Labour's Corporate Tax Roadmap

The Labour Party election manifesto included a pledge to publish a roadmap for business taxation within six months of taking power, with the aim of allowing businesses to plan investments with confidence for the lifetime of the next parliament. That roadmap, the Corporate Tax Roadmap, was published by HM Treasury alongside the Budget on 30 October 2024. The aim is clear and set out in the first paragraph of the document - "to provide the stability needed for businesses to make investments that are critical to boosting growth in the UK".

The Labour Party election pitch was predicated on achieving economic growth and raising private sector investment in the UK to help achieve that aim. Businesses and adviser feedback to the Labour Party had made it very clear that a stable and predictable tax environment is needed to provide the confidence needed to encourage investment and innovation.  So the Roadmap aims to provide the tax certainty needed to give businesses the confidence to invest. Predictablity, stability and certainty are the repeated catch-phrases of this publication.

Of course, certainty and stability cannot mean no change at all. The Roadmap leaves the door open for changes when needed to address developments, such as identified risks of abuse or issues with new business models or practices. There is also the perceived need to keep the UK tax system "dynamic and up to date", but here the Roadmap does its best to point us to those areas of expected developments, including a list of planned consultations.

So what is actually in the Roadmap?

Corporation tax rates and base

There is no surprise that the Roadmap repeats the Labour Party manifesto pledge to cap the corporation tax (CT) rate at 25% for the entire parliament, whilst the promise to act if tax changes in other countries pose a risk to UK competitiveness suggests a "race to the bottom" would not be out of the question if necessary. The small profits rate of 19% and marginal relief for profits between £50,000 and £250,000 will also be maintained.

The key principles governing how CT liabilities are calculated will not undergo major change and the Roadmap commits the government to keeping the structural features of the CT regime in place which make the UK an attractive location for international headquarters and holding companies. The Roadmap also commits to maintain the current features of loss relief in place and maintain the current, largely territorial CT system.

Capital allowances and other reliefs

Again no surprise that the Roadmap confirms that the system of full expensing will be maintained for the whole of the parliament given this also appeared in the manifesto. This extends to other core features including the £1m annual investment allowance, writing down allowances and the structures and buildings allowance. The question of extending full expensing to assets that are bought for leasing or hiring will be revisited again "once fiscal conditions allow".

The manifesto also promised to give businesses greater clarify on what qualifies for allowances and in this context there is the promise of a consultation to be published shortly on the treatment of predevelopment costs. This is a technically difficult area as amply demonstrated by the recent Gunfleet Sands decision in the context of a large offshore windfarm development, which caused some investor concern and uncertainty. This consultation will be particularly important given the government's hopes for private investment in infrastructure projects and especially it's desire for the UK to accelerate towards net zero as part of its Clean Energy Superpower mission.

In the longer term, the government will explore options for providing further clarity on what qualifies for different allowances and simplification of the capital allowances legislation.

R&D reliefs obviously play a crucial role in attracting investment and innovation in the UK. Here the message is, again, one of certainty, quite rightly recognising that after recent changes now is the time to prioritise stability. So the government commits to maintaining the generosity of the merged R&D regimes and the enhanced regime for R&D intensive SMEs, whilst considering longer term simplifications and improvements to their effectiveness and continuing to evaluate their effectiveness.

On the flipside, however, the Roadmap also recognises that the system attracts an unacceptable level of fraud and errors, amounting to 17.6% in 2021/22. Measures to address this unacceptable position will include establishing an R&D expert advisory panel, continuing to improve guidance on the reliefs and launching an R&D disclosure facility by the end of 2024. The government will also discuss widening the use of advance clearances in R&D reliefs, including launching a consultation in spring 2025.

Both the patent box and the existing tax treatment of intangible fixed assets are to be maintained. As part of its sector plan for creative industries (including film, TV and gaming), the government has also committed to maintain an audio-visual expenditure credit for film and high-end TV producers and a video game expenditure credit for video game developers.

Land remediation relief

Land remediation relief is seen as particularly important in the context of the Labour government's plan to get Britain building through a range of reforms. This includes a "brownfield first approach" and land remediation relief can be particularly important in this context by providing extra tax relief for the substantial costs involved in cleaning up contaminated or derelict land. However, in view of the period of time since its last review (2011) and its potential importance, the government will launch a consultation to review its effectiveness in spring 2025. This will determine whether it is still meeting its objective and evaluate its value for money.

International tax issues

Broadly, the Roadmap confirms that the government supports recent changes to make the UK CT system more territorial and will continue a number of consultation processes. In particular, there are plans to engage in further consultations on reforms to the UK transfer pricing, permanent establishment and Diverted Profits Tax rules, aiming to enhance taxpayer certainty, ensure alignment with international tax treaties, and safeguard the UK tax base. This includes the potential removal of UK to UK transfer pricing. The initial round of consultations happened in August 2023 with a summary of responses published in January 2024, as outlined in our earlier Insights article.

In addition, the government has indicated it will be exploring new areas for consultation, expected to be published in Spring 2025, which include:

• The potential reduction of existing thresholds for medium-sized businesses to bring them within the scope of transfer pricing rules, aligning with international standards while maintaining exemptions for small businesses. This clearly indicates the UK government's efforts to cast the transfer pricing net wider to increase the opportunity for and receipt of UK tax revenues.

• Proposals to introduce reporting obligations for multinationals on cross-border related party transactions to improve risk identification and streamline HMRC's compliance efforts with more targeted enquiries. To some extent, comments on this were requested in the transfer pricing documentation consultation in 2021 but it seems with the current government's HMRC investment strategy to tackle compliance and tax avoidance, this has been prioritised.

• Review the treatment of cost contribution arrangements to encourage investment and ensure the equitable development and sharing of intellectual property among group companies. This reflects a strategic effort to ensure the rules provide certainty and do not act as a deterrent to investment that brings economic benefits to the UK.

The Roadmap confirms the UK's continuing commitment to the OECD's Pillar 1 and Pillar 2 solutions, including introducing the Undertaxed Profits Rule with effect from 31 December 2024. The Roadmap also reiterates that the government will look for opportunities to simplify existing UK cross-border rules in the light of Pillar 2, whilst recognising that any changes will require careful consideration. The repeal of the offshore receipts in respect of intangible property legislation from 31 December 2024 is held out as an example.

The Roadmap also recognises that implementation of Pillar 2 will be challenging and HMRC has developed a dedicated Pillar 2 compliance team and is working on technical guidance.

Administration

The Roadmap expresses the government's desire to create a business tax environment which promotes tax certainty. Whilst not contained in the Roadmap specifically, the Budget Red Book (published at the same time) states that the government will engage with stakeholders over the coming months to understand their views on where the tax policy making process works well, and what could be improved. The government will take forward simplification of the tax system as part of its three strategic priorities for HMRC: closing the tax gap, modernisation and reform, and improving service. The government intends to announce a package of measures to simplify tax administration and improve taxpayer experience in spring 2025 with a focus on reducing burdens on small businesses. The government will meet stakeholders to understand the priorities for administration and simplification, ensuring that this work is driven by the views of taxpayers.

One specific measure will be developing and consulting in spring 2025 on a new process that will give investors in major projects increased advance certainty about the tax that will apply.

The Roadmap notes that modernisation of tax administration is one of its key priorities, however finding the right way to take this forward (involving integrating tax within day to day systems and business processes) will take time and the costs and benefits need to be carefully weighed. The Roadmap also recognises that corporation tax applies to a wide range of different types of taxpayer and care will be needed to find the best solutions for all. Further details of HMRC's modernisation ambitions will be published in spring 2025.

Finally, the Roadmap notes the government's continuing support of the Customer Compliance Manager model for managing the tax compliance of the largest businesses. HMRC will consider how to build on this system.