Midweek Tax News

On 30 October, the Chancellor delivered her Autumn Budget, focusing on the Government’s aim to deliver economic stability while at the same time setting the Government’s growth program for the life of this Parliament.

Our summary of the measures was circulated to Midweek Tax News subscribers on Budget day and can also be found here or on the EY Budget webpage. Our webcast on 31 October looked at the economic impact of the Chancellor’s announcements and assessed the key tax implications – if you were not able to attend on the day, an on-demand replay of the webcast can be accessed here.

The headline measures were broadly expected (with a few surprises). From a business tax perspective, employer National Insurance contributions will rise by 1.2% to 15.0% from 6 April 2025 while the secondary threshold will be reduced to £5,000 per year. Also as expected, the Chancellor announced the publication of a corporate tax road map and reconfirmed that the corporation tax rate would be capped at 25% for the life of the parliament, while full expensing for plant and machinery expenditure, the £1 million annual investment allowance and the current rates for research and development (R&D) reliefs will be retained.

As previously announced, the rate of the energy (oil and gas) profits levy (EPL) will increase to 38%, with effect from 1 November 2024, and the levy will be extended to March 2030. The 29% investment allowance will be abolished, though the 100% First Year Allowance will be retained, along with the decarbonisation allowance which will be set at 66%. The Government will introduce legislation to allow film and high-end TV companies to claim an enhanced 39% rate of Audio-Visual Expenditure Credit (AVEC) on their UK visual effects (VFX) costs.

For multinational companies, there are various amendments to the UK’s Pillar Two legislation following stakeholder consultation to ensure that UK legislation remains consistent with commentary and administrative guidance to the GloBE rules, together with confirming, as expected, that a Pillar Two undertaxed profits rule (UTPR) will be introduced in Finance Bill 2024-25 and that the Offshore Receipts in Respect of Intangible Property (ORIP) rules will be repealed in respect of income arising on or after 31 December 2024.

The Government has confirmed that a UK Carbon Border Adjustment Mechanism (CBAM) will be introduced from 1 January 2027. The UK CBAM will place a carbon price on goods that are at risk of carbon leakage imported to the UK from the aluminium, cement, fertiliser, hydrogen and iron & steel sectors. Products from the glass and ceramics sectors will not be in scope of the UK CBAM from 2027 as previously proposed. A separate alert on these changes is available.

For the fund management industry, the capital gains tax rate applicable to carried interest will increase to 32% from April 2025, with further changes to be considered from April 2026 to make the rules better targeted within the income tax framework.

The Chancellor’s personal tax announcements included the news that, contrary to pre-Budget speculation, income tax thresholds (outside Scotland) would not be frozen beyond April 2028 and the personal allowance (which applies throughout the UK) would therefore be uprated by indexation from that date. There were however increases in the rates of capital gains tax, and changes to inheritance tax (including a freeze on the nil-rate threshold and changes to agricultural property relief (APR) and business property relief (BPR) from 6 April 2026). Further details of the employment and personal tax measures included in the Budget can be found in our Budget alert and in last week’s edition of our People Advisory Services Weekly News Roundup.

As expected, the Government confirmed plans to take forward changes to the treatment of non-UK domiciled taxpayers, introducing new residence-based regimes for foreign income and gains (FIG) and inheritance tax. A Budget edition of EY’s Non-Dom Newsletter summarises the key features of the non-dom reform set out on Budget Day, as well as highlighting other changes of interest to non-doms.

It is expected that the Finance Bill will be published in the coming days.

The next in our series of Indirect Tax Perspectives events will take place on 27 November. This in-person event will take place at our 1 More London Place offices and will run from 9.45 to 11.15, with networking and refreshments available from 8.45.

The session will cover:

• A round-up of the latest indirect tax topical issues including Budget highlights
• Navigating the pros and cons of integrating a tax engine into your tax ecosystem
• Following HMRC’s publication of its Guidelines for Compliance (GfC8) – Help with VAT compliance controls, what businesses should be doing
• Current and growing compliance trends in HMRC activity

You can register for the event here, and if you would like to forward the details to your colleagues, please feel free to do so. Subscribers to EY VAT News should already have received this invitation.

In Collins Construction Limited, the First-tier Tribunal has considered whether research and development expenditure incurred by a company pursuant to contracts with clients was prevented from qualifying for R&D tax relief.

Collins carried out bespoke construction projects for a range of clients. The contracts with clients typically required Collins to deliver a specified product in return for an agreed sum. On occasions, Collins encountered a difficulty during the delivery of a project and would incur expenditure in innovating to develop a solution. HMRC denied Collins’ claim under the R&D tax relief rules for small or medium enterprises (SMEs) in respect of this expenditure. It argued that the expenditure did not qualify, on the basis that it was either “subsidised” (section 1138 CTA 2009) by the clients, or was incurred in carrying out activities which had been “contracted out” to Collins by the clients (section 1052(4) CTA 2009).

In relation to the “subsidised” issue, the key question to be considered by the Tribunal was whether expenditure fell within section 1138(1)(c) as being expenditure “met directly or indirectly by a person other than the company”. HMRC argued that the expenditure was subsidised because it was met indirectly by the clients through their payments for the works. However, the Tribunal found that the expenditure was not subsidised. They agreed with the decision of the First-tier Tribunal in Quinn (London) Ltd that, in the absence of a clear link between the price paid by the clients and the expenditure on R&D, section 1138(1)(c) should not apply.

On the “contracted out” issue, HMRC argued that, as the expenditure was incurred in fulfilling Collins’ contractual obligations to its clients, it should be regarded as “contracted out” to them by the clients. However the Tribunal disagreed, noting that the contractual bargain between Collins and its clients was for Collins to provide specified works. The clients did not agree to pay for specified R&D activities, and any R&D was carried out at Collins’ own economic risk. Accordingly, Collins’ appeal was allowed.

Yesterday, 5 November, the EU Economic and Financial Affairs Council (ECOFIN) of the EU met to discuss proposed changes to the EU VAT rules as part of the VAT in the digital age (ViDA) initiative, which was originally announced in December 2022. ECOFIN has now adopted all three pillars of the proposal, following the adoption of compromises to the original proposals made to satisfy all 27 Member States.

The ViDA initiative is a package of fundamental changes to the common VAT rules across the EU, with three pillars and gradual implementation dates. The three ViDA pillars can be summarised as:

• Digital Reporting Requirements (DRR) – Introducing common standardised Digital Reporting Requirements and e-invoicing for intra-community transactions (i.e., between Member States)
• Platform Economy – Addressing the challenges of the platform economy for short-term rental of accommodation and passenger transport services by enhancing the role of digital platforms in collecting VA
• Single VAT Registration – Reducing VAT registration requirements in the EU by expanding the scope of the One Stop Shop (OSS) for imports and the reverse charge for business-to-business (B2B) transactions

Businesses operating in the EU will need to consider the implication of the new rules and the associated systems, tax and commercial implications of the changes. An alert will shortly be issued to EY VAT News subscribers which will provide further details on this development and its implications for businesses.

On 28 October, the European Commission published a proposal to revise the Directive on Administrative Cooperation (DAC9) to implement the OECD Global anti-Base Erosion (GloBE) Information Return. The revisions would enable central filing via a top-up tax information return as provided for under the Minimum Tax Directive. To achieve this, the proposal amendments would set up a system for tax authorities of Member States to exchange information with each other; and introduce a standard form, in line with the form developed by the Inclusive Framework of the OECD and the G20, which covered taxpayers will have to use to report certain tax-related information. A global tax alert is available which sets out further details.

On 23-24 October, the G20 Finance Ministers and Central Bank Governors met in Washington. The meeting concluded with a communiqué that welcomes progress on BEPS Pillars One and Two and reaffirms their commitment to swift implementation by all interested jurisdictions. In advance of the meeting, the OECD released the OECD Secretary-General's Tax Report to the G20 Finance Ministers and Central Bank Governors. This report provides an update on activities with respect to the G20's international tax agenda, including ongoing work on the BEPS 2.0 project, tax transparency, and capacity-building efforts. Further information is available in this global tax alert.

We have included links to a selection of our tax alerts below. Additional articles are available in our global tax alert library.

Cyprus: Cyprus has extended the deadlines for submitting income tax returns and summary information tables of intercompany transactions for the 2022 and 2023 tax years.

El Salvador: El Salvador's Tax Authority has issued its 2025 list of 101 low- and no-tax jurisdictions, with payments to these “tax havens” subject to a 25% withholding tax.

Kenya: Kenya’s Supreme Court has found that Finance Act 2023 was constitutional, overturning the decision of the Court of Appeal. The Supreme Court found that sufficient public participation had been conducted on the Act, and that Parliament is not required to provide detailed reasons for accepting or rejecting views after public participation.

In two new articles available on LinkedIn, A discussion of various tax function operating models and The vested relationship of a tax GPO with their co-source counterpart, EY’s Steve Foster explores how tax functions are organised and looks at the role of a Global Process Owner (GPO) in the world of tax.