A roundup of some of the other measures in the Finance Bill which have implications for businesses.
Finance Bill 2021 includes a number of other measures for businesses which were announced at the Chancellor’s Budget on 3 March 2021 or were subject to consultation during 2020. This article provides an update on some of the more notable measures: the plant and machinery Super Deduction, repeal of provisions relating to the Interest and Royalties Directive, technical amendments to the corporate interest restriction and hybrid and other mismatch provisions, preventing abuse of the research and development (R&D) relief for small and medium-sized enterprises, the new Plastic Packaging Tax and the withdrawal of the London Inter-Bank Offered Rate (LIBOR).
Plant and machinery Super Deduction
As reported in our previous edition of Tax Matters Digest the Chancellor announced a new ‘Super Deduction’ for companies investing in qualifying new plant and machinery between 1 April 2021 and 31 March 2023 at the Budget. At the time of writing our previous article we noted that the first year allowances (FYAs) introduced “are subject to general exclusions; the one area of concern is whether property landlords will be affected by the exclusion for leased plant and machinery; clarification will be needed from HMRC on this specific point”. Following publication of the Finance Bill we can now confirm that the FYAs introduced are subject to the general exclusions at s46 CAA2001 and HMRC have confirmed that property landlords are caught by the exclusion for leased plant or machinery.
Repeal of provisions relating to the Interest and Royalties Directive
The Budget proposals included the abolition of the UK domestic legislation implementing the Interest and Royalties Directive in relation to interest payments made from 1 June 2021. The draft legislation in Finance Bill 2021 includes an anti-forestalling rule that denies application of the withholding tax exemption to payments made on or after 3 March 2021, where the payment is made in connection with arrangements having a main purpose of securing application of the exemption. Any exemption notices issued by HMRC to allow gross payment under the Directive are correspondingly cancelled and, where relevant, a new application will need to be made to pay gross or at a reduced withholding rate under a treaty.
Hybrid and other mismatches
Finance Bill 2021 includes a number of proposed changes to the hybrid and other mismatches legislation to ensure the regime operates proportionately and as intended. Most of these changes were originally announced by HMRC on 12 November 2020 and reconfirmed on Budget Day 2021, subject to certain tweaks and additional changes. Although the proposed changes are largely helpful to taxpayers, the draft legislation is extremely detailed (c30 pages long), so affected groups will need to study the detail very carefully to (i) assess whether the proposed changes resolve any relevant problems they have been suffering in relation to the existing rules, and (ii) if not, consider making representations to HMRC, or restructuring their affairs to align with the new proposed changes. Although some changes only operate prospectively from Royal Assent to Finance Bill 2021 (or 1 January 2021 in the case of one particular change), some of the changes operate retrospectively from 1 January 2017 (or from Royal Assent, but with an option to apply the changes retrospectively from 1 January 2017), so may help resolve uncertainties in historical returns or result in currently disallowed amounts now becoming deductible.
Corporate interest restriction
Two technical amendments are to be made so that the corporate interest restriction (CIR) rules work as intended. The first amendment concerns the interaction of the CIR rules with the UK real estate investment trust (REIT) rules. This deals with a potential issue regarding the allocation of a CIR disallowance where a non-UK company is within the charge to UK corporation tax in respect of a UK property business, but its residual business is not within the charge to UK corporation tax. The second amendment makes sure that no penalties arise for the late filing of an interest restriction return if there is a reasonable excuse for the failure. Draft legislation was first published in July 2020 and this remains unchanged in the Finance Bill.
Preventing abuse of the R&D relief for small and medium-sized enterprises
Two changes have been announced to the draft legislation in relation to the PAYE/NIC cap for SMEs that was published in November 2020. The context to this is that this measure is intended as an anti-abuse measure by ensuring companies claiming refunds have some substance in the UK. Firstly, the new rules will now be applicable for accounting periods starting on or after 1 April 2021, as opposed to applying for expenditure with effect from 1 April 2021 as previously suggested. Secondly, the definition of intellectual property (IP) is being widened to include know how and trade secrets. Previously it had been more narrowly defined to registered IP. This recognises many businesses may opt not to formally register or protect IP but rely on trade secrets. These are both welcome changes reflecting concerns voiced by businesses ensuring genuine businesses are not adversely impacted.
New Plastic Packaging Tax
The UK’s new Plastic Packaging Tax will come into force on 1 April 2022. The Finance Bill contains the primary legislation for this tax which will create an economic incentive for businesses to use recycled material in the manufacture of plastic packaging. This should create a greater demand for recycled plastics and will divert plastic waste away from landfill or incineration. The Government expects that the tax, which will apply to manufacturers and importers of plastic packaging, will have a significant impact on business. This impact will go far beyond the projected Exchequer impact of c£235 million per annum because the real cost to business will be in developing new types of packaging, sourcing safe and reliable supplies of suitable recycled materials, and in demonstrating compliance by clear reporting.
There will be a registration threshold of 10 tonnes of manufactured or imported packaging and there will be an exemption for packaging that comes into direct contact with medicinal products. There is provision for further exemptions to be introduced by regulation.
Withdrawal of LIBOR
The Finance Bill includes legislation to replace the references to LIBOR in certain leasing provisions with ‘the incremental borrowing rate’. This is broadly consistent with draft legislation published in November 2020 following a period of consultation on the tax implications of the withdrawal of LIBOR.
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