Midweek Tax News

At Autumn Budget 2025 the Government announced that it proposes to change the capital gains avoidance rules that apply to share exchanges and company reconstructions. The rules will now apply to those cases where a person has entered into arrangements where the main purpose, or one of the main purposes, of those arrangements was to secure a tax advantage. Draft legislation was published alongside Budget 2025, and the measure was subsequently included in Finance (No. 2) Bill 2025.

On 12 December 2025, HMRC added ‘provisional guidance’ on the proposed changes to its Capital Gains manual. The guidance confirms that the driver for this change is the decision of the Court of Appeal in Delinian – which considered the identification of the “scheme or arrangements” for the purposes of the second limb of the current test in section 137(1) TCGA 1992. HMRC states that “the revised wording puts the focus of the purpose test on the particular arrangements that are put in place to avoid tax” as well as noting that the new rules are “intended to deter and, where necessary, counteract, situations where additional features have been included in a commercial transaction in order to obtain a tax advantage.”

However, despite HMRC’s statement that the new rules target arrangements with “additional features”, the change in the focus of the rules – from the purpose of the share exchange transaction to the purpose of the tax-avoidance arrangements - may have wider implications.

The guidance also sets out (with examples) HMRC’s proposed approach with regard to existing clearance applications. It states that applications received by HMRC before 26 November 2025 will be considered under the wording which applied prior to 26 November 2025 for the purposes of the application. Where HMRC provides clearance, that existing wording will apply provided the issue of shares happens within 60 days of a clearance being granted, or before 26 January 2026 if clearance was granted before 26 November 2025.

While tax controversy continues to increase in both volume and length of time to settle disputes, both businesses and tax authorities are rushing to embrace technology including generative AI (GenAI) in the hopes of alleviating burdens.

The 2025 EY Tax Risk and Controversy survey of 1,934 senior tax executives provides evidence that tax functions are moving steadily along the GenAI adoption curve. It finds that 87% anticipate GenAI will improve their future controversy management by making the tax audit and dispute resolution process more efficient, less time-consuming and more accurate. Nearly seven in ten say they’ve already created at least one GenAI tool focused on tax controversy management or are integrating GenAI into other key processes. Tax authorities are also moving along the AI adoption curve. An OECD report on tax administration shows 29 of its 38 members were using some form of AI as part of their tax administration as of 2024.

The pace with which the technology is being adapted brings the future of tax controversy more sharply into focus: The days of documenting and defending positions taken years or even decades ago in audits are increasingly giving way to real-time interactions.

You can read more on how Tax functions can benefit from the move to AI and four things businesses should be doing now in our new EY article.

On 10 December 2025, the Government published draft guidance on the new Advance Tax Certainty Service (ATCS). The draft guidance reflects the intended position for the first year of the process, and will be finalised ahead of the formal launch of the service in July 2026. As a reminder, the ATCS will be open to projects involving qualifying expenditure of £1bn over the life of the project.

A clearance provided as part of the ATCS will set out HMRC’s view of how the tax rules, including corporation tax, VAT, stamp taxes, PAYE and the operation of construction industry scheme, apply upfront in writing.

The guidance notes that the aim is to provide a 90-day turnaround from formal submission to providing clearance, depending on the complexity of the case. However, before submitting a formal clearance request, it will be possible to request an early engagement discussion with HMRC to check if clearance is likely, before committing resources to the process.

Clearance requests will need to be supported by a clear technical analysis of the position and include any supporting information. If the application is accepted into the process, then a scoping and planning meeting will follow at which a timeline will be agreed, identifying key milestones.

In the first year of operation of the ATCS, an expression of interest (EOI) and triage process may be implemented to help manage applications. HMRC is looking to make a balanced selection of projects across different tax regimes and sectors, scheduling them throughout the year to maintain service quality and manage workload.

A clearance will last for up to five years or until the project ends. For projects lasting significantly longer than five years, this period may not seem long enough, but applications can be made to renew clearances more than once. It will be necessary to show to HMRC that the project is continuing to progress in line with the position set out in the clearance, and a key practical issue will be to ensure that the clearance has some flexibility to satisfy the taxpayer that it can address unforeseen commercial issues but still provide a framework that HMRC can agree to. The guidance notes that clearances will not be modified for non-material changes of fact.

The guidance does address practical issues such as who can apply for a clearance (especially where there are multiple interested parties) and the definition of project expenditure, and responding to the draft guidance may help resolve any potential misunderstandings upfront. The guidance also addresses the situations in which HMRC will not offer clearances and helpfully notes that HMRC will offer a view, where appropriate, that there is a low risk of a future compliance intervention on the unallowable purpose rules in the loan relationships and derivative contracts regimes (further guidance on this is to follow).

When HMRC does not agree with a tax position, HMRC suggests it will issue ‘unable to agree’ opinions which will take the form of a written letter setting out that it is unable to confirm the tax treatment on which clearance has been sought is correct.

On 17 December, the Supreme Court released its judgment in the Hotel La Tour Limited (HLT) case. The case focused on the recovery of VAT on advisers’ costs relating to the sale of shares of a subsidiary.

The Supreme Court has followed the Court of Appeal’s decision and held that there is no modification of the ‘direct and immediate link’ test. The fact that the ultimate purpose of the share sale was for fundraising for downstream taxable activities was irrelevant. To determine the VAT recovery position, a direct and immediate link needs to be identified between the input VAT and either the share sale or with the company’s business as a whole. In the HLT case, there was a direct and immediate link between the costs and the exempt share sale and therefore the input VAT was irrecoverable.

The decision brings this litigation to an end. However, deal costs remain a complex area where businesses frequently do not claim the right amount of VAT. Please do get in touch with your usual EY contact if VAT on deal costs has been incurred and you wish to review the VAT treatment applied.

For more detail please see our VAT alert.

Second reading of the Finance Bill took place on 16 December. The Commons passed a programme motion under which the clauses to be considered by a Committee of the Whole House will include the clauses on income tax (both the charge and rates) as well as the clauses extending the freeze of tax allowances. The Committee will also consider the clauses covering inheritance tax being the amendments to agricultural property relief and business property relief as well as for the tax to be charged on certain pension interests. No date has yet been set for the Committee of the Whole House.

Clauses not considered in the Committee of the Whole House will be committed to a Public Bill Committee which will conclude its work by 26 February 2026. The timing suggests that report stage and third reading (after which the legislation will be treated as substantively enacted for UK GAAP and IFRS purposes) is likely to be early to mid-March.

Second reading of this Bill was due to take place on 17 December. The Bill is then due to be considered by a Committee of the Whole House.

HMRC has published an update to its guidance at INTM413205 to confirm that it is undertaking a review of its concession to set aside its right to assess and collect income tax, and only seek late payment interest, where there have been failures to deduct income tax from payments of yearly interest and it is established that such tax would be repayable.

As a result of this review, HMRC has found it necessary to pause consideration of disclosures of failures to deduct income tax. The update makes it clear that, notwithstanding this pause, disclosures of identified non-compliance must still be made. The update also confirms that repayment claims in respect of income tax that was not correctly deducted have also now been paused (though repayment claims for correctly deducted income tax and applications for directions for future payments to be made at a future date are still being processed).

HMRC has also stated that, as a consequence of the review, changes may be required to be made to HMRC’s manual, including the concession to assess only the late payment interest.

Please get in touch with your usual EY contact if you would like to discuss this issue further.

HMRC has added new sections (INTM489100 to INTM489400) to its International Manual, providing guidance on the corporation tax charge on unassessed transfer pricing profits (UTPPs) which replaces the diverted profits tax (DPT). UTPP sits within the corporation tax regime but applies a higher tax rate. It applies to accounting periods beginning on or after 1 January 2026.

The UTPP guidance is split into four parts:

• The UTPP conditions – this guidance sets out the conditions and gateways that must be met for UTPP to apply
• The UTPP process – this guidance explains the mechanics and timelines of the UTPP assessment process
• UTPP practical guidance – the intention is that this covers the approach to use when administering UTPP
• UTPP examples - to be released in early 2026

On 10 December 2025, the Double Taxation Relief and International Tax Enforcement (Andorra) Order 2025, the Double Taxation Relief and International Tax Enforcement (Peru) Order 2025, the Double Taxation Relief and International Tax Enforcement (Portuguese Republic) Order 2025 and the Double Taxation Relief and International Tax Enforcement (Romania) Order 2025 were made, ratifying the UK's new double tax treaties with Andorra, Peru, Portugal and Romania (including the protocols in the last three cases). Each treaty and protocol will enter into force when the UK and the relevant counterparty have notified each other that they have completed all of the necessary legal procedures to bring the relevant treaty and protocol into force.

Upholding the decisions of the First-tier and Upper Tribunals, the Court of Appeal in Watts has dismissed the taxpayer’s appeal in this case regarding income tax relief on losses from discounts on gilt strips. The Court applied a purposive approach to statutory interpretation and found that the purpose of paragraph 14A Schedule 13 FA 1996 was to provide relief for real, commercial losses, not artificial or notional ones created by tax avoidance schemes. The Court noted that the absence of explicit anti-avoidance provisions in the legislation did not preclude the application of the purposive approach. The decision includes discussion of statutory construction, including reference to Rossendale and related decisions.

In light of these decisions, the Court took the view that Parliament could not have intended for taxpayers to generate artificial losses by dividing the consideration for a transfer into separate steps within a pre-planned scheme.

The Court found no material error in the Tribunals' approach to the distinction between legal and commercial concepts, emphasising that the statutory language must be construed in context and with regard to economic reality. The allowable loss was limited to the real economic loss arising from the transactions, not “arithmetical differences”.

On 11 December 2025, HMRC published The Code of Practice on Taxation for Banks Annual Report 2025, covering the year to 31 March 2025. The report notes that none of the banks which had adopted the Code by 31 March 2025 has been determined to be in breach of the Code during the period and that banks that had adopted the Code did not make any disclosures under the Disclosure of Tax Avoidance Schemes regime in the period. In addition, all transactions for which a review was completed in the Period, during risk assessments, were considered to be Code compliant.

As reported recently in Midweek Tax News, Ireland's Department of Finance has published a Feedback Statement on Phase One of the reform of Ireland's taxation regime for interest.

The Phase One Feedback Statement contains a Strawman Proposal that sets out a possible approach for how the underlying framework for the taxation and deductibility of interest may be reformed. The possible approach outlined is not intended to be definitive but to facilitate discussion of the principal design questions. The Strawman Proposal focuses on several primary areas of reform, including:

• A new interest deductibility rule for corporation tax
• The extension of transfer pricing rules to medium-sized enterprises (but not small enterprises)
• A redesign of interest limitations rules
• Transitional provisions and simplification measures for "Section 247" borrowings
• Alignment of tax treatment between trading and passive interest income
• Taxation and deduction of interest equivalents

A high-level summary outlining the main proposals provided for under each key reform area is set out in our global tax alert.

We have included links to a selection of our tax alerts below. Additional articles are available in our global tax alert library.

Bermuda: On 11 December 2025, the Tax Credits Act 2025 and the Corporate Income Tax Amendment (No. 2) Act 2025 were enacted in Bermuda. The Tax Credits Act 2025 formalizes the substance-based tax credit (SBTC), community development tax credit (CDTC) and utilities infrastructure tax credit (UITC), with several notable refinements from the consultation draft. The Corporate Income Tax Amendment (No. 2) Act 2025 introduces targeted technical amendments to the Corporate Income Tax Act 2023, including integration with the new tax credit regime and additional administrative provisions.

Cayman Islands: Regulations released on 27 November 2025 implement the Crypto-Asset Reporting Framework (CARF) and the amended Common Reporting Standards (CRS 2.0), effective from 1 January 2026, with certain reporting deadlines taking effect in 2027. Financial institutions must designate a Principal Point of Contact located in the Cayman Islands and ensure compliance with new due diligence and reporting requirements.

Honduras: The Honduran Tax Authorities have published a "Guide on Country-by-Country Reporting (CbCR) Frequently Asked Questions," detailing procedures for submitting the Country-by-Country (CbC) Report and notifications, effective for reportable fiscal years starting 1 January 2025. The Guide outlines the CbC Report's purpose and content requirements as well as the obligation to submit the report within 12 months after the end of the fiscal year, with submissions required in an XML format compliant with OECD standards.

Italy: In recent tax audit activity, the Italian Tax Authorities appear to have increased their focus on financial intermediaries, putting particular emphasis on the VAT treatment of year-end true-up transfer pricing adjustments. These actions may have a significant impact on the sector but also more generally.

Türkiye: Presidential Decision No. 10680 has extended the application period for temporary Article 67 of the Income Tax Code through to 31 December 2030. Temporary Article 67 establishes a source-based withholding mechanism for the taxation of income and gains derived from securities.

United States: A senior US Treasury official has said that the US Government is optimistic that an agreement will be reached on a BEPS 2.0 Pillar Two global minimum tax side-by-side deal. The official said negotiations are in the final stages notwithstanding objections by some governments, noting that addressing concerns that are expressed is an ordinary part of international negotiations. He reiterated that the US goal continues to be to "reach an agreement before year-end, and we remain hopeful and optimistic that will happen."

United States: In Chief Counsel Advice Memorandum 202548004, the IRS has concluded that a partnership is not liable for withholding tax on borrow fees (including securities lending fees and negative rebates) that it receives and that are allocable to its foreign partners. This conclusion is aligned with Notice 2025-63, which allows for the sourcing of borrow fees based on the recipient's residence. While the memorandum is addressed to a specific taxpayer, it shows IRS support for allowing Notice 2025-63 to be applied retroactively, which would allow taxpayers to treat borrow fees incurred in prior years as foreign-source income provided they meet the criteria outlined in Notice 2025-63.

Our December summary of the latest international developments regarding permanent establishments (PE Watch) is now available. This edition includes the OECD update of its Model Tax Convention with new guidance on home office PEs and extractive activities; confirmation from Denmark that expanded onshore support for offshore operations remains auxiliary; clarification by India’s High Court of the Service PE day-count and rejection of the Virtual PE concept; and the UK proposed PE rule updates and changes to the Investment Manager Exemption.

Around the world, Governments continue to explore e-invoicing as a route to greater transparency, helping to reduce the tax gap and boost national revenues while providing potential cost savings and improved efficiency for businesses. Last month, the UK became the latest jurisdiction to confirm its intention to implement mandatory e-invoicing. The Government is expected to publish an implementation roadmap next year but the Government’s response to the recent consultation on e-invoicing provides some clues to how the regime might be constructed. A LinkedIn article by EY’s Chui Ming Man and Chris Taylor looks at the options and what businesses can do to get ready.