New guidance on UK uncertain tax treatment published ahead of law change

The new rules are being introduced to make sure that HMRC is aware at an earlier stage if a large business has adopted a treatment that is contrary to HMRC's known position.

Uncertain treatments will be defined by reference to two criteria: that a provision has been made in the accounts for the uncertainty; or that the position taken by the business is contrary to HMRC’s “known” interpretation, as stated in the public domain or in dealings with HMRC.

A tax treatment will only be uncertain under the new regime if it, and any related uncertain amounts, result in a difference of more than £5 million between the taxpayer's calculation of their tax liability and HMRC's calculation of their tax liability. Importantly, this threshold is “per amount” and it is not the “net” position that must be considered: for example, the amount relating to an uncertainty regarding an output tax liability is to be considered independently of any input tax offset.

A business is not required to notify HMRC about an amount included in a return if it is reasonable for the company or partnership to conclude that HMRC already has available to it all, or substantially all, of the information relating to that amount that they would have to provide in the notification.

A penalty may be payable if a business is obliged to notify an uncertainty and does not do so within the required timescale unless there is a reasonable excuse for the failure. The penalty starts at £5,000 and rises to £50,000 if there have been three or more penalties in relation to notification failure in a three year period.

HMRC has consulted on the guidance and the final version, which is included in a new HMRC manual, has changed from the version circulated in January 2022. Some helpful clarifications have been made but there are still some areas where businesses may not be entirely clear about their obligations.

HMRC’s known position

Of the two criteria for a tax position to be uncertain, establishing whether the treatment is contrary to HMRC’s “known” interpretation will inevitably be the more challenging test: if a provision has been made in the accounts it will be visible.

The guidance contains a list of items that will be considered to show HMRC’s “known” position. This includes HMRC guidance, including technical manuals; Revenue and Customs briefs; statements of practice and public notices; explanatory and technical notes relating to legislation; guidelines for compliance; and correspondence between the taxpayer and HMRC. The list expressly does not include advice provided during HMRC forums; or submissions made by HMRC in litigation.

The guidance recognises that there is a large volume of published material and advises that the uncertain tax treatment regime “is not intended to act as a series of tripwires leading to penalties, where a business took a reasonable approach to establishing HMRC’s position”.

Nevertheless, this new regime means that large businesses will need to consider whether there is any HMRC guidance that conflicts with a tax treatment they have adopted. It therefore introduces an additional administrative burden and potential cost.

The guidance states that “HMRC expects a level of familiarity with its published material” and suggests that it would expect a business to have considered guidance that is easy to find – for example, by being in a guidance manual which is clearly relevant to the matter in question, or guidance that can be found by a search using relevant search terms. The guidance suggests that if the tax issue concerned is novel, contentious, high value or high-risk, a more careful examination of HMRC’s view would be expected.

HMRC’s known view can also derive from dealings with HMRC in respect of the business. These may include discussions with a HMRC customer compliance manager (CCM) or HMRC tax specialist as well as a written view of the correct tax treatment from HMRC or a response to a non-statutory clearance request.

Any views expressed directly to a particular taxpayer or regarding a particular situation will not apply to other taxpayers or to other situations.

There is no requirement to notify HMRC under the known position criterion if HMRC’s position is not known or is unclear. Where HMRC’s position is contradictory, the known position is to be taken as the most recently published statement of the position. For example, based on an example given in the final guidance where HMRC is unsuccessful in litigation but has not updated its guidance to reflect the court’s decision, businesses are still expected to notify HMRC if they take a tax position which reflects the outcome of the litigation on the grounds that it remains contrary to HMRCs known position.

This is an important point because HMRC is often slow to update its guidance following an adverse judgment; and the obligation to notify remains in place even in circumstances where HMRC have lost before the Supreme Court and has therefore exhausted all right of judicial challenge. So even where HMRC is obviously wrong in law, taxpayers can still be penalised if they fail to meet the requirements of the regime.

Exemption where HMRC already aware

Businesses are not required to formally notify a tax treatment if it is reasonable to conclude that HMRC already has available to it all, or substantially all, of the information that the business would have to provide in the notification.

In practice, many large businesses will engage in regular discussions at an early stage with HMRC regarding tax uncertainties. The guidance recommends that if taxpayers wish to rely on the exemption they should make it clear to HMRC that any such discussions are being entered into with a view to avoiding the requirement to notify; and to document that discussion.

The exemption will apply in circumstances when the same information is provided as would have been provided in a formal notification. Helpfully, the guidance says that HMRC will confirm to taxpayers whether the exemption has been met.

Any changes to a transaction, or to the tax treatment, following discussions with HMRC must be notified. A failure to do so will invalidate the exemption.

Taxpayers do not need to re-notify uncertainties in returns due on or after 1 April 2022 if a notification has already been made to HMRC prior to 1 April 2022 – for example, by way of discussion with a CCM. However, the guidance advises taxpayers to indicate to HMRC in pre-April 2022 interactions that they are seeking to satisfy the requirements and to meet the general exemption. They are also advised to keep a record of the interaction as evidence of the disclosure having been made and to share this with HMRC to avoid future enquiries.

HMRC is trying to encourage early engagement and taxpayer transparency and indicates that it shall prioritise those seeking exemption (as a result of having already disclosed sufficient information) over those formally notifying an uncertain tax treatment (to whom the exemption shall not apply): “HMRC will assist if possible but will not prioritise this over supporting customers who engage early and seek exemption in good time”.

Making a notification

Notification must be made on or before the filing deadline of a related “relevant return” that is due after 1 April 2022. The notification requirement applies separately in relation to each relevant tax.

Where the relevant return is an annual return, such as a corporation tax return, the notification must be given on or before the date on which the return is required to be made. Where the relevant return is not an annual return, such as a VAT or PAYE return, the notification must be given on or before the date on which the last relevant return for the financial year in question is required to be made.

Notification is made on a digital form which will be available from April 2022. HMRC further updated its guidance page on the requirements for the contents of the notification to state that it has the force of law and to expand the details that must be submitted. The information which must be disclosed includes the facts or description of the transaction or position that created the uncertainty; details of the uncertainty and alternative tax treatment and any relevant statute, case law and HMRC guidance to which the uncertainty relates. There is currently no exclusion for legally privileged information.

It will be important for businesses to make sure that the notification meets all of these requirements to avoid it being treated as an invalid notification, with consequent risk of penalties.

The HMRC guidance confirms that there is no direct read across from a notification being made to a large business’s risk rating so that making a notification will not automatically mean a business cannot be low risk.

The guidance also confirms that an uncertain tax treatment is unlikely to have any consequences on senior accounting officer (SAO) certification and HMRC would not ordinarily expect an SAO certificate to automatically be qualified due to a notification.

Next steps for businesses

With the rules coming in force from 1 April 2022, large businesses should now undertake a review of existing tax positions to determine whether, in respect of each position, they are confident that there is no uncertainty by reference to HMRC’s known position. This exercise should be fully documented.

Where there is uncertainty, a review of what information has already been disclosed to HMRC should be conducted – and outputs recorded – to determine whether the threshold for exemption from notification has been satisfied. Where there is ambiguity, affected businesses should engage with HMRC, seek confirmation of exemption or to make a disclosure of the uncertainty.

A procedure to alert relevant individuals within the business promptly to any new tax positions will need to be established so that a review of HMRC’s “known” view can be undertaken to determine whether disclosures are to be made or requests for exemptions sought, or notifications required, in advance of notification deadlines.

There will of course often be a good level of understanding of HMRC’s “known” position within large businesses with experienced tax teams for the most common transactions. However, outside of this, the review exercise    may be time consuming, particularly in complicated corporate structures with various lines of business.

HMRC indicates that the regime is not intended to require businesses to take advice on positions but inevitably some, indeed many, will do so; whether to get comfortable regarding a particular transaction given the varied sources of information – sometimes contradictory – that should be reviewed, or to assist with the workload of the internal resource given responsibility for managing compliance with this new regime. This increases compliance costs.

If an uncertain tax position is identified taxpayers need to decide whether to raise it with HMRC rather than to formally notify. If the business decides to raise the issue with HMRC, they should make clear to HMRC that the aim is avoid the formal requirement to notify. It will also be important to ensure that HMRC’s confirmation is obtained that the general exemption applies.

All records of decision making and communications with HMRC should be documented and safely stored: employees move on and with them their knowledge of events, so clear, accurate and easily accessible records are critical to mitigate the risk of future penalties for the business arising from an absence of records.

Businesses must also check carefully that any transaction raised with HMRC was carried out exactly as envisaged in the information disclosed to avoid invalidating any exemption from notification.

When providing information to HMRC, either in advance to obtain the general exemption or as part of a formal notification process, businesses should have regard to the full content of the information disclosed. A business may consider the disclosure of professional advice received, including legal advice protected by privilege. Where this is the case, assessment of the broader implications of doing so is needed, which may of itself prompt the need for further advice to be taken.