Behind “L-Day” 

There may be a leadership election underway, but that doesn’t stop the wheels of tax policy from turning. In fact, there is typically a rather long journey from the germ of a policy idea or a Budget announcement, as changes go through various calls for input, evidence, consultation, and review stages, before finally blooming into a legislative or guidance change. 

Wednesday 20 July was ‘L-Day’ which is a standard feature of the UK Tax Policy Making framework. In the afternoon, the government published draft clauses ahead of their potential inclusion in Finance Bill 2022-23, for technical scrutiny. These clauses put into legislation changes which have mostly already been announced at previous Budgets or Statements, along with explanatory notes and guidance (see our L-Day coverage here) – although this year there were some surprises and a few missing items which we’ve since explored.

Expected draft legislation

Following announcements going back to the Autumn Budget 2021, Tax Administration and Maintenance Day 2021 and the Spring Statement 2022, draft legislation and associated documents were published with comments invited by 14 September 2022:

• OECD Pillar Two reforms: The 91-page draft legislation and 239-page accompanying explanatory note for the UK implementation of the Pillar Two global minimum tax covers only the income inclusion rule at this stage, as expected. The government is preparing to introduce clauses to implement the undertaxed profits rule, with an update on the timing and design to be released at a later date. There is, for now, no draft legislation for a UK domestic minimum top-up tax and whilst no decision has yet been taken, the government has commented that there are "strong arguments" in favour of introducing one. For many businesses, as ever with the global minimum tax under Pillar Two, the biggest challenge will be compliance with the complex new rules and collection of the necessary data. Our special alert on the measure is available here.
• Transfer pricing documentation: Master File, Local File and Summary Audit Trail: This provides an update on current requirements and brings the UK closer into line with the OECD's suggested approach. The draft legislation confirms that failure by large multinational businesses operating in the UK to maintain such documentation will, in the first instance, be considered 'careless', with an impact on penalties levied under the UK's tax penalty regime. Such businesses will also need to complete a summary audit trail questionnaire detailing the main actions they have taken in preparing their UK local file (to be published by HMRC soon). We expect further guidance and consultation in the Autumn, as this legislation will have effect for accounting periods starting on or after 1 April 2023.
• R&D tax relief reforms: This reflects the previously announced measures at Autumn Budget 2021 and Spring Statement 2022 to ensure the UK remains a competitive location for cutting-edge research and that the relief remains fit for purpose. The proposed legislation once enacted will take effect for accounting periods beginning on or after 1 April 2023 (i.e. for calendar year ends, this will take effect for the accounting period ended 31 December 2024). Following several years of consultation, the draft legislation includes the expansion of software and consumables to include certain digital data licences and cloud computing services as qualifying R&D expenditure.  Such changes, however, have been a long time coming, so taxpayers may be disappointed to see its introduction being pushed out even further.
• Air Passenger Duty: Following a consultation, these changes were announced at the Autumn Budget 2021 and will not be a surprise, introducing new domestic and ultra long-haul bands for flights over 5,500 miles. This means that from 1 April 2023, on a direct flight from London to Tokyo, a passenger in the lowest class of travel will pay £91 or £200 for any other classes. A domestic flight from London to Manchester will see an air passenger duty of £6.50 instead of £13 due on a flight between London and Paris. 

Some unexpected changes

• Chargeable gains: Separating spouses and civil partners: This extends the “nil gain, nil loss” Capital Gains Tax treatment of transfers made after separation (divorce or dissolution of civil partnerships) from 5 April after the date of separation, to up to three years after separation. This change follows the Office of Tax Simplification (OTS) recommendations made in their report published in May 2021 (see our previous note here). The government have gone further than the OTS had recommended by including a three-year window rather than the suggested two years.
• Changes to the Qualifying Asset Holding Companies (QAHC) rules: three changes have been made to the current QAHC rules to better enable certain investment vehicles to meet the definition of ‘qualifying fund’ for the purposes of the regime, in line with the original policy intention.
• Double taxation relief: time limit for claims. This protects Exchequer revenues following recent case law, by preventing certain new claims to Double Taxation Relief when those claims only related to deemed amounts of foreign tax, with effect from 20 July 2022. The relevance of this change is limited to foreign distributions received by UK companies before the introduction of distribution exemption in 2009 which explains a limited impact in the explanatory note accompanying the draft legislation.

A few missing pieces?

• Mandatory Disclosure Rules: at the Autumn Budget 2021 the government announced that the UK will implement the OECD Mandatory Disclosure Rules (disclosure of CRS avoidance arrangements and opaque offshore structures), and ran a consultation.
• Re-domiciliation: in April 2022, the Department for Business, Energy & Industrial Strategy, HMT and HMRC published a summary of responses to their re-domiciliation consultation, re-affirming the government’s commitment to introducing the regime and indicating a possibility of a further formal consultation. The respondents to the initial consultation were overall supportive but would be interested in seeing further consultation for more detail of how the government plans to implement the regime.  
• Online sales tax: the government is looking for ways to address the business rates burden on high street retailers, considering a new tax on online sales to do this. With a consultation ending just two months ago, no news is not a real surprise, but we should expect some conclusions or further consultation in the Autumn.
• Alcohol duty reform: this relates to an announcement made at the Autumn Budget 2021, following a review. The reforms were originally anticipated to enter into force in February 2023. The written ministerial statement by Lucy Frazer mentions that the government is looking further at responses from the consultation which ended in January 2022 and announcements will be made this Autumn, which would not leave a lot of time for implementation. Given the systems changes that would be required, the implementation date may therefore be pushed back further.

What comes next?

On 5 September, we will know who our next Prime Minister will be and their chosen Chancellor. The Autumn Budget will be one of their bigger challenges given the inflationary environment and a growing number of tax policy areas to manage – so it will of course be avidly followed by finance and tax professionals. As well as those referenced above, conclusions to consultations on crypto-assets, UK capital allowance regimes and further R&D and innovation incentives are liked to be announced in the Autumn. Finally, we’re also expecting a new consultation on carbon leakage which, given COP27 in Egypt in October, may trigger some fresh thoughts on how to use the tax system to achieve the UK’s net zero targets.

Related content

• You may also be interested in our article on the UK Pillar Two draft legislation, available on Deloitte tax@hand.
• View our concise summary of L Day proposals here.