities may be needed to benefit from these reliefs.

Extended Loss Carry Back.

Those businesses that have been pushed into a loss-making position will be able to carry back losses for up to three years rather than the normal one year. This extension will apply for the tax years 2020/21 and 2021/22. Relief will only be available for losses of up to £2m and this cap will apply to groups as well as individual companies. However, as well as the overall £2m cap, companies that are members of a group will be able to obtain relief for up to £200k of losses without any group limitation.

Super Deduction Tax Relief.

To encourage investment by companies, the Chancellor has announced a new Super Deduction Tax Relief, with tax relief of 130% on qualifying spend. This enables companies to receive 25p of relief for every £1 of eligible expenditure. Investment must be in new qualifying plant and machinery and be made in the next two years. There is no upper limit on the level of investment qualifying for this relief and it is only available to companies. Where an asset is subsequently sold there is a potential clawback of the super deduction to prevent abuse. A 50% first year allowance will also be available for qualifying special rate assets (including long life assets).

Hybrid and other mismatches.

A number of technical changes have been made to the Hybrid Mismatch rules to ensure that the regime operates as intended.

VAT.

Apart from targeted extensions to a VAT reduction for hospitality businesses and the broader implications from the introduction of Freeports, the Budget did not give rise to any changes in VAT rates and / or VAT registration thresholds.

Controlled Foreign Companies (CFCs).

Broadly the rules dealing with CFCs are anti-avoidance in nature aiming to prevent UK resident companies setting up subsidiaries abroad with a view to keeping profits outside the UK tax net. Any profits of such an overseas subsidiary that could be attributable to UK activities would be taxed in the UK as a CFC charge.

Whilst the budget did not introduce any changes to the rules or operation of CFC’s, the proposed increase in the Corporation Tax rate to 25% will affect one of the key exemptions available to controlled foreign subsidiaries of UK companies, being that the local tax in the jurisdiction in which it operates is at least 75% of the corresponding UK tax (‘The Tax Exemption’).

Due to the increase, the ‘threshold’ for the exemption has increased from 14.25% currently to 18.75% in 2023. This means that tax rates in fewer jurisdictions will apply for the exemption and thus controlled companies that in the past may have been exempt will need to either apply another of the exemptions available or pay additional tax in the UK.

OECD Mandatory Disclosure Rules (MDR).

EU mandatory disclosure regime Directive 2018/822 (or ‘DAC6’) reporting applies to cross-border tax arrangements, which meet one or more specified characteristics (hallmarks), and which concern either more than one EU country or an EU country and a non-EU country. It mandates a reporting obligation for these tax arrangements if in scope no matter whether the arrangement is justified according to national law.

As a result of Brexit and the Free Trade Agreement, the UK committed to exchange information on potential cross-border tax planning arrangements at a level that complies with the OECD MDR. As a result, from 1 January 2021 the scope of the proposed rules were significantly narrowed and so only one of the originally 5 hallmarks proposed obligate a reporting requirement in the UK, being broadly where agreements undermine reporting requirements or agreements which obscure beneficial ownership through the use of offshore entities.

The government will consult later this year on draft regulations to implement the OECD’s MDR, which facilitate global exchange of information on certain cross-border tax arrangements, to combat offshore tax evasion.

Employees.

For businesses with employees in the UK, despite the looming threat of tax increases, no increases were introduced or signposted for individuals in the form of income tax or national insurance contributions.

Whilst there is a need for the Chancellor to increase tax revenues to pay for the support provided throughout the pandemic, the UK is still an attractive place to do business, either as a location for a holding company, or for trading entities. The Super Deduction Tax Relief will mean that if significant investment is going to be made in new plant and machinery, it would be best to do this within the next two years to maximise the tax relief secured.

We will be regularly updating the Budget pages of our website. If you would like to discuss the implications, please don’t hesitate to get in touch. Alternatively, book your place on our Budget question time webinar on Friday 5 March 2021 to find out more.