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 earlier this year focusing more on some of the practical issues, with revised proposals published in March 2021. The rules are expected to be legislated in Finance Bill 2021/22, to apply to returns filed from 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 likely to be broadly aligned to the current threshold tests for the Senior Accounting Officer (SAO) provisions under Finance Act 2009 and the Tax Strategy publication rules under Finance Act 2016 (although these have noticeable differences already). Essentially, the test will be based on the £200m UK turnover and £2bn UK balance sheet test, but could also include the €750m global revenues parameters within the Tax Strategy legislation. Note that this applies to partnerships and LLPs as well as corporates.
Originally, the government proposed that the notification should be a single, annual process which encompasses all of the relevant taxes. However, the second consultation now suggests that a separate notification would be required for each relevant tax (although the taxes within the scope of these rules has been reduced to Corporation Tax, Income Tax (including 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).
In its notification, a business must provide a concise description of the technical issue, the nature of the uncertainty, the date of the transaction and periods affected, and an indication of the tax at stake. 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 now proposes the use of seven more objective ‘triggers’ to identify an uncertainty that must be reported.
In summary, the seven proposed triggers cover different scenarios where a tax treatment:
- Results from an interpretation that is different from HMRC’s known position
- Was arrived at other than in accordance with known and established industry practice
- Is treated in a different way from the way in which an equivalent transaction was treated in a previous return and the difference is not the result of a change in legislation, case law or a change in approach to accord with HMRC’s known position
- Is in some way novel such that it cannot be reasonably regarded as certain
- In respect of which a 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
- Results in either a deduction for tax purposes greater than the amount incurred by the business, or, income received for which an equivalent amount is not reflected for tax purposes, unless HMRC is known to accept this treatment
- Has been the subject of professional advice, that is not protected by legal privilege, which is contradictory, in terms of tax treatment, to other professional advice they have received, or which they have not followed for the purpose of determining the correct tax treatment of a given transaction.
A financial threshold applies: uncertain tax treatments of £5m or more will be notifiable by the business (an increase on the original proposal for a £1m threshold).
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) is excluded from the notification requirement. It is also not expected to be necessary to notify anything under formal 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. 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. HMRC is also exploring the potential for excluding businesses who achieve a ‘low risk’ rating under the BRR+ so we may yet see further developments.
Penalties for non-compliance
Originally penalty proposals aligned with the SAO regime, with a proposed £5,000 penalty for an entity failing to notify HMRC details of the person liable to notify, and £5,000 on the person liable to notify, or the entity, where they should have notified but failed to do so. It has been welcomed that the proposals have moved on to suggest one £5,000 penalty at the corporate level for a failure to notify.
There will be debate about the extent to which a tax treatment is uncertain at the time notification submission is required. For example, what happens if a tax treatment later becomes uncertain; will businesses be expected to revisit their stance (unless the tax treatment is ongoing, which could cause a further notification requirement) and how will this interact with the proposed penalty regime?
It seems quite possible that larger businesses that do not have a CCM could be at a disadvantage. To address these concerns, the second consultation proposes that a similar system for discussion of tax uncertainties will be provided for businesses that do not have a CCM. 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, and it remains to be seen whether any alternative system could provide the same level of support as easily for businesses without one. 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 if only 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 filed from April 2022 which means there is a need for large businesses to be considering transactions now before draft legislation is available, albeit it’s unclear at present whether the proposals will develop further prior to implementation.
Read the consultation document