HMRC’s new Guidelines for Compliance: what large businesses need to know

GFCs, which were introduced following a 2021 government review of tax administration for large businesses, are designed to “mitigate uncertainty” and to “provide practical guidance and greater transparency on the approaches HMRC regards as higher or lower risk”.

Over time, HMRC plans to develop of “suite” of GFCs that clarify its view on “complex, widely misunderstood, or novel, areas of the tax rules” for all taxes and sizes of business. To date, however, only two have been published. While taxpayers who follow the approach set out in GFCs reduce their risk of HMRC intervention, officials have also made clear that compliance with a GFC will not shield a taxpayer from any enquiry.

PAYE settlement agreements

The first GFC, published in December 2022, covers PAYE settlement agreements (PSA), which are an optional way for employers to deal with the tax and national insurance contributions (NICs) arising on minor benefits provided to employees. The GFC, sets out a number of recommendations on practical matters, like record keeping and how to use the digital PSA1 form provided by HMRC. It also covers technical matters such as how to deal with unusual fact patterns, and how to use a sampling system to cover benefits provided to a large number of employees. 

The GFC contains numerous links to existing, detailed guidance within HMRC manuals and other taxpayer-facing guidance. Although PSAs are a non-compulsory element of the tax system, once a taxpayer decides to use one, they must fall within the statutory regime.

Apportionment of consideration for VAT

The second GFC, published in March 2023, relates to apportionment of consideration for VAT purposes. Where a single amount of consideration is paid for a bundle of supplies, the law requires that the consideration is apportioned – but it does not set out the method of apportionment.

In the new GFC, HMRC recommends an apportionment based on the seller’s usual selling price for each element of the bundle with any discount being apportioned proportionately between the items. It goes on to flag risk factors such as attributing the discount to one item within the bundle or being unable to justify the usual selling price used in the calculations.

HMRC suggests that apportionment based on cost price should be used where the selling price method is not available, and identifies higher risk methods and the documents and evidence that a taxpayer should keep.

Setting out expectations

Both GFCs give us a glimpse of the way HMRC plans to use them. By providing guidance on the “acceptable” approach to making these applications, HMRC is setting out its position as to what it will consider low-risk behaviour. This aligns with a number of other regimes which increasingly put the burden on taxpayers, not only to self-assess, but also to have all the appropriate procedures in place to monitor and apply HMRC’s interpretation of the law.

The GFCs highlight what a taxpayer has to do if it needs to make corrections to its PAYE or VAT positions after applying the guidance. This suggests that HMRC is expecting businesses to review their current and past compliance against the guidelines. Businesses should take heed of HMRC’s views on high-risk approaches when deciding what position to adopt.

Enhanced compliance regimes

Large businesses that fall within the enhanced compliance regimes, such as the senior accounting officer regime (SAO) and the obligation to notify uncertain tax treatments (UTT), will need to be particularly aware of GFCs. Under the UTT regime, a large business must notify HMRC where it has applied a tax treatment that “relies (wholly or in part) on an interpretation or application of the law that is not in accordance with the way in which it is known that HMRC would interpret or apply the law”.

HMRC has stated that a GFC falls into the category of a “known position” for UTT purposes. Under the SAO regime, the SAO must provide a certificate to HMRC that their company had appropriate tax arrangements in place to calculate its tax liabilities accurately, otherwise it must qualify that certificate. A company within the SAO regime would need to ensure that reviewing the GFCs is included it its procedures.

HMRC has expressly stated that GFCs go beyond interpretation of the law and extend to HMRC’s “expectations”. It is not yet clear whether HMRC’s expectations as to taxpayer behaviour fall within the definition of “interpretation or application of the law”. The combination of these GFCs with the UTT regime could potentially muddy the waters if some of the contents of the GFC is interpretation of the law and some is not. While reviewing the GFCs will be important for SAOs, they will also need to consider what qualification, if any, is required if the company chooses not to follow the guidance in the GFC.

On the other side of the coin, taxpayers who follow HMRC’s expectations in the GFC to the letter will want to be certain that they can rely on that approach and are not at risk of enquiry or assessment should HMRC later change their position. Claims by a taxpayer that HMRC’s approach constitutes a breach of legitimate expectation must be brought by way of judicial review. While some taxpayers are successful, it can be a very high bar and it seems unlikely that the guidance in the GFCs would be treated any differently by a court from any other types of HMRC guidance.