Corporate and business taxes

Transfer pricing, permanent establishments and Diverted Profits Tax (DPT)

The Autumn Budget has confirmed a comprehensive package of reforms to the UK’s transfer pricing, permanent establishment and Diverted Profits Tax (DPT) regimes. The measures are designed to simplify the UK’s international rax rules and bring them to up to date with the international standards. The changes will apply for accounting periods beginning on or after 1 January 2026. Transitional rules for guarantees and securities apply to new financing from this date, or to all financing from periods starting on or after 1 January 2028, unless an earlier election is made. Contrary to expectations, the Autumn Budget did not amend the threshold to bring Small to Medium Enterprises (SME) within the scope of the transfer pricing rules.

The participation condition will be updated to cover agreements for common management, introduce an anti-avoidance rule for arrangements designed to avoid participation, and give HMRC power to require taxpayers to apply participation for future periods.

For transfers of intangible fixed assets, the arm’s length price will need to be applied in the case of cross-border transactions between related parties, while the market value will be used in all other circumstances.

As expected, intercompany UK-UK transactions will be exempted from transfer pricing rules where there is no risk of tax loss, accompanied by corresponding anti-avoidance measures.

The OECD Model Tax Convention and Transfer Pricing Guidelines are to be expressly confirmed as interpretative aids. The rules governing financial transactions have been revised to ensure alignment with OECD guidelines, including the treatment of both implicit and explicit guarantees.

Permanent Establishments (PEs)

The Autumn Budget confirms that the definition of PE will be updated to match Article 5 of the 2017 OECD Model Tax Convention and the attribution rules will be revised in line with Article 7, supported by OECD commentary and reports. In addition to that, the Autumn Budget proposes changes to the Investment Manager Exemption (see the item The UK investment manager exemption below).

DPT

The DPT regime will be fundamentally changed, with the standalone DPT charge repealed and replaced by a new Corporation Tax charging provision for unassessed transfer pricing profits (UTPP). The new regime retains the essential features of DPT, including the two gateway tests (effective tax mismatch outcome and tax design condition), but is intended to be simpler and to allow access to the UK’s treaty network, including the Mutual Agreement Procedure (MAP).

In relation to DPT, the Autumn Budget confirms that the government will legislate to clarify the interaction between DPT and transfer pricing rules. The changes will apply to profits arising on or after 1 April 2026. The Budget states that the amendments are designed to ensure that profits taxed under DPT are not also subject to transfer pricing adjustments, thereby reducing the risk of double taxation. The government also confirms that it will continue to monitor the effectiveness of the DPT regime and consider further changes if required.

The Autumn Budget does not set out detailed transitional rules or specific guidance on how the new definitions and clarifications will apply in particular scenarios. It also does not provide further detail on the interaction with existing anti-avoidance provisions or the potential impact on ongoing disputes. Taxpayers should note that the government intends to publish draft legislation for consultation ahead of the Finance Bill, providing an opportunity to comment on the technical detail and practical implications.

International Controlled Transactions Schedule (ICTS)

The Autumn Budget confirms that the government will introduce a new annual filing requirement for in-scope multinational businesses: the International Controlled Transactions Schedule (ICTS). The ICTS will apply to UK resident businesses within the scope of transfer pricing legislation (which currently excludes SMEs), UK resident businesses with foreign permanent establishments and foreign businesses with a UK permanent establishment.

The ICTS will capture specific factual information about relevant cross-border related party transactions in a standardised format. The information is intended to be used for automated risk profiling and manual risk assessment by HMRC compliance teams.

The ICTS is expected to be required for accounting periods beginning on or after 1 January 2027, with the commencement date and detailed requirements to be set out in future regulations following the Finance Bill 2025-26.

The UK investment manager exemption

Alongside broader reforms to the UK domestic permanent establishment rules, Budget 2025 provided further detail on the upgrade of the UK’s investment manager exemption (IME), a core part of the UK’s offering as a jurisdiction from which investment managers can operate.

In light of feedback to the previous consultation on draft legislation and guidance (see our response at IME and SP1/01: Simmons response to consultation), it was confirmed that the narrowing of the IME by reference to transactions undertaken by investment funds was unintended and that the final legislation should not include this restriction. In addition, the legislation will make clear that where an investment adviser would otherwise amount to a UK permanent establishment of a non-resident, that adviser will also be able to rely on the IME. The government does not intend, at this stage, to adopt broader limitations to the income tax charge for non-resident companies as had been proposed by industry.

The government also confirmed that it would take on board feedback on the revised Statement of Practice 1/01, with an updated version being released before the revised legislation enters into force covering all of the issues raised in the consultation (although the detail of these updates is awaited).

Capital allowances: new first-year allowance and reduced main rate writing-down allowance

Capital allowances at different rates can be claimed on capital expenditure for certain plant and machinery. The current rate for plant and machinery for “main rate” expenditure – which is the default rate that applies unless a special rate (typically 6 per cent) is applicable – is 18 per cent, and has been since 2012. This rate will be reduced to 14 per cent per year. The government states that this will still enable full relief for the expenditure, but it may delay tax relief for some taxpayers. The measure is expected to take effect from 1 April 2026 for corporation tax and 6 April 2026 for income tax, with hybrid rates for periods spanning these dates.

A new 40 per cent first year allowance (FYA) is being introduced alongside the rate reduction to writing down allowances. Deductions are already available at 100 per cent on different categories of expenditure, through full expensing and the annual investment allowance. This new 40 per cent FYA will be available in respect of assets that are not within full expensing and the existing annual investment allowance (such as assets used for leasing). Cars and second hand assets will be excluded, but unincorporated businesses will be able to claim.

Tax support for entrepreneurs: call for evidence

As part of Budget 2025, the government issued a call for evidence proposing a broad review of how the UK tax system supports founders and high growth companies, with a particular focus on closing “scale up” gaps rather than simply adding more early stage reliefs. It seeks views and evidence on the impact, accessibility and generosity of existing schemes, and on whether these are effectively targeted at helping innovative firms start, scale and stay in the UK.

Amongst other measures, the document proposes to test whether current tax incentives are working for founders and scaling firms by asking detailed questions on the effectiveness of the EIS and VCT schemes in channelling capital to genuinely high risk, high growth companies; how fund fees and investment terms affect investee companies; and how VCT/EIS participation affects firms’ ability to raise follow on capital from other sources, especially around scheme limits and “cliff edges”. It also asks for evidence on whether EMI and the wider share scheme offer remain adequate for attracting and retaining talent as companies grow under the new, higher size thresholds, and how these schemes could be redesigned or supplemented to support access to talent through the scale up journey.

Responses to the call for evidence should be submitted by 28 February 2026 via an online form and will inform post consultation options for more targeted, fiscally sustainable tax support for entrepreneurs and high growth firms.

Research and development tax reliefs: advance assurance reforms and pilot

The Autumn Budget confirms the government’s commitment to maintaining the generosity of the merged R&D Expenditure Credit (RDEC) and Enhanced R&D Intensive Support (ERIS) for SMEs, aiming to provide stability for companies investing in qualifying R&D. Alongside this, the government continues to address non-compliance, noting a £578m reduction in error and fraud in tax year 2022-2023 following the introduction of previous changes to the regime.

The government published a consultation at Spring Statement 2025 which included questions seeking views on both the current advance assurance system, its effectiveness and areas for improvement, and design and delivery of a future clearance system. A summary of the responses to that consultation have now been published as part of the Autumn Budget.

Respondents identified restrictive eligibility, administrative burdens, and lack of awareness as key barriers to the current advance assurance scheme, which is currently limited to first-time SME claimants. Stakeholders broadly supported reforming the advance assurance process, favouring a more flexible and accessible system. The responses demonstrated a clear preference for a voluntary, pre-claim assurance model, which would allow businesses to seek certainty on specific issues without imposing additional requirements on all claimants.

Many respondents preferred a voluntary assurance approach, emphasising its adaptability and appropriateness for businesses with different requirements. This model enables companies to obtain certainty when necessary, without placing extra obligations on those already confident in their claims. It was considered especially beneficial for SMEs, which may not have the capacity to handle more complex compliance demands. By contrast, mandatory assurance was viewed more cautiously, with respondents preferring targeted, risk-based approaches. Respondents also raised concerns about the potential exclusion of innovative but lower-spending businesses if a minimum expenditure threshold were reintroduced, and warned of possible unintended consequences such as cost inflation.

Respondents showed clear preference for pre-claim assurance, considering it the most effective point to provide certainty, as businesses generally have greater clarity over their R&D activities at that stage. Pre-activity assurance was regarded as more appropriate for larger or more complex projects, but less practical for SMEs given changing project scopes and limited resources. Post-claim assurance was seen as less valuable and received little backing.

Stakeholders were divided on reintroducing a Minimum Expenditure Threshold (MET) for R&D tax relief. Supporters felt a threshold could help HMRC target higher-value claims and reduce fraud, with suggested thresholds between £10,000 and £25,000. However respondents representing smaller businesses warned that a MET could exclude innovative firms with lower spending and risk discouraging genuine claims. There were also concerns that it might encourage some businesses to inflate their costs.

Following the consultation, HMRC will launch a targeted advance assurance pilot in Spring 2026, open to any SME planning to claim R&D relief. The pilot will allow applicants to seek assurance on four specific issues, including project eligibility and overseas expenditure. The existing advance assurance scheme will continue during the pilot.

These changes are intended to improve certainty and reduce compliance burdens for innovative businesses, particularly SMEs. However, the Autumn Budget recognises ongoing concerns about administrative complexity and the need for clearer guidance. Further details on the pilot and any future reforms will be set out by HMRC in due course.

Taxation of decentralised finance: response to consultation on taxation of DeFi

The government has published a summary of the responses received to the 2023 consultation on the taxation of decentralised finance (DeFi) arrangements involving the lending and staking of cryptoassets, now known as cryptoasset loans and liquidity pools. The summary document sets out the government’s latest position on the taxation of such arrangements. Following extensive consultation and stakeholder engagement, HMRC is considering a new approach to the tax treatment of cryptoasset loans and liquidity pools, with the aim of better aligning tax outcomes with the economic substance of these transactions. The government’s response reflects the rapid evolution and increasing complexity of the cryptoasset sector and acknowledges the need for rules that are both flexible and sufficiently broad to accommodate emerging market practices.

The proposed approach centres on treating certain disposals within cryptoasset loan and liquidity pool arrangements on a ‘no gain, no loss’ (“NGNL”) basis for capital gains tax (CGT) purposes. This would apply to single token arrangements, cryptoasset borrowing, and automated market makers, provided specific conditions are met. For example, where an individual lends tokens and subsequently receives equivalent tokens back, the interim disposals and acquisitions would be disregarded for CGT, with any gain or loss crystallising only when the tokens are economically disposed of. Similarly, for automated market makers involving multiple token types, the rules would seek to match the tax outcome to the net economic position, recognising gains or losses only where the number of tokens received back differs from those contributed. The scope of qualifying cryptoassets would exclude securities and tokenised assets representing rights in respect of other assets.

Stakeholder feedback has been broadly supportive of reform, with consensus that the current rules impose disproportionate administrative burdens and do not reflect the economic reality of DeFi transactions. Respondents have emphasised the importance of including automated market makers and multi-token arrangements within the scope of any new rules and have highlighted practical challenges such as tracking transactions and the need for clear guidance. Some concerns remain regarding the administrative burden, particularly for individuals with high transaction volumes, and the potential for unintended non-compliance due to complexity. The government is not currently proposing to change the tax treatment of rewards from cryptoasset loans and liquidity pools but will keep this under review.

The summary of responses confirms that HMRC is continuing to engage with industry and advisers to refine the NGNL approach, with a view to assessing the case for legislative change. No effective date or draft legislation is set out at this stage, and the government will continue to monitor developments in the sector. Taxpayers should note that the proposals remain under consideration and that further updates may follow as HMRC’s work progresses. The government has also indicated that any new rules would apply to both centralised and decentralised finance arrangements and may be extended to corporates following initial work on individuals. For now, taxpayers engaged in DeFi lending and staking should continue to apply existing rules, while monitoring for future announcements and potential changes to the tax treatment of these activities.

Cryptoasset reporting: extension of CARF to UK resident users

The Autumn Budget confirms that, from 1 January 2026, UK-based reporting cryptoasset service providers will be required to collect and report information on UK resident cryptoasset users under the Cryptoasset Reporting Framework (CARF), extending the existing international reporting obligations.

Enterprise Management Incentives (EMI) share options: expanding company eligibility

There was good news in today’s Budget for companies that wish to offer their employees an Enterprise Management Incentives (EMI) share option. The government has announced plans to relax some of the eligibility criteria for companies that wish to offer EMI options, which will increase the availability of these tax-efficient discretionary share options for scaling companies in the United Kingdom.

Under the changes announced today, companies with up to 500 full-time equivalent employees and gross assets of up to £120m may offer EMI share options. Previously, only companies with 250 FT equivalent employees and up to £30m of gross assets could grant EMI share options. These changes apply to new options granted from 6 April 2026.

In addition, the aggregate market value of shares over which EMI share options may be granted will double to £6m (again, applicable for new options granted from 6 April 2026) and the long stop date for the exercise of options has increased by 50 per cent to 15 years from grant. We understand that the 15 year exercise period will apply both to existing options as well as new options.

This is potentially good news for companies that were previously prohibited from granting qualifying EMI share options and for companies that had been eligible to grant EMI options but had out grown the old £30m gross assets and 250 FT equivalent employee limits.

Employee Ownership Trusts: changes to capital gains tax relief on disposals

The Autumn Budget 2025 announced changes to availability of capital gains tax relief on disposals of shares to an employees’ ownership trust (EOT). Under the changes announced, capital gains tax relief on disposals to an EOT will be reduced from 100 per cent to 50 per cent from November 2025. Previously, company owners who made a qualifying disposal of shares to the trustees of an EOT benefited from 100 per cent relief from CGT, but under this measure, 50 per cent of gains will be treated as chargeable gains and subject to CGT.