What tax changes might L-day bring?

Laura Hodgson

 Laura Hodgson

July 20 is 'L-day' – the day on which the government publishes the first draft of legislation to be included in the finance bill 2022-23. 

On previous L-days the government has also published consultations on measures that may lead to legislative changes further down the track. 

These are our predictions of the key business tax legislation and consultations that we could see published on L-day. 

OECD international tax reform

The key item expected to be published is legislation implementing international tax reform agreed between members of the OECD. 

These measures are the latest development in a lengthy project by the OECD to combat base erosion and profit shifting (BEPS).

In Autumn 2021, international agreement was reached on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy.

While international consultation on the detail of pillar one – rules that aim to align international taxing rights over the profits of extremely large businesses more closely with the location of customers or users – is ongoing, pillar two is much more advanced. 

The main plank of pillar two is the global anti-base erosion rules (GloBE rules) that seek to establish a global minimum corporate tax rate of 15 per cent for multinational enterprises (MNEs) that meet a €750mn (£635mn) turnover threshold, although various entities, such as pension funds, will be excluded.

The GloBE rules do not require low-tax countries to increase their corporate tax rates to 15 per cent, although they may lead to them doing so.

Instead, broadly, other countries are required to impose top-up taxes on the relevant MNE to the extent it pays tax at a rate below that level elsewhere.

Even if a country's headline corporate tax rate is 15 per cent or above, an MNE may have an effective tax rate for GloBE purposes there of less than 15 per cent. 

To prevent the local tax shortfall being subject to top-up taxes elsewhere, that country may choose to introduce a domestic minimum top-up tax, and we may find out on L-day whether the UK will follow that approach.  

In January 2022 the government launched a consultation on the implementation of the GloBE rules in the UK with an aim, at that time, of an implementation date of April 1 2023 for the first tranche of the rules. 

This led to concerns from businesses that the implementation of extremely complicated and far-reaching new rules was being rushed, and it was recently announced that this measure will now have effect in relation to accounting periods commencing on or after December 31 2023. 

This is in line with the expected timing for EU implementation of the GloBE rules, although agreement is yet to be reached between EU member states.  

R&D tax reliefs

In spring statement 2022 the government stated that it would legislate to reform the research and development regime. 

It is expected that relief for overseas R&D expenditure will be restricted unless there are material factors (eg geography) or regulatory reasons for carrying out the R&D activities overseas.