UK updates slew of tax initiatives, including R&D, transfer pricing, MDR

By Doug Connolly, MNE Tax

The UK government on November 30, in a planned “Tax Administration and Maintenance Day,” outlined updates to numerous tax policy plans as part of an effort to modernize and simplify the UK’s tax system and tackle non-compliance.

Notable initiatives affecting business and international taxation include measures relating to research and development (R&D) tax reliefs, transfer pricing documentation, mandatory disclosure rules (MDR), large business tax compliance, and “making tax digital” for corporation tax.

R&D tax reliefs

The government recently announced plans to reform R&D tax reliefs, including by expanding qualifying expenditures to include data and cloud costs, refocusing support towards activities in the UK, and targeting abuse.

The government has now provided further details on the changes and next steps in a report on its review of R&D tax reliefs, which also includes a summary of responses to its R&D tax consultation held earlier this year.

Regarding the new categories of qualifying expenditures, the report explains the kinds of costs that the government intends to bring into scope and clarifies certain issues around staff costs.

With respect to refocusing relief on activities in the UK, the report states that the changes would no longer allow relief for R&D activity subcontracted to a third party unless the work is performed in the UK. Similarly, expenditures for externally provided workers would only be eligible for relief if paid through a UK payroll.

To address abuse and improve compliance, the government intends to adopt a requirement that R&D relief claims be made digitally. Claims would also require additional detail and would need to be endorsed by a senior officer of the company. Further new requirements would also apply.

The report notes that the government plans to issue draft legislation on the R&D tax relief changes next summer, allowing further opportunity for stakeholder feedback. The changes are planned to take effect in April 2023.

In addition, the government has concurrently published findings from an independent organization that it commissioned to review customer experiences in preparing and submitting claims for R&D tax reliefs.

Transfer pricing documentation

The government plans to introduce transfer pricing legislation next year to require businesses in-scope of country-by-country reporting requirements to maintain a master file and local file in line with Action 13 of the OECD’s base erosion and profit shifting (BEPS) plan. The changes will take effect in April 2023.

Following a public consultation on the new documentation requirements that closed in June, the government has now published a summary of responses. The summary notes that many businesses are already preparing the master file and local file in some form, and respondents generally asked that any new requirements follow OECD guidelines.

The government continues to review – but is not currently adopting – a requirement to submit an international dealings schedule.

The government plans to issue a further consultation next year on the draft legislation to introduce the master file and local file documentation requirement.

Mandatory disclosure rules

The government has issued a technical consultation and draft regulations on implementation of the OECD’s model mandatory disclosure rules. The mandatory disclosure rules require tax advisors – and, in some cases, taxpayers – to report to tax authorities information on certain prescribed arrangements and structures, such as those that might be used to circumvent tax transparency rules under the Common Reporting Standard.

The draft regulations, which will replace previously introduced EU rules, largely follow the OECD model rules. They would require promoters, service providers, and taxpayers to provide information about certain reportable arrangements and structures. The reported information will be exchanged with relevant tax authorities to deter non-compliance and tax evasion.

Feedback on the consultation – which seeks views on the design of the draft regulations – will be accepted until February 8, 2022.

Large businesses tax administration and compliance

The government also announced measures aimed at improving the large business tax administration and compliance experience, including developing new guidelines for compliance. The actions follow a review of tax administration for large businesses launched earlier this year.

The new guidelines for compliance will provide practical guidance and transparency on approaches that the government considers to be higher or lower risk. The government is also undertaking measures to address long-running inquiries, including inquiries relating to transfer pricing and issues related to transfer pricing documentation. It is also looking into improving clarity and transparency in government processes to improve the cooperative compliance experience.

Making tax digital for corporation tax

The government published a summary of responses received in its consultation on the design of “making tax digital for corporation tax.” The UK’s “making tax digital” modernization effort has already been applied to value-added tax and piloted for income tax.

In the context of corporate tax, it would adopt requirements such as maintaining income and expenditure records digitally and using specified software both to provide an annual corporate tax return and to provide regular summary updates to the tax administration.

The government states that, if it adopts the digital requirements for corporate tax, it will allow adequate time for implementation.