Banking & Capital Markets
The FS team looks closely at what direct effects the Autumn Budget will have on the bank profits surcharge, securities and expansion of the dormant asset scheme.
FS - Autumn Budget 2021 commentary
Many of the Budget announcements had already been released in some capacity so were expected, although there were welcome announcements for some reliefs that have been enhanced and/or extended.
In her reply to the Budget, Rachel Reeve (Labour’s Shadow Chancellor) said that “At least the bankers on short-haul flights sipping Champagne will be cheering this Budget today”. It is understandable why this may have been the response, although this suggests the Budget was positively skewed to the Financial Services industry, which it was not.
The devil is always in the detail and we are still awaiting much of the legislation to review, but the key relevant headlines so far are:
This legislation is coming into effect from 1 April 2022. 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 (above a £5m threshold) where there is a potentially contentious treatment.
The key takeaway from the way it has been introduced is the Government has not included one of the proposed triggers (a substantial possibility of a court or tribunal ruling against the position a company has adopted). It has been indicated that HMRC are intending to consult further on this.
Commencing 1 April 2022, a new tax called the Economic Crime (Anti-Money Laundering) Levy will be charged on entities regulated under Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017. This includes various financial institutions, professional services firms, estate agents, casinos, art market participants, crypto asset exchanges and custodian wallet providers.
The levy aims to raise £100m per year.
DPT applies to profits arising from 1 April 2015 and is focused on contrived arrangements used by large groups that are designed to erode the UK tax base. As announced in the 2021 Spring Budget, the starting DPT rate of 25% will increase to 31% from 1 April 2023, to maintain the current differential between the DPT rate and the Corporation Tax rate.
In practice, the operation of DPT means that although the onus remains on the taxpayer to notify HMRC if DPT may apply, it is possible to reduce the actual DPT liability to zero by correcting the corporate tax position i.e. making transfer pricing adjustments to bring pricing in line with the arm’s length principle.
Two DPT related measures were announced in the Autumn Budget.
Mutual Agreement Procedure (‘MAP’) decisions relating to the Diverted Profits Tax
Under this measure, a possible DPT assessment may now be within the scope of arrangements that may be mutually agreed between tax authorities under a MAP. Opening up DPT profits to potential MAP agreement may reduce the extent of profit subject to the higher rates of DPT and reduce the risk of double taxation for groups. This change will take effect in relation to MAP decisions reached after 27 October 2021.
Diverted Profits Tax - interaction with Corporation Tax closure notices and amendment to relieving provision
The second measure appears to further reduce the likelihood that DPT is payable in practice.
Legislative updates will be made to preserve the intended route for a company to obtain relief from DPT by amending corporation tax returns and bring taxable diverted profits into the charge to corporation tax during the diverted profits review window (i.e. 15 months after the upfront DPT payment has been made). It also ensures that corporation tax enquiry closure notices cannot be issued until after the end of the diverted profits review window.
A specific technical amendment, left out of the Finance Bill 2021, is now to be enacted. The rules for 'hybrid payee deduction/non-inclusion mismatches are to be amended so that, if certain conditions are met, 'relevant transparent entities' are treated as partnerships, and so the counteraction in the rules is not triggered. In particular, the change should assist US LLCs which are fiscally transparent to be regarded as partnerships under these rules. The investors in the relevant transparent entity are to be treated as partners and each investor's hybridity is to be evaluated on its own merits. The relevant clause was published in July.
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