Behind L-Day 2023

Tuesday 18 July 2023 was ‘L-Day’ which is a standard annual feature of the UK government’s tax policy making framework. The government published a raft of draft clauses ahead of their potential inclusion in Finance Bill 2023-24, for technical scrutiny. These clauses put into legislation changes which have mostly already been announced at previous fiscal events, and at this point the government expands upon how the new law will apply by issuing explanatory notes and guidance. However, the clauses contained a few surprises which we’ve explored below.

Aside from the draft legislation, HMRC and HM Treasury also took the opportunity to publish a couple of consultation outcomes and four new consultations which are in addition to those already announced at Spring Budget 2023, during Energy Day and on Tax Administration and Maintenance Day (‘TAM Day’) at the end of April. It’s fair to say that the high level of change in tax policy continues… in fact, the number of formal calls for evidence/input and consultations into new tax policy areas issued by HM Government since 1 January 2023 is nearing 50.

Expected draft legislation

Following announcements going back to the Autumn Statement 2022, draft legislation and associated documents were published with comments invited by 12 September 2023 as follows:

Creative industry tax reliefs: As announced at Spring Budget 2023, the government is now legislating to reform the film, TV and video games tax reliefs to refundable expenditure credits. The design of the expenditure credits will be based on the Research and Development (R&D) Expenditure Credit. The reforms also introduce a new higher rate of relief for children’s TV, animated TV and films to further support the industry. Additionally, administrative changes are made to all the creative industry tax reliefs and clarifications are introduced to the rules for cultural tax reliefs. While the proposed changes pose a number of challenges to businesses in the industry and have the potential to impact tax teams (and the wider business), this reform will modernise the creatives tax relief system and ensure they continue to provide the same level of generosity to businesses without any expected exchequer impact.

Research and Development (R&D) reform – potential merged R&D scheme and additional tax reliefs for R&D-intensive SMEs: The government has published a policy paper and draft legislation on the design of a potential merged R&D scheme, together with its response to the associated consultation held earlier this year. The government will announce its final decision on whether to proceed with the merged scheme in the autumn; if it goes ahead, the merged scheme will apply for expenditure incurred on or after 1 April 2024. The government also published a policy paper and draft legislation to retain the 14.5% repayable credit for R&D-intensive SMEs (announced at the 2023 Spring Budget), applicable for expenditure incurred on or after 1 April 2023. Businesses will be keenly watching any further development of the draft proposals on a merged scheme, and whether a decision is made to proceed with it. In particular, given the design of the merged scheme, the reforms may have an especially significant impact for businesses currently making R&D claims under the SME regime, and businesses involved in subcontracted R&D. Our summary of the key proposals is available here.

Enterprise Management Incentives - extension of the time limit to submit a notification of a grant of options: To provide businesses with more time for the notification process, the time limit for companies to notify HMRC of a grant of Enterprise Management Incentives (EMI) options will be extended, from 92 days following the grant currently to 6 July following the end of the tax year in which the grant was made. The measure will apply to EMI share options granted on or after 6 April 2024. This is another sensible update to the rules at no cost to exchequer which was supported by small and medium sized companies.  

Tonnage tax elections to include third party ship managers: In a bid to continue to boost the competitiveness of the UK within the international shipping industry, the scope of Tonnage Tax will be extended to include elections into the regime by third party ship managers. Alongside the new ‘election window’ for qualifying shipping companies which have previously left the regime, this change will be a welcome development for the industry. A summary of our analysis is available here.

Some unexpected changes

This year's L-Day also brought three changes that were not previously announced:

Abolishing the pensions lifetime allowance:  Draft legislation was published on the abolition of the pensions lifetime allowance from 6 April 2024. The legislation goes much further than abolishing the lifetime allowance, however, particularly in relation to death benefits of those who die before reaching age 75. The transitional provisions will be important, but there is currently only a placeholder for these reading "TBC". It may also come as a surprise to some that there is still a lifetime limit of sorts that is equal to the lifetime allowance but no longer goes by that name.

Further amendments to the Real Estate Investment Trust regime: The government is making additional amendments to the Real Estate Investment Trust (REIT) regime. The most widely applicable changes are to amend the close company rules to add ‘widely held’ requirements to certain categories of institutional investors and recasts the REIT non-close company condition to follow the non-resident capital gains tax (NRCGT) equivalent more closely. The close company amendments also import the NRCGT principles of not attributing partnership interests and ignoring general partner control rights when assessing the close company position. There are also some helpful amendments to the profit: financing cost ratio rules.

Multinational top-up tax: Draft clauses to introduce a ‘backstop’ Undertaxed Profits Rule (UTPR) based on the OECD Pillar Two Model Rules have been published earlier than expected. The start date is to be confirmed at a later date, but the UTPR will take effect no earlier than 2025.  

More consultations

Last year L-day 2022 had two new consultations and four consultation outcomes. The reverse is true this year as L-day saw the release of two outcomes (cited above) and four upcoming ones: 

Energy Profits Levy Energy Security Investment Mechanism: A discussion paper has been published to support engagement with the sector on the technical details of the Energy Security Investment Mechanism’s application. This document outlines a number of questions including when the energy security investment mechanism is reviewed and the transitional arrangements of the mechanism. This consultation closes on 1 September 2023.

Updating the VAT Terminal Markets Order legislation: The government is consulting on proposals to update the Terminal Markets Order legislation to clarify the VAT treatment of exchange traded commodity transactions, ensuring the legislation reflects how the markets operate today and provides greater certainty in relation to the VAT treatment. This consultation closes on 12 September 2023.

Taxation of Employee Ownership Trusts and Employee Benefit Trusts: Proposals to reform the tax treatment of two types of employee trusts: Employee Ownership Trusts (EOTs) and Employee Benefit Trusts (EBTs) is undergoing consultation. HMRC notes that the aim of this consultation is to ensure that the tax regimes for EOTs and EBTs remain focused on the targeted objectives of rewarding employees and encouraging employee ownership, whilst preventing tax advantages being obtained through use of these trusts outside of these intended purposes. This closes on 25 September 2023.

Plastic Packaging Tax - mass balance approach: The government is consulting on how a mass balance approach can be used for calculating the recycled content in packaging made from chemically recycled plastic for the purposes of Plastic Packaging Tax. This follows ongoing engagement between stakeholders which highlighted that businesses sometimes struggle to use chemically recycled plastic in packaging without having to pay the plastic packaging tax, as in some cases it is impossible to distinguish between plastic from virgin and recycled sources. This consultation closes on 10 October 2023.

What comes next?

Following the end of the consultation period on the draft legislation, the government will consider stakeholders’ comments before any updated clauses are potentially included in the next Finance Bill introduced to Parliament. The timing for this has not been announced, however this would typically be shortly after the next Budget.

Political parties are beginning to discuss and debate key ideas and policies for inclusion in their respective manifestos, with speculation around abolishing the non-dom status, ending existing carried interest arrangements, or scrapping inheritance tax altogether.

The Prime Minister, Rishi Sunak, has seemingly suggested on the record during PMQs on 19 July 2023, that the fiscal event in the autumn is due to be an Autumn Statement. With inflation still higher than the Bank of England’s 2% target, we expect to see the government reserving any significant announcements for a bigger fiscal event in the form of a Spring Budget next year, in the lead up to the General Election.