UK: HMRC revises guidance on multinational, domestic top-up taxes

The UK HMRC released updated guidance on ‘How to prepare for the Multinational Top-up Tax and the Domestic Top-up Tax’ on 6 August, 2024.

HMRC online service

HMRC is developing a new online service to enable businesses to meet their MTT and DTT obligations. This will include the ability to register, file returns and make payments. The service are being released in stages.

The first stage, which will allow you to register for the new taxes, is now available, well in advance of your registration deadline. The deadline to register is six months from the end of the accounting period in which your group became a qualifying group.

You can now register for the Report Pillar 2 top-up taxes digital service using your Government Gateway account. Make sure you are using your sign in details and not your tax adviser’s credentials.

To set up a Government Gateway account or sign in, see HMRC online services: sign in or set up and account.

To register, you will need to provide HMRC with:

The name and registered address for the Ultimate Parent Entity (UPE)
The name and registered address for the filing member, if it is not the UPE
If either of these are a UK limited company or limited liability partnership, you must also provide the company registration number (CRN) and Unique Taxpayer Reference (UTR)
Whether the group you are registering only has entities located in the UK, or in the UK and other jurisdictions
The start and end date of the group’s accounting period
Contact details and preferences, for one or two individuals or teams in the group
The name and registered address for the UPE
The name and registered address for the filing member, if it is not the UPE
If either of these are a UK limited company or limited liability partnership, you must also provide the CRN and UTR
Whether the group you are registering only has entities located in the UK, or in the UK and other jurisdictions
The start and end date of the group’s accounting period
Contact details and preferences, for 1 or 2 individuals or teams in the group

Guidance

HMRC guidance

HMRC published draft guidance in December 2023, including updates to sections on chargeability, scope and administration that were published in June 2023. This guidance includes a new section on:

Calculating the effective tax rate;
Applying MTT and DTT to particular types of entity.

OECD guidance

The OECD has recently published further Agreed Administrative Guidance (June 2024) and Consolidated Commentary to the Global Anti-Base Erosion Model Rules, incorporating the Agreed Administrative Guidance that was released by the Inclusive Framework between March 2022 and December 2023.

Common misconceptions

Some businesses have estimated that they won’t have to pay any MTT and/or DTT but have mistakenly assumed that this means they won’t have UK compliance obligations. As with other UK direct taxes, if your business is in scope, you’ll still have reporting obligations, even if there’s no tax liability. This means you’ll need to register for Pillar Two top-up taxes, file returns and make notifications. This applies to both UK and non-UK headed groups, regardless of whether the jurisdiction of the ultimate parent entity implements Pillar Two.

The group’s filing member will need to submit a UK Pillar Two Self Assessment return and a GloBE Information Return (GIR) to HMRC for every accounting period that the group is within the scope of MTT and DTT – or DTT only, if the group is a domestic-only group. The filing member does not need to be a UK resident. However, if the filing member is not a UK resident, HMRC will not be able to automatically exchange any GIR. This also applies to businesses where the UK presence is limited to a UK branch.

Transitional safe harbour

You may be able to take advantage of the transitional Pillar Two safe harbour, to make it easier for you to administer the new taxes. Qualifying for a safe harbour doesn’t exclude you from registering and filing returns.

A transitional safe harbour aims to reduce the compliance obligations for groups in the first years of the regime. It allows groups to use figures calculated for the purposes of Country-by-Country (CbC) reporting to assess if they’re likely to face a top-up tax under MTT for a territory. If these simplified calculations show that one of the safe harbour tests is met, the group is treated as having no tax charge and doesn’t have to perform the full effective tax rate calculation.

A group only needs to meet one of the following tests to qualify for the safe harbour:

The threshold test – where revenue of members in a territory is less than EUR 10 million and profit before tax is less than EUR 1 million (or a loss);
The simplified effective tax rate test – where the simplified effective tax rate (ETR) of members in a territory is at least the ‘minimum’. The ETR is calculated as the members’ qualifying Income Tax expense divided by the aggregate profit (or loss) before Income Tax for those members. The ‘minimum’ ETR is 15% for accounting periods beginning in 2023 or 2024, 16% for accounting periods beginning in 2025 and 17% for accounting periods beginning in 2026;
The routine profits test – where the aggregate profit (or loss) before Income Tax of members in a territory is not greater than the qualified substance-based income exclusion (SBIE) for the territory. The SBIE is calculated using the model rules.

Transitional safe harbour – election

A group must make an election for the safe harbour to apply for a territory in an accounting period. This election is made annually on the GIR.

If a group has already submitted full MTT calculations for a territory, they can’t make the election for subsequent periods. This is because the purpose of the transitional safe harbour is to reduce the compliance burden for groups first entering the scope of MTT.

Transitional safe harbour – DTT and groups not required to prepare a CbC report

If a group is in scope of MTT but not in scope of CbC reporting they won’t have prepared a CbC report. In these cases, the group can use the figures that would have appeared in a qualifying CbC report had they been required to prepare one.

The transitional safe harbour applies for DTT purposes in the same way as it does for MTT, with some exceptions for wholly domestic groups and entities. For more information, see our draft guidance at MTT15970.

Transitional safe harbour – other things to note

You’ll need to make some adjustments to the CbC report figures for the purpose of the transitional safe harbour. These adjustments make sure the calculations for the safe harbour tests are more closely aligned to the calculations that would normally be made for MTT. For more information, see our draft guidance at MTT15925.