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In brief

On 18 July 2023, HM Treasury and HMRC published draft tax legislation for inclusion in the Finance Bill 2024 and certain policy papers. The draft legislation is open for technical consultation until 12 September 2023. Finance Bill 2024 is expected to be introduced to Parliament in Autumn 2023 and to receive Royal Assent in Spring 2024.

In this update, we highlight the measures of most interest to our clients. We also mention the key tax measures about which an announcement was perhaps expected but has not been made.

In more detail

The government uses “legislation day” – this year on 18 July – to publish draft clauses to be included in the next Finance Bill to be put before Parliament. It is unusual that the day sees the announcement of anything unexpected and this year was no different. 

Draft Legislation

International – Multinational top-up tax: adoption of the undertaxed profits rule and other amendments

The OECD Pillar Two rules impose a top-up tax on large multinationals to the extent they are not subject to a minimum effective tax rate of 15% in each jurisdiction in which they operate. The detailed provisions are contained in the global anti-base erosion rules (“GloBE Rules“). The main charging mechanism of the GloBE Rules, the income inclusion rule, was implemented into UK law as the multinational top-up tax (MTT), alongside a domestic top-up tax (DTT), by Finance (No. 2) Act 2023. The MTT and DTT will apply for accounting periods beginning on or after 31 December 2023. The government has now published draft legislation to implement the undertaxed profits rule (UTPR) and draft amendments to the legislation implementing the MTT. This is in line with the government’s announcements at Autumn Statement 2022 and reflects its ongoing commitment to continue to lead the way on the implementation of Pillar Two.


The UTPR is the backstop charging provision under the GloBE Rules. It applies where the income inclusion rule does not collect all of a multinational group’s top-up tax. Under the UTPR, any residual top-up tax is, broadly, allocated to territories in which the multinational group has substantive activities based on the number of employees and the value of tangible assets.

The UK UTPR amendments will take effect for accounting periods commencing on or after a date to be specified by HM Treasury in regulations, which will not be before accounting periods beginning on or after 31 December 2024.

Broadly speaking, the draft legislation amends Part 3 of Finance (No. 2) Act 2023 to implement the UTPR as follows:

  • The charge to the MTT and the persons chargeable to the MTT are extended to cover the UTPR.
  • A UK member of a multinational group (other than an investment entity) is chargeable to the MTT if a group member has an “untaxed amount” and that amount is allocated to the UK. A group member will have an untaxed amount if its top-up amounts are “potentially undertaxed” (these terms are defined under a new Chapter 9A).
  • Chapter 9A also provides for the steps required to determine whether any of the untaxed amount is allocated to UK group members and, if so, how much is allocated to each UK group member. It also sets out the rules for allocating untaxed amounts in respect of joint ventures.
  • The filing member of the group can elect that a specified UK group member is allocated the whole of the tax that is attributable to UK group members.
  • In accordance with the GloBE Rules, the UTPR will not apply to multinational groups in the initial phase of their international expansion. These transitional provisions will also apply to untaxed amounts under UK legislation. 

Amendments to MTT

Part 3 of Finance (No. 2) Act 2023 will also be amended in various places to ensure that the MTT remains consistent with the GloBE Rules and the OECD administrative guidance on those rules. As anticipated, based on our discussions with HMRC, the amendments cover (among other things):

  • How the MTT applies in the context of partnerships, permanent establishments and tax transparent entities.
  • Clarifications on how CFC tax regimes and blended CFC tax regimes are treated for MTT purposes.
  • A safe harbour election for non-material members, pursuant to which there is no need to determine that member’s adjusted profits or covered tax balance using full MTT calculations, instead simplified calculations using information already collected by the group for country by country reporting can be used, thereby easing some of the compliance burden on groups.

These amendments to elements of the regime that have already (and very recently) been enacted are stated to ensure that it “functions as intended and reflects the latest internationally agreed guidance”. That we are already seeing amendments to very newly enacted Pillar Two legislation is not surprising given that the UK forged ahead with draft rules before the OECD administrative guidance was complete. This is something that could have been avoided if the UK had taken the approach adopted by many other countries and enacted the OECD Model Rules into domestic law by reference. The fact that the government has not done that, coupled with the publication of further revised OECD guidance on 17 July, means we may well see further legislative amendments in the near future, which is not helpful for businesses undertaking the significant planning and compliance expense of preparing for the introduction of the rules. 

Intellectual property – Possible merger of R&D schemes

Following on from a consultation that concluded in March 2023, the government has published draft legislation on the proposed design of a merged R&D scheme. However, the government has also clarified that it has not yet taken a decision on whether or not to introduce the merged scheme. It seems to be an inefficient use of time and resources to draft legislation on a merged R&D tax relief system that the government has not yet decided whether to proceed with. Businesses need certainty around the availability of R&D tax reliefs, of course, and the inference that might be read from the publication of draft legislation before any final policy decision has been taken is that the government is rushing this reform and its implementing legislation. If that’s the case, we risk the government not getting it right, leading to further reforms/ legislative amendments in the future.

In any event, the features of the draft legislation, which would merge and replace the R&D expenditure credit (RDEC) and the SME R&D relief, include:

  • Operation as an above-the-line expenditure credit (in line with the current RDEC in that respect).
  • Whilst the underlying policy decision is that the claimant of the RDEC should be the IP owner funding the R&D (as under the R&D SME scheme), rather than a subcontractor actually performing the R&D (as under RDEC), the draft legislation contains an exemption for R&D undertaken in the UK for a foreign IP owner (that doesn’t carry on a trade that is subject to UK tax). 

Reporting by digital platforms

The government consulted on draft compliance regulations at the end of last year as part of the UK’s implementation of the OECD’s model tax reporting rules for digital platforms. On 19 July 2023 the government published the Platform Operators (Due Diligence and Reporting Requirements) Regulations 2023 which will come into force on 1 January 2024. We are reviewing these, alongside accompanying draft guidance we are being consulted on, to ensure they clarify critical areas where the draft regulations were unclear, causing frustration for businesses seeking to prepare their systems for collecting the required information. We are also meeting with HMRC soon to discuss the regulations and guidance and will follow up with impacted businesses as appropriate.  

Transfer pricing records and documentation

On 19 July 2023 the government also published the Transfer Pricing Records Regulations 2023 which give effect to the record-keeping requirements in the OECD Transfer Pricing Guidelines. The regulations come into force on 9 August 2023 and have effect for corporation tax purposes in relation to returns for accounting periods beginning on or after 1 April 2023. These regulations leave the door open to the introduction at a later date of the requirement for taxpayers to also produce a “summary audit trail” (SAT). HMRC has said that it intends to consult further on the requirement for and content of the SAT but it has not yet made any further announcements on that.

Measures about which no announcement made

Nothing substantive was published on a number of measures in respect of which draft legislation, a consultation/ consultation response or another announcement may have been expected. These include:

  • Stamp Taxes: We did not receive a response to the consultation on the Stamp Taxes on Shares modernisation that closed on 22 June 2023. In addition, following the enactment of the Retained EU Law (Revocation and Reform) Act 2023 on 29 June 2023, the government did not take this opportunity to provide further clarity as to whether the 1.5% higher rate stamp duty reserve tax charge on the issue of chargeable securities to a depositary or clearance service operator might return on 1 January 2024. 
  • VAT treatment of asset management services: There was no announcement on this following the consultation that ended earlier this year.
  • Corporate re-domiciliation: We continue to see nothing further on the government’s proposal to introduce a UK corporate re-domiciliation regime following its consultation last year.

If you would like to discuss any aspect of the government’s most recent announcements, please contact us or feel free reach out to your regular contact.


Patrick O'Gara is a partner in Baker McKenzie's Corporate Tax department in London.


Holly Bradley is a Senior Knowledge Lawyer in Baker McKenzie, London office.


Charlotte Jones is a Knowledge Lawyer in Baker McKenzie, London office.

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