A corporation tax view on the government’s spring tax update

Last week, the government published several announcements across taxes. The primary aim of these announcements is to simplify and modernise the UK tax system. The announcements range from consultations and establishing working groups, to deferring certain measures already enacted (mandatory payrolling of benefits in kind).

From a corporation tax perspective, there are several points to watch out for. These are summarised below and we will issue further guidance on specific issues in due course.

Overview of corporation tax changes

The corporation tax-related announcements fall into broadly four categories:

1. Establishment of a working group in relation to the administration of the corporate interest restriction

The government is looking to engage with taxpayers, their agents and other stakeholders in relation to the corporate interest restriction regime, and specifically how it is administered. This comes off the back of a recent concession announced by HMRC in relation to how they will police historical administrative errors in relation to the nomination of reporting companies. See our blog for more information.

This engagement from the government is welcome. Whilst further detail has not yet been published, we will be participating in the discussions.

2. Draft legislation to reform certain international tax measures following the 2023 consultation

The second announcement consisted of draft legislation in relation to three specific international tax rules. The topics covered are transfer pricing, permanent establishments and the diverted profits tax.

Removing transfer pricing obligations for UK-to-UK transactions

Currently the UKs transfer pricing rules require all groups of a certain size to apply the arm’s length principle to all related party transactions. However, the draft legislation will exempt UK-to-UK transactions where there is no loss of tax to HMRC. This is a welcome change and will significantly reduce the administrative burden for solely domestic groups. However, as noted below, this may place a greater burden on multinational groups.

Updating the definition of a UK permanent establishment

If a multinational business has a UK permanent establishment, the multinational will be charged UK corporation tax on profits attributable to the UK. The UK intends to align the definition of a permanent establishment with that in the OECD Model Tax Convention. Some consider this to be an expansion of the current definition to bring more international businesses in scope of UK corporation tax. However, the government do not consider this to be the case.

Transforming diverted profits tax

Finally, draft legislation regarding the diverted profits tax goes so far as to repeal diverted profits tax and replace it with a new unassessed transfer pricing profits regime. Most significantly, the new provision will allow businesses to benefit from the treaty network and mutual agreement procedure to resolve double taxation disputes. This is not the case with double taxation disputes.

Any changes are proposed to take effect from 1 January 2026 at the earliest.

We are working through the draft legislation in detail and will be responding in due course.

3. A consultation on whether to expand transfer pricing obligations to mid-sized businesses

Two transfer pricing consultations have opened, welcoming views on removing medium enterprises from the current exemption from transfer pricing for SMEs. They also propose introducing a requirement for multinationals to report additional information to HMRC in relation to overseas related party transactions. Both of these measures will increase the burden on multinational groups operating in the UK. However, many other OECD member states do not have small entity exemptions and already require additional reporting for intragroup transactions. This aligns with the general shift towards increased reporting for multinational groups, alongside the introduction of pillar two.

4. Modernising corporation tax communication with HMRC

Finally, it was also announced that HMRC would stop issuing certain corporation tax communication by post. This has been highlighted as a relatively outdated part of interacting with HMRC.

Our views

Overall, the announcements are a mixed bag. The openness to discuss CIR administration is promising, as it has been an overly-burdensome area since the introduction of the regime. The changes to transfer pricing will simplify matters for solely domestic UK groups. However, they are likely to require additional work for groups with UK and overseas presence.

If you have any questions about how these changes might affect your business, our corporation tax specialists are here to help.

Related articles:

HMRC’s consultation on transfer pricing: what you need to know