The UK's tax strategy stabilised in 2023 – at least in the near-term – following a very disruptive 2022. Two fiscal events saw comparatively uneventful policymaking generally welcomed by the business community. The scheduled rise in the corporation tax rate to 25% took effect in April 2023, but accompanied by a permanent 100% first-year allowance for qualifying capital expenditure. Although the details (including applicability to SPVs and to leasing transactions) remain to be worked out, the significant cashflow benefit of this "full expensing" measure is expected to promote UK business investment.

Other UK tax policy developments in 2023 included:

  • Legislating for the OECD's global "Pillar II" 15% minimum tax reforms;
  • Confirmation of the final reformed R&D tax relief regime to apply from April 2024 (of particular interest to the life sciences sector);
  • Liberalising the UK REIT regime;
  • The abandonment of the consultation to pare back UK sovereign and Crown immunity (welcome news for SWF investors); and
  • The extension until 2035 of the tax-advantaged EIS and VCT schemes.

The UK Government's response to a 2023 consultation on modernising UK stamp taxes on shares is also expected shortly, while the Autumn Statement included the welcome, if expected, confirmation that the 1.5% SDRT charge on certain equity issuances will not be reintroduced.

The rising headline rates environment has increased the significance of tax reliefs (such as portfolio company carry-forward losses) to corporate transactions and we expect this trend to continue into 2024.

The UK's ongoing reform of its funds taxation regime slowed somewhat during 2023. Some helpful refinements to the qualifying asset-holding company tax rules were released – and we expect the enthusiastic uptake of this new regime to continue during 2024 – but HM Treasury is not expected to entertain any material changes to the VAT treatment of fund management services (such as the holy grail of zero-rating).

Interest deductibility for holding companies is expected to remain an area of focus during 2024, as UK case law on the unallowable purpose rule develops, while for cross-border context investments substance should remain front-of-mind even if the EU's "Unshell" initiative has stalled.

For secondary fund transactions, the proposal in the stamp taxes consultation to abolish stamp duty on the transfer of partnership interests would be a welcome simplification for a sector that continues to grapple with the reformed U.S. 1446(f) withholding regime.

Preparing for the advent of Pillar II has become an increasingly central concern for asset management tax functions. Consolidation requirements across portfolios can mean that even determining the scope of the rules (which have a €750m annual revenue threshold) can be a complex process, especially in coinvest and joint venture scenarios.

Unshell aside, other EU tax initiatives that may gather momentum during 2024 include the "FASTER" directive on withholding tax relief mechanisms and the latest proposal for a common EU tax base ("BEFIT") which proposes formulaic profit apportionment redolent of Pillar II. Tax's prominence as an ESG matter also continues to increase.

In advance of the UK general election, which is expected during 2024 and due in any event by January 2025, the taxation of carried interest is expected to be a focal point. The Labour Party has pledged to increase UK tax revenue from carried interest returns, although the contours of its proposals are yet to take shape, and election manifestos will be keenly watched.

The competitive European tax landscape for investment professionals, with favourable carried interest tax regimes in force in various jurisdictions, is also (it is hoped) increasingly recognised by policymakers.

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