In May 2020, HMRC released a consultation document regarding a new requirement for notification of uncertain tax treatments by large businesses to HMRC. Following input from advisers and industry, a second consultation took place in early 2021 which revised proposals and focussed on some of the practical issues. In July 2021 HMRC published draft legislation and in August 2021, published draft detailed guidance, in which proposals had developed further. HMRC intend to legislate in Finance Bill 2021/22, to apply to returns due to be filed from 1 April 2022.
Key points from the consultation
The rules will require large businesses to notify HMRC where they have adopted an uncertain tax treatment. The aim is to improve HMRC’s ability to identify issues where businesses have adopted a different ‘legal interpretation’ to HMRC.
The requirement will only apply to ‘large businesses’ – this is broadly aligned to the current threshold tests for the Senior Accounting Officer (SAO) provisions under Finance Act 2009. Essentially, the test will be based on the £200m UK turnover and £2bn UK balance sheet test. Note that this applies to partnerships and LLPs as well as corporates, wherever incorporated.
The government proposes that separate notifications are required for each relevant tax (Corporation Tax, PAYE and VAT). It is proposed that for annual returns (e.g. corporation tax), notifications will be required in line with CT return filing deadlines but for non-annual returns, the proposals are to align the requirement to notify with the date when the last return for a financial year is due, meaning different deadlines for different taxes. A return or certificate would not be required if there is no uncertain tax treatment to notify. This is different to SAO, which requires a nil return (ie when there are appropriate tax accounting arrangements). Notifications will be made via a digital form due to be accessible via the government gateway from April 2022.
In its notification, a business must provide details of the uncertainty including the tax regime, the notification trigger under which disclosure is being made (see below), a description of the tax issue/transaction, an explanation of the uncertainty, reference to relevant law or HMRC guidance to which the uncertainty relates, and an indication of the amount of tax advantage relating to the uncertainty. The original consultation adopted certain principles of IFRIC 23 in defining an ‘uncertain tax treatment’ that would need to be notified to HMRC. This was widely seen as a potentially subjective approach, so the second consultation proposed the use of seven more objective ‘triggers’ to identify an uncertainty that must be reported, and draft legislation has now narrowed measurement of uncertainty by reference to three ‘triggers’.
In summary, the three proposed triggers cover scenarios where:
- Provision has been recognised in the accounts of the company or partnership, in accordance with Generally Accepted Accounting Practice (GAAP), to reflect the probability that a different tax treatment will be applied to the transaction
- A tax treatment applied relies on interpretation or application of law which differs to HMRC’s known position
- It is reasonable to conclude that if a tribunal or court were to consider the treatment applied, there is a ‘substantial possibility’ that the treatment would be incorrect in one or more material ways
A financial threshold test applies: uncertain tax treatments (singular or related) of £5m or more will be notifiable by the business.
Interaction with other disclosure requirements
To avoid duplication, the proposals state that any tax issue reported under the Disclosure of tax avoidance schemes (DOTAS) rules – DASVOIT for VAT – or EU rules on disclosure of cross-border tax avoidance schemes (DAC6) or IMOC provisions is excluded from the notification requirement. It is also not expected to be necessary to notify anything under discussion already - for example, an ongoing enquiry. In addition, if HMRC clearance is sought and granted on a specific tax issue, there is no expectation that the matter would be notified to HMRC. In this regard, HMRC - through its Customer Compliance Managers (CCMs) - can agree that no notification is required if it is believed it has sufficient information in advance of the notification requirement but retaining documentary evidence will be key.
Some more detailed specific exemptions may apply, for example, the requirement for reporting transfer pricing uncertainties is more limited.
Overall there is a movement towards encouraging open dialogue with HMRC around uncertainties to negate the need to notify, for example, via the CCM relationship or BRR+ process. However, it is clear that HMRC expects there to be strong compliance with the uncertain tax treatment provisions; HMRC’s CCMs and mid-sized business case workers will consider this as part of their overall risk assessment of large businesses so we expect it will feature in HMRC’s Business Risk Review + process.
Penalties for non-compliance
Penalties can arise for late notification, not submitting a notification where one is required, or where a notification is incomplete; penalties are to be applied on a rolling failure basis - £5,000 for a first failure, £25,000 for a second failure and £50,000 for a third failure in the last three accounting periods, applicable to each tax regime so penalties have the potential to really escalate. For example, a failure for each of corporation tax, VAT and PAYE in ‘year 1’ could lead to penalties of £15,000, similar failures in year 2 could trigger penalties of £75,000 and a further £150,000 in year three, although penalties will be appealable.
It seems quite possible that larger businesses that do not have a CCM could be at a disadvantage. To address these concerns, HMRC currently propose that the existing mid-sized business Customer Engagement Team framework is used to allow those without a CCM to discuss uncertainties, but having a CCM who has built up an understanding and a relationship with the business is a clear advantage in terms of processing and addressing notifications. In effect, those large businesses which already engage openly with HMRC may be able to fall outside the requirement but it’s clear that businesses will need to demonstrate compliance action around the requirement (even to establish documentary evidence to safeguard decisions not to notify) and build into their overall tax governance approach.
As things stand, the proposals are to apply to returns due to be filed from 1 April 2022 which means there is a need for large businesses to be considering transactions now which will feature in upcoming returns within the requirements, albeit it’s unclear at present whether the proposals will develop further prior to implementation.
Read the consultation document