Corporate tax update - January 2023

Welcome to the latest edition of our Corporate Tax Update, written by members of RPC's tax team.

This month's update reports on some of the key developments from November and December 2022

This includes updates from the 2022 Autumn Statement, an ECJ ruling on the VAT treatment of vouchers provided to employees under a staff reward scheme, a Court of Appeal decision on the VAT treatment of supplies of staff and various OECD 'pillar 2' related developments.

November 2022

PAYE regulations amend employee expenses tax relief mechanism

On 28 November 2022, Regulations were made to:

• Widen the scope of regulation 65A of the Income Tax (Pay as you Earn) Regulations 2003 (SI 2003/2682) (Regulation 65A).
• Require employees claiming relief for certain deductible expenses to provide further information to HMRC. 

Regulation 65A provides a mechanism for employees to claim tax relief on certain eligible expenses totalling less than £2,500 in a tax year without having to file a self-assessment tax return (unless otherwise required).

As a result of the changes, which took effect on 20 December 2022, Regulation 65A now also applies to fixed allowances for employee expenses under Chapter 4 of Part 5 ITEPA 2003.

The new information required to be provided to HMRC (using Form P87) includes:

• The tax year for which the employee is entitled to the tax relief.
• The employee's full name, date of birth, address and National Insurance number.
• A description of the deductible expense (including the amount), the employer's PAYE reference number and (for fixed allowances) details of the employer's industry / business sector.

The Regulations can be viewed here.

UK government publishes response to consultation on implementing OECD mandatory disclosure rules (MDR)

On 24 November 2022, the government published its response to the November 2021 consultation on regulations to implement the OECD's mandatory disclosure rules (MDR). The current rules requiring disclosure of certain cross-border tax avoidance arrangements will be replaced by new rules, which will be implemented during 2023.

In response to stakeholder concerns:

• The requirement to report pre-existing arrangements will apply from 25 June 2018.
• Pre-existing arrangements from that date must be reported with 180 days of implementation of the new rules. 
• 'New' reportable arrangements (following implementation of the new rules) must be reported within 30 days. 
• Mitigations to the burden of reporting in the draft regulations will remain.
• Businesses will need to report using XML software. HMRC will not provide an online manual system.

HMRC confirmed that they may consider expanding their current guidance on the existing regulations to address certain specific areas and complex issues.

To view the consultation response, see here.

Staff reward vouchers not subject to VAT – ECJ decision in GE Aircraft Engine Services Ltd 

On 17 November 2022, the ECJ ruled¹ that output tax was not due from an employer on the value of vouchers awarded (free of charge) to employees as part of a reward scheme for high performance. 

The reasons for the ECJ's conclusion can be summarised as follows:

• Any advantage for employees arising from the reward scheme was incidental to the needs of the (employer's) business.
• This particular reward scheme was primarily established to increase the employer's business profitability (by improving employee performance).
• the employer bore the full cost of the vouchers and the employees had the choice of how to redeem the vouchers.
• An employee had no means of ensuring they would receive a voucher.
• Output tax would be payable by the retailer on redemption of a voucher.

From a practical perspective, employers operating similar reward schemes should take care that the reward scheme can be shown to be designed primarily to improve business performance with no more than incidental benefit to employees.

To view the decision, see here.

2022 Autumn Statement 

On 17 November, the Chancellor delivered the 2022 Autumn Statement. The key corporate tax announcements are summarised below. For full details of what was announced in the Autumn Statement, see here.

Increase in the energy profits levy 

From 1 January 2023, the energy profits levy increased from 25% to 35%. This increase will remain in place until at least 31 March 2028 (an extension of over two years). In addition, the trading deduction for qualifying investment expenditure will reduce from 80% to 29% (with the exception of the deduction for decarbonisation expenditure which will remain at 80%). 

Electricity generator levy 

From 1 January 2023, an electricity generator levy of 45% has been introduced, designed to apply to "exceptional generation receipts". This levy will remain in place until 31 March 2028. This is part of a package of measures intended to support households and businesses during the 'cost of living' crisis.

The levy will apply to companies and corporate groups that generate electricity in the UK connected to the national grid or local distribution networks from the following sources:

• Nuclear
• Renewables
• Biomass

An allowance of £10m per annum per group will apply. A benchmark price of £75 per MWh has been set - if electricity prices fall below the benchmark price, no levy will be due. The levy will also not apply if less than the de minimis threshold of 50,000 megawatt hours (MWh)² per annum of electricity is generated. The levy will not be deductible from profits subjected to corporation tax.

Exclusions from the levy include: 

• Electricity generated under a contract for difference entered into with the Low Carbon Contracts Company Ltd
• Storage hydroelectricity
• Battery storage
• Coal or oil generation
• Electricity generated from gas

Banking company tax surcharge 

From April 2023, the planned decrease of the banking company tax surcharge rate from 8% to 3% will go ahead.

Diverted profits tax (DPT)

The rate of DPT will increase from 25% to 31% from April 2023.

Global minimum corporate tax rate

It was announced that the government will implement the OECD's pillar 2 proposal for a global corporate tax rate from 31 December 2023.

The Spring Finance Bill 2023 will include the following:

• An income inclusion rule, so that large multinational groups with UK headquarters must pay a 'top up' tax if their foreign operations have an effective tax rate of less than 15%.
• A domestic 'top-up' tax in the event that UK operations have an effective tax rate of less than 15%.

Please see RPC's corporate tax update January 2022 for further details of the OECD's pillar 2 rules.

Online sales tax

It was announced that the government will not be proceeding with any plans to introduce an online sales tax.

Research and development (R&D) reforms for SMEs

The government announced that, for expenditure on or after 1 April 2023:

- the R&D expenditure credit rate will increase from 13% to 20%
- the SME additional deduction will decrease from 130% to 86% 
- the SME credit rate will decrease from 14.5% to 10%

It was also confirmed that the scope of R&D tax reliefs will be expanded by bringing data and cloud costs into the scope of 'qualifying expenditure'.

The government will consult on whether more support should be provided for R&D activities for SMEs.

VAT registration - threshold frozen for two years

It was announced that the VAT registration and deregistration thresholds will remain at £85,000 for a further two years from 1 April 2024, taking the registration threshold frozen period to 31 March 2026.

UK signs multilateral agreement on digital platform information exchange 

On 9 November 2022, the UK (together with 22 other jurisdictions) signed the multilateral competent authority agreement for the automatic exchange of information about income earned through digital platforms. This demonstrates the UK's continuing commitment to initiatives for the cross-border exchange of information.

For further information, see here.

Enforceability of interim dividends – First-tier Tribunal decision

On 1 November 2022, the First-tier Tribunal³ confirmed that an interim dividend is not due and payable until it is actually paid (even if other shareholders have already received their interim dividend payment).

Partly for tax-planning purposes, one shareholder elected to delay receipt of his share of a resolved interim dividend. The Tribunal agreed with the taxpayer that a resolution of directors to pay an interim dividend does not create a debt due to the recipient (in contrast to a 'final' dividend declared by a company). Therefore, for income tax purposes, as the dividend only becomes taxable when it becomes due and payable, HMRC failed in their argument that the relevant trigger point for tax purposes was the resolution to pay the interim dividend. The distinction between interim and final dividends may be relevant in other scenarios, for instance the question of whether there is any stampable consideration on 'in specie' distributions of (potentially) stampable assets.

The decision can be viewed here.

December 2022

HMRC consults on draft transfer pricing records regulations

On 21 December 2022, HMRC published for consultation the draft Transfer Pricing Records Regulations 2023 (Regulations). The Regulations would require, for accounting periods beginning on or after 1 April 2023, multinational enterprises (MNEs) with UK operations and turnover in excess of EUR 750m to maintain both a 'master file' and a 'local file' as set out in the OECD's Transfer Pricing Guidelines. 

The draft Regulations would also empower HMRC to introduce the requirement for MNEs to produce a summary audit trail covering the preparation of the 'local file'. 

To view the consultation, see here.

Electricity generator levy – policy paper and draft legislation published

On 20 December 2022, HM Treasury published a policy paper on the new electricity generator levy (announced as part of the 2022 Autumn Statement). The policy paper includes draft legislation and explanatory notes. Draft HMRC guidance on the new levy in expected in early 2023.

The policy paper can be viewed here.

OECD publishes draft multilateral convention on withdrawal of digital services taxes and implementation package for 'pillar 2' rules

On 21 December 2022, the OECD published a consultation on a draft multilateral convention on the withdrawal of digital services taxes and implementation of the pillar 2 'GloBE' rules.

This is part of the 2021 political agreement, led by the OECD, to address the tax challenges stemming from the digitalisation of the economy. The pillar 2 Global Anti-Base Erosion (GloBE) rules that form part of this package will, if implemented, result in a global minimum tax rate of 15% for the largest multinational groups. 

The OECD consultation can be viewed here.

OTS report on hybrid and distance working

On 20 December 2022, the Office of Tax Simplification published its report on the tax implications of hybrid and distance working.

Amongst other things, the report concludes that the increase of hybrid working in the UK provides an opportunity to revisit the tax rules around benefits and expenses (with home to 'office' travel being an obvious example).

A large part of the report is devoted to the challenges and opportunities arising from the increased incidence of cross-border working arrangements.
The OTS report can be viewed here.

R&D tax relief reforms – draft guidance published

On 20 December 2022, HMRC published for consultation draft guidance on proposed R&D tax relief reforms. The consultation closes on 28 February 2023.

The draft guidance:

• Gives HMRC's view as to what amounts to qualifying expenditure where R&D is subcontracted (both for UK expenditure and overseas expenditure).
• Confirms that where data or cloud services are used for multiple purposes, HMRC will accept that a 'reasonable apportionment' may be used (so long as evidence is provided).
• States that where claimants have not made an R&D claim in the previous three calendar years, a claim notification must be submitted.
• Lists additional information that must be submitted for R&D claims to be valid (a form will be provided for this purpose, and will be 'live' from April 2023).

The draft HMRC guidance can be viewed here. 

Court of Appeal decision on VAT treatment of supply of staff

On 9 December 2022, the Court of Appeal⁴ held that the supply of locum doctors via an intermediary company was a taxable supply of staff for VAT purposes, rather than an exempt supply of medical services.

The Court held that the lower tribunal decisions were correct to consider whether the supply in question was one of staff or medical care. The Court held that the NHS controlled the provided doctors (taking into account control over what work was done, and where, and how the medical care was provided by the doctors) and that – accordingly – the taxpayer in this case had made a taxable supply of staff.

The decision demonstrates the importance of considering the commercial and economic reality in any case where the VAT liability turns on whether what is being supplied is a (taxable) supply of staff or a supply of services that may not be taxable. In this instance, the Court found it to be unrealistic to regard the intermediary taxpayer as having the ability to provide medical care (which was – it was held – provided only by the individual doctors supplied by the intermediary).

The decision can be viewed here.

References

¹In GE Aircraft Engine Services Ltd v HMRC (Case C-607/20) EU:2022:884
²Confirmed as part of the policy paper subsequently published in December, and reduced from the initial announcement.
³In Gould v HMRC [2022] UKFTT 00431 (TC).
⁴In Mainpay Ltd v HMRC [2022] EWCA Civ 1620.