UK Autumn Budget 2021 – AMIF insights

This article forms part of our wider Budget 2021 coverage including expert analysis of the tax aspects which can be found on our Budget hub.

Overview

Autumn Budget 2021 contained relatively few fireworks from a tax perspective.  Within this though are a number of measures that will be of interest to clients in the Asset Management and Investment Funds sector, including the following topics:

Asset holding companies - new tax regime

The proposed UK tax regime for qualifying asset holding companies (QAHCs) is a key element of the ongoing UK fund review, intended to support UK competitiveness and establish the UK as a favourable domicile in which to establish and operate the asset holding companies that are typically seen in private fund structures investing in private equity, infrastructure, credit and real estate.

An intensive phase of engagement with stakeholders has followed the release on 20 July 2021 of the government response to the second stage consultation and draft legislation for the new regime, and it is pleasing to see a number of positive developments in the Autumn Budget announcements.  For further details of the QAHC regime as originally proposed in July 2021, see our article UK asset holding companies regime: government response.

Amongst the most noteworthy developments are the following:

• permitting corporation tax deductions for certain interest payments that would typically be treated as distributions in a broader range of circumstances than proposed in the draft legislation;
• switching off the late paid interest and deeply discounted securities rules to facilitate relief for relevant payments on an accruals rather than a paid basis;
• a broader exemption to disapply the obligation to withhold income tax at the basic rate on payments of interest by a QAHC;
• enabling any premium paid on a repurchase of shares by a QAHC from an individual to be treated as capital rather than an income distribution;
• permitting certain amounts paid to qualifying remittance basis users by a QAHC to be treated as non-UK source, based on the underlying mix of income and assets of the QAHC; and
• exempting repurchases of shares and loan capital by a QAHC from stamp duty and stamp duty reserve tax.

The regime is expected to contain detailed eligibility criteria together with entry and exit provisions that will apply when a company joins or leaves the QAHC regime, with a new accounting period commencing at transition and with certain assets being rebased.

Simmons comment: We are pleased to have participated in the working groups supporting the development of the QAHCs regime and that HM Treasury and HMRC have engaged in a positive manner in response to feedback from stakeholders. Whilst there will inevitably be points that have not been reflected or which may need to be addressed through guidance or further dialogue, the introduction of the proposed new regime underlines the importance of the asset management sector to the UK.

REITs - targeted reforms

As part of the UK fund review, the government received feedback that certain aspects of the UK REIT regime continued to act as barriers to the wider adoption of UK REITs as vehicles through which UK real estate could be held.  In the government response to the second stage consultation on asset holding companies on 20 July 2021, the government identified certain targeted reforms that should be addressed as a priority, with wider reforms being dealt with subsequently.

In Autumn Budget 2021, the government confirmed that they would move forward with the targeted reforms (with certain changes since the July announcement), with the intention that these would take effect from 1 April 2022.  The key elements of the reforms are:

• removal of the requirement for REIT shares to be admitted to trading on a recognised stock exchange where institutional investors hold at least 70% (rather than the previously proposed "wholly or almost wholly" requirement) of the REIT's ordinary share capital;
• amendments to the "foreign REIT equivalent" limb of the institutional investors definition, so that this considers the equivalence of the foreign entity itself, rather than the relevant foreign regime - this will open up institutional investor status to a greater range of foreign REITs, which may in turn result in simplification of holding arrangements;
• removal, as previously proposed, of the "holder of excessive rights" charge where the relevant investors to whom property income distributions are paid are entitled to gross payment - again this will facilitate the simplification of a number of existing structures where holdings have been fragmented between a number of SPVs that each hold less than 10% of the REIT;
• amendments to the balance of business test, including to disregard non-rental profits arising from certain planning obligations, together with a simpler gateway test that, where satisfied, will not require preparation of the full statements by the REIT in order to meet the full balance of business test.

Simmons comment: Since the introduction of the original REIT regime with effect from 1 January 2007, there have been several previous rounds of reforms that have resulted in almost 100 REITs now benefitting from the regime.  We expect that the targeted reforms confirmed in Autumn Budget 2021 will result in a number of additional REITs being established, as well as enabling the holding structures adopted for some existing REITs to be rationalised, both of which will underline the continued attractiveness of the REIT regime as a vehicle for holding UK investment property.

Update on the broader UK funds regime review

The asset holding companies and REIT announcements form part of the broader UK funds regime review, which covers a range of regulatory and tax barriers that affect the competitiveness of the UK from an asset management sector perspective.  We have already seen the FCA's publication on 25 October 2021 of its final rules and guidance on the introduction in the UK of the new illiquid assets fund vehicle, the Long-Term Asset Fund or LTAF.

The government has announced that it remains committed to its ongoing review of the UK's funds regime and, in addition to the announcements above, it will publish its response to the call for input on the broader elements of the UK funds regime review, as well as a consultation on options to simplify the VAT treatment of fund management fees, in the coming months.

Simmons comment: Given the continued focus on UK competitiveness and facilitating the growth of the UK as a fund domicile, we hope that there will be positive developments to come, particularly to remove the VAT disadvantage that exists currently for UK managers that manage relevant UK funds.  This has been a recurring theme of client conversations around what could really drive the success of the UK as a fund domicile, supporting the UK competitiveness agenda.  The badging of the VAT consultation as a simplification measure may suggest that root and branch reform is not on the cards despite the extensive feedback provided by the sector.

Research and development (R&D)

Following the consultation launched at the Spring Budget 2021, the government has announced that reforms will be introduced to R&D tax reliefs. R&D tax reliefs will be reformed to support modern research methods by expanding qualifying expenditure to include data and cloud costs, to more effectively capture the benefits of R&D funded by the reliefs through refocusing support towards innovation in the UK and to target abuse and improve compliance.

These changes will be legislated for in Finance Act 2022 and take effect from April 2023. Further details of these changes are still awaited and the Budget documents merely state that the next steps for the review will be set out in due course.

Simmons comment: Given the importance of technology and digital to the asset management sector, it is hoped that these reforms will further support investment by UK based managers in this area.

Corporate re-domiciliation

A key feature of the Chancellor's Budget was attracting more overseas investment; part of that plan includes making it easier for companies to move to the UK through a new re-domiciliation regime. Re-domiciliation has been implemented in around 50 other countries and jurisdictions including Canada, New Zealand and several US states. However, it is not currently possible for a company to transfer incorporation to the UK and retain the same legal identity. Accordingly, the government has launched a consultation seeking views on the introduction and implementation of a re-domiciliation regime to provide for companies to re-domicile and subsequently relocate to the UK.

The government's rationale for re-domiciliation is to attract foreign companies to relocate to the UK by enabling continuity of operations through a shift in a company's place of incorporation whilst maintaining its corporate history, management structure, assets, IP and property rights, contracts, and regulatory approvals. Currently, a relocation of a foreign entity to the UK can trigger complex, lengthy and costly administrative or regulatory issues, including re-negotiations of contracts, or might result in complex group structures having to be maintained when they may otherwise be rationalised. However, it should be noted that for a company to redomicile, generally it must be also be permitted in the company's originating jurisdiction. As noted above, this currently stands at 50 countries and jurisdictions, however some of these do not have outward re-domiciliation as part of their regimes or are limited to investment funds only (such as Singapore and Ireland).

Generally, the government is keen to understand the degree to which these issues currently pose barriers for companies, and how a re-domiciliation regime would help overcome them. Additionally, the consultation seeks to assess the demand for such a regime, the advantages (and disadvantages) of re-domiciliation and, in generally which aspects to replicate or avoid from other implemented regimes. Questions within the consultation request suggestions for appropriate checks and entry requirements, including solvency criteria and whether additional powers for the registrar are necessary. Moreover, HM Treasury and HMRC are also considering, and have requested responses as to whether changes are required to UK tax law as well as any implications that a re-domiciliation regime may have in respect of:

• avoiding UK tax;
• material risk of loss importation;
• capital gains and intangible asset base cost on inward re-domiciliation;
• personal taxation for owners of companies;
• stamp taxes on shares and securities; and
• VAT.

The deadline for responses to the consultation is 07 January 2022.

Simmons comment: although the focus of these proposals seems to be on operating businesses, the consultation does touch upon the fund redomiciliation regimes that are a feature of many competitor jurisdictions.  We hope that this item will remain on the agenda, particularly given the UK funds review, as creating a straightforward means for existing funds and investment vehicles to redomicile to the UK will be a factor in driving take-up of the UK domestic opportunities that will be on offer.

Basis period reform

Following government consultation during 2021, the government has announced that it will be reforming the income tax basis period system for unincorporated businesses, including trades conducted through partnerships and LLPs. The aim of this new measure is to simplify the method for allocating trading profit to specific tax years by taxing profits arising during the tax year. This will involve changing the basis period from a 'current year basis' to a 'tax year basis' such that a business's profit or loss for a tax year would be the profit or loss arising in the tax year itself, regardless of its accounting date. The reform will take effect for the 2024/25 tax year with a transition year in the 2023/24 tax year. This will impact individuals, trusts, partnerships (including trading LLPs) and other unincorporated entities with trading income that is subject to income tax.

For businesses that do not draw up their accounts to 31 March or 5 April, there will be an apportionment of profits to determine the profits treated as arising in the tax year. Introducing the 'tax year basis' for trading income will also bring the payment of tax closer to the time that profits are earned.

Legislation in Finance Act 2022 will introduce special rules for the one year transition period (2023/24) which will impact the way that the basis of taxable profits for the 2023/24 tax year is determined - for example, the basis period for a business with a 30 September year end will comprise (i) taxable profit for the year ended 30 September 2023, plus (ii) a transition component consisting of taxable profit from 1 October 2023 to 5 April 2024. Any overlap profits will need to be relieved in full in 2023/24 and will not carry forward into the tax year basis.

For businesses with higher profits in 2023/24 due to the change in basis, the government is legislating to automatically spread the transitional period additional profits over a period of five years (with the option for businesses to elect out of spreading the additional profits, accelerating the charge, if preferred). It seems, however, that a number of points stakeholders had raised, such as the request for spreading to operate over a longer period of ten years, or for spreading to apply to the tax due on the additional profits rather than the profits themselves, may not be reflected in the draft legislation when released.

Simmons comment: Given the widespread adoption of the LLP by UK based asset managers, the decision by the government to proceed with these reforms (with a one year delay to the original timetable consulted upon) may present challenges.  Affected businesses should review the draft legislation when released and start planning for the potential impact of these changes on the principals behind the business.

Notification of uncertain tax treatment by large businesses

Following two consultations, the government has confirmed it will introduce legislation in Finance Act 2022 to place an obligation on large businesses to notify HMRC when they take a position in their tax filings which is subject to uncertain tax treatment.

The regime will require large businesses to notify HMRC of any uncertain tax treatments, defined by reference to specified triggers, where the aggregate tax advantage is £5m or more in a year. It will apply to corporation tax, income tax (including PAYE) and VAT. The new regime is due to be introduced with effect for relevant returns filed on or after 1 April 2022.

It was expected that there would be three triggers. However, the government has now confirmed that initially only two of the three proposed triggers will apply. The two triggers that will apply are as follows.

• where a provision has been made in the accounts for the uncertainty; or
• where the tax treatment applied is not in accordance with HMRC's known position.

The government has stated that it is committed to further consideration of the third proposed trigger (where there is a substantial possibility that a tribunal or court would find the taxpayer's position to be incorrect in material respects) for possible inclusion later. This is a welcome narrowing of the requirements (at least initially) as the third proposed trigger was the most subjective and therefore contentious during the most recent round of consultation.

Simmons comment: The regime is a significant tax development that will affect all large businesses in the UK. At the very least, it will require further due diligence and add to the administrative and compliance burden of the tax function. Although the rules do not come into force until April 2022 -- and may still change in their passage through the Finance Bill -- businesses should already be considering their approach given that the rules may well be relevant to transactions being entered into now.