Budget 2025: Corporation Tax

Anti-avoidance rule in relation to non-derecognition liabilities

Legislation will be introduced with immediate effect to target particular arrangements whereby a UK company is perceived to receive a tax advantage arising from transaction involving financial assets (such as loan notes) and a securitisation vehicle. Whilst HMRC state that they believe existing legislation is robust enough to negate any UK tax advantages already, they have felt the need to introduce a targeted anti-avoidance measure to counter this arrangement.

Capital allowances: new first-year allowance and reducing main rate writing-down allowances

The Government has reduced the rate of Writing-Down Allowance (WDA) on the main pool of plant and machinery from 18% to 14% per year, with effect from 1st April 2026 for companies and from 6th April 2026 for businesses within the charge to Income Tax.

In addition, it introduces a First-Year Allowance (FYA) of 40% for main rate expenditure, with reduced restrictions compared to other FYAs, to encourage investment where those FYAs are not available, such as for assets bought for leasing and by unincorporated businesses. The new FYA will be available for expenditure incurred from 1st January 2026 but will not apply to second hand assets or cars.

Corporate Interest Restriction (CIR) —reporting companies

Administrative changes will be made regarding the appointment of reporting companies for CIR purposes. In particular, HMRC will remove the time limit to appoint a reporting company, and remove the requirement for the appointment to be made ‘by notice’ to HMRC. Instead, businesses will be responsible for ensuring the reporting company has been appointed for a period, with details of the appointment disclosed in the interest restriction return. The majority of the changes have effect for periods ending on or after 31st March 2026.

Pillar 2: Further amendments to Multinational Top-up Tax and Domestic Top-up Tax

Changes will be made to update UK legislation in line with administrative guidance published by the OECD in January 2025 as well as issues identified as a result of stakeholder consultation.  

Most of the changes will take effect for accounting periods beginning on or after 31st December 2025, although it will be possible for affected taxpayers to elect into some of these changes at an earlier date if beneficial to them.

However, changes to the treatment of pre-regime deferred tax assets will take effect for accounting periods ending on or after 21st July 2025.

Reform of UK law in relation to transfer pricing, permanent establishment and Diverted Profits Tax

On 26th November 2025 the Government confirmed big changes to three important international tax rules. Most will start from January 2026.

Transfer Pricing (TP) – the “arm’s length” pricing rules

• You’ll only be allowed to adjust prices in one direction: upwards (to pay more UK tax) or to reduce a loss. Downward adjustments that would cut your UK tax bill will be blocked

• Purely UK-to-UK deals between companies taxed at the same rate will be completely exempt from transfer pricing documentation (removing an unnecessary compliance burden)

• The rules will catch more cross-border arrangements, especially where companies share management or use artificial structures to shift profits out of the UK tax net

Permanent Establishment (PE)

• The definition of when a foreign company has a taxable presence in the UK is being updated to match the latest OECD wording

• How profits are allocated to a UK PE and therefore taxed in the UK will follow the latest clearer OECD guidelines

Diverted Profits Tax (DPT) – the 25% + surcharge “Google tax”

• Good news: the separate DPT is being scrapped completely

• It’s being replaced by a new 31% charge called “Unassessed Transfer Pricing Profits” (UTPP) that sits inside normal corporation tax

• The new charge still targets profit-shifting, but it now benefits from double-tax treaties, so it’s easier to defend and more predictable

In short: simpler rules, less double taxation risk, but tougher anti-avoidance tests in some places.

International Controlled Transactions Schedule (ICTS)

Issued alongside the Autumn Budget 2025, this HMRC policy paper finalizes responses to the April 2025 consultation on the ICTS, confirming its introduction as a cornerstone of UK transfer pricing reforms.

Effective for accounting periods starting on or after 1st January 2027, the ICTS mandates annual reporting of cross-border related-party transactions directly with corporation tax returns. Key details include:

1. Scope and thresholds: Applies to all UK entities subject to transfer pricing rules. Mandatory if aggregate cross-border related-party transactions total £1 million or more, or if dealings involve “non-qualifying” territories (countries without a UK double tax treaty). Transactions below £100,000 are generally exempt from line-by-line disclosure
2. Reporting requirements: A standardized schedule (HMRC have provided a draft template) captures objective data such as transaction type (e.g., goods, services, intangibles), counterparty details, values, and geographic locations. Excludes UK-domestic transactions, Advance Pricing Agreement (APA)-covered dealings, and exempt dividends
3. Purpose and benefits: Designed to enable HMRC’s automated, data-driven risk assessment, improving enquiry targeting, upstream compliance, and efficiency. It aligns UK rules with OECD standards and peers (e.g. similar schedules in Australia and Canada), while addressing 2021 feedback by narrowing scope and minimizing burdens-estimated at low ongoing costs for most filers
4. Implementation: Legislation via Finance Bill 2025-26; HMRC will provide guidance and software integration by mid-2026. No penalties will be applied for good-faith errors in the first year, with a focus on education over enforcement

Creative industry and Research & Development (R&D) tax reliefs – administration changes

We have seen many changes to R&D tax reliefs and creative industry tax reliefs in recent years, and we can breathe a sigh of relief that only minor changes have been announced in this Budget. The changes relate to the administration of R&D Expenditure Credits (RDEC), and companies claiming Audio-Visual Expenditure Credits (AVEC) or Video Games Expenditure Credits (VGEC) for film, TV programme or video game production. There are 3 minor changes to the rules:

1. Additional wording to clarify that payments made between group companies in return for one company surrendering RDEC, AVEC or VGEC to the other company are to be ignored for Corporation Tax purposes. Payments are only ignored if they do not exceed the amount of the credit surrendered. This provides clarity for groups and avoids having to approach HMRC for agreed treatments
2. A small change to VGEC calculations when transitioning from the old video game tax relief regime to the new VGEC
3. Closing a loophole in the rules where visual effects credit calculations gave an unintended generosity to some companies which was meant to lower the claim value (specific negative clauses in the law)

Oil and Gas (Energy Profits Levy) – decommission relief deeds

It was confirmed that the windfall tax on oil and gas is to remain until 2030, and the OBR assessment projects receipts from the tax for the next decade. This tax is a levy introduced on oil or gas in the UK or on the UK continental shelf and is set at a rate of 38% (increased from last years budget).

Decommissioning Relief Deeds (DRDs) are contracts entered into between HM Treasury and oil and gas companies. They define and, in effect, guarantee a minimum level of tax relief that an oil and gas company will receive in relation to its decommissioning expenditure (and companies can claim a payment). The Energy Profits Levy does not allow a deduction for the decommission expenditure incurred. The policy measure announced confirms (as was always intended) that no payments can be made under the DRD in relation to unavailable tax relief for decommission expenditure in the Energy Profits Levy.