Out-Law / Your Daily Need-To-Know

Notification of uncertain UK tax treatment by large businesses

Out-Law Guide | 23 Nov 2021 | 10:21 am | 6 min. read

Large businesses will be required to notify HM Revenue and Customs (HMRC) where they have adopted an uncertain tax treatment from 1 April 2022.

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. HMRC estimates that £5.8 billion of the estimated £35bn UK 'tax gap' for 2019-20 is attributable to legal interpretation, most of which involves disputes with large businesses.

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.

Draft legislation published in July 2021 had included a third trigger of where there is a substantial possibility that a tribunal or court would find the taxpayer’s position to be incorrect in material respects. This is not included in the legislation which has been published in the Finance Bill 2022, although HMRC said that the government is committed to further consideration of this third trigger and could add it to the legislation later.

Large businesses

The requirement will only apply to large businesses, including partnerships and LLPs.

A large business is one with either, or both, a turnover above £200 million and a balance sheet total over £2bn. This includes all businesses handled by HMRC's large business directorate as well as the larger groups in its mid-sized business directorate.

Collective investment schemes are excluded from the new regime.

Definition of an uncertain tax treatment

The notification requirement will apply when a return is delivered by a large business which includes an ‘uncertain amount’ in respect of a liability for corporation tax, income tax (including PAYE) or VAT.

There will be an uncertain amount if:

  • provision has been recognised in the accounts to reflect the probability that a different tax treatment will be applied to a transaction to which the amount relates; and/or
  • the tax treatment applied in arriving at the amount 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’s position on a matter is taken to be ‘known’ if it is apparent from guidance, statements or other HMRC material that is of general application and in the public domain, or dealings with HMRC by or in respect of the business, whether or not they concern the amount in question or the transaction to which the amount relates.

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

Draft guidance published in July 2021 states that notification is still required where there is legal uncertainty that HMRC’s view is correct, for example, where the Upper Tribunal has found HMRC’s view to be incorrect, but that judgment is being appealed.

It also confirms that there is no requirement to notify HMRC of an uncertain tax treatment if HMRC’s position is not known, unless the amount is uncertain because a provision has been made in the accounts.

The business will be required to make a decision about whether a tax treatment is uncertain at the time it submits the return, amends the return, or where the amount is uncertain because of an accounting provision, by reference to when that provision is made. If a tax treatment becomes uncertain after that date – perhaps due to changes in case law – there is no requirement to revisit that year or accounting period.

The notification requirement applies separately in relation to each tax covered.

The government first consulted on the new rules in March 2020. They were originally intended to apply where a business believed that HMRC may not agree with its interpretation of tax legislation, case law or guidance. However, there were concerns that this definition was too subjective because it required a business to decide whether a tax position was one that HMRC may challenge or was likely to challenge. Accordingly, in November 2020, the government announced that it would delay the introduction of the new rules from April 2021 to April 2022 in order to reconsider the proposals.

A second consultation was issued in March 2021. This set out seven 'triggers' for uncertain tax treatment, including where the underlying transaction is novel, where the tax treatment differs from that in a previous return and where contradictory professional advice has been obtained. By the time draft legislation was published in July 2021 the seven triggers had been reduced to three. These were the two now included and a third trigger of where there is a substantial possibility that a tribunal or court would find the taxpayer’s position to be incorrect in material respects.

The legislation published in the Finance Bill does not include the third trigger. However, the government said it is committed to further consideration of this third trigger and could add it to the legislation later.

Exceptions

A business is not required to notify HMRC about an amount included in a relevant return if it is reasonable for the company or partnership to conclude that HMRC already have available to them all, or substantially all, of the information relating to that amount that they would have to provide in the notification. This is designed to reduce the compliance burden for businesses which are already open in their dealings with HMRC. However, it is not as wide as might be expected.

Businesses will still need to check that they have given HMRC all the information that would be covered by notification. The draft guidance also states that it should be made clear that the discussion with HMRC is to avoid the requirement to notify, and the conclusion should be documented. It also states that notification would still be required if the business treats the transaction contrary to HMRC’s recommendation.

The guidance also states that notification will still be required even if a clearance was applied for if the clearance was not given by HMRC, but the transaction/tax treatment was still implemented.

Specifically, anything disclosed under the Disclosure of Tax Avoidance Schemes (DOTAS) rules, the DOTAS VAT rules or the mandatory disclosure of cross-border arrangements rules would not be notifiable under the new regime.

Threshold

A tax treatment will only be uncertain 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.

Two uncertain amounts are related if both amounts are included in the same return, or a return for the same tax in the same financial year or accounting period, both amounts relate to the same tax and the tax treatment applied in arriving at one amount is substantially the same as the tax treatment applied in arriving at the other amount.

Companies in groups are not required to notify uncertain amounts in relation to corporation tax if they relate to intra group transactions and the net effect is that the value of tax advantages obtained by the group as a whole does not exceed the £5m threshold.

Notification and penalties

According to the draft guidance, notification of an uncertainty will be by way of a digital form which is accessible from within the business’s government gateway account. The notifier should provide the company name and tax reference/VAT registration number; and details of the uncertainty, including:

  • tax regime;
  • notification trigger(s) under which disclosure is being made;
  • description of the transaction/ tax issue type;
  • explanation of the uncertainty;
  • reference to any relevant statute, case law and HMRC guidance to which the uncertainty relates; and
  • indication of the amount of tax advantage relating to the uncertainty.

There will be a separate annual notification for each of the covered taxes. For corporation tax, this would be due when the return is due to be filed. For VAT and other non-annual returns, the notification would be due when the last return for the financial year in question is due to be filed.

There will be a £5,000 penalty for the first failure to report. A second failure in a 3 year period in relation to the same tax will give rise to a £25,000 penalty and any subsequent failure in the 3 year period in relation to the same tax a £50,000 penalty. Penalties will be appealable, and there will be a 'reasonable excuse' defence.

For companies, the penalty will only be imposed on the company and not on individual employees.