As we look towards a New Year, we review some of the key tax areas to consider in the next 12 months.
Corporation tax and international tax matters
HMRC opened a consultation over the summer (ending in August) on transfer pricing, permanent establishments and diverted profits tax. There is, so far, no timeline for future actions.
But here are some key points to monitor and consider with your tax advisor:
- Possible simplification of UK-UK transfer pricing and alignment of reporting requirements to those of CbCR and Pillar 2 information needs
- Certain businesses with UK activities may fall within the broader definition of ‘dependent agent permanent establishment’ and inadvertently give rise to a UK taxable presence
- As Diverted Profits Tax (‘DPT’) is brought into Corporation Tax, the applicable higher tax rates are expected to remain. But you may be able to access double tax relief for tax paid under the mutual agreement procedure, which is not currently the case for DPT.
Groups with consolidated turnover above €750m
OECD Base Erosion Pillar 2
UK Pillar 2 minimum tax legislation applies (global minimum effective tax rate is 15%) to companies or groups with annual consolidated turnover exceeding €750m, for accounting periods that begin on or after 31 December 2023.
Both IAS 12 and FRS 102 provide a temporary exception to the requirements for deferred tax assets and liabilities related to Pillar 2 taxes. You must, however, disclose the application of the exception, as well as the qualitative and quantitative information regarding the company’s exposure to Pillar Two taxes in the financial statements as at 31 December 2023.
What does this mean for you?
- Consult with your tax advisor to agree disclosures for inclusion in the 2023 financial statements
- Although the first reporting date is 30 June 2026 (for a 31 December 2024 year end), the first provisions may need to be considered as early as Q1 2024, see our article
- Continue monitoring UK and global Pillar 2 developments.
Transfer pricing documentation
The UK has legislated that groups with a country-by-country reporting requirement are obliged to maintain an OECD Master File and Local File (prescribed standard formats of transfer pricing documentation) for accounting periods beginning on or after 1 April 2023.
What does this mean for you?
- Companies must comply with their transfer pricing responsibilities. These include monitoring the additional requirements that may come if the summary audit trail and the international dealings schedule are introduced
- Groups must also be aware of other country requirements for the jurisdictions in which they operate. Applicable thresholds, filing and transfer pricing documentation requirements can vary from country to country.
Tax transparency and disclosure
Country by country reporting (CbCR) applies to cross border groups with €750m consolidated turnover. In the context of ESG reporting and initial steps towards more tax transparency, there is a new EU directive that mandates public CbCR reporting for financial years starting on or after June 2024. It applies to groups that are EU parented or have EU subsidiaries or branches of a certain size.
What does this mean for you?
- Focus on efficiency in gathering data as you work towards a 2025 publishing date.
- In this context, consider that CbCR data will feed into the Pillar 2 safe harbour considerations. This will be the first time that CbCR data directly impacts tax calculations.
- Be aware of other ESG initiatives. If the group plans to make voluntary disclosures, say under the Global Reporting Initiative 207, then it will help to gather data for the various reporting requirements holistically.
Human capital considerations
HMRC continues to focus on the use of contractors and whether they count as employees. There are several key indicators for being classed as an employee. The responsibility lies with the employer to determine the employee/contractor status. If a contractor is an employee, based on HMRC’s criteria, the company must add the person to their payroll and deduct tax and Class 1 National Insurance.
Hybrid working continues in companies keen to attract and retain talent. But when more than one country is involved, it’s important to seek advice as there may be tax implications for the corporate as well as the individual.
UK resident directors, UK non-resident directors and non-executive directors of UK companies are of particular interest to HMRC. Directors and statutory board members of a UK company are taxed under specific legislation and HMRC expects them to appear on the UK payroll. Specific social security (National Insurance) rules for non-resident directors of a UK company must be observed.
What does this mean for you?
- Where more than one country is involved, contact your tax advisor. The individual may be creating a taxable presence both for themselves and the company in a second country.
- We recommend a regular review of the pay structure for directors. This will ensure compliance with UK tax and social security rules – which can be complex.
Indirect taxes
Since Brexit, many UK-based insurer groups and insurance intermediaries have set up companies and/or branches in EU member states so they can continue writing EU insurance business. Specific provisions exclude supplies made from overseas establishments from the UK partial exemption calculations that are used to determine the recoverable amount of residual input VAT.
HMRC has recently been targeting insurers with a sectorised partial exemption special method (PESM), focusing on divisions with investment sectors. Its key focus is to check whether they are correctly applying their PESMs. The issue with these sectors can be twofold:
- Often, little thought is given to how recoverable input VAT will be calculated (for example, boilerplate formulas are used)
- Some insurers are not using their sectors at all. Instead, they are applying the standard values-based method for input VAT recovery when they have a PESM agreed with HMRC that they are required to follow.
What does this mean for you?
- We recommend insurance businesses with overseas establishments check that their UK VAT returns treat the activity of such branches in a way that complies with the partial exemption provisions.
- We recommend insurers speak with their tax advisors to review how their investments impact their VAT partial exemption calculations. See our article.
For further guidance on any issues raised in this article, please contact Mimi Chan.
