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New UK consultation on notification of uncertain tax treatment by large businesses

  • United Kingdom
  • Tax planning and consultancy - Budget

01-04-2020

The UK government announced at the March Budget that they intend to introduce a requirement for large businesses to notify HMRC where they adopt an “uncertain tax treatment”.  The proposal is designed to improve HMRC’s ability to identify issues where businesses have adopted a different legal interpretation to HMRC’s view.   

HMRC have now published a consultation document which explains the proposals in more detail and seeks views on a range of implementation issues. 

The consultation is open until 27 May 2020, with the government’s response and draft clauses expected in late summer 2020.  The new requirement will be introduced in the Finance Bill 2020-2021 and will apply to uncertain tax treatments in returns filed after April 2021.

What has prompted this?

The consultation notes that the “legal interpretation tax gap” was £6.2bn in 2019, or 18% of the overall tax gap, and that the majority of this was attributable to large businesses.  HMRC hope that this new measure will help them narrow that gap, although the summary of impacts (included at the end of the consultation) suggests that HMRC expect that the financial impact of the new requirement may be fairly modest. 

The aim is to ensure that HMRC are aware of all cases where large businesses have adopted a treatment with which HMRC may disagree and to accelerate the point at which discussions between HMRC and taxpayers in relation to uncertain tax treatments take place.  HMRC also expect that the new policy will identify areas of law that are currently unclear and should be clarified to avoid future disputes.

HMRC point to the US and Australia, both of which have required notification of uncertain tax positions for several years.  However, as explained below, the UK’s proposals go further than the notification requirements in either of those countries.

Who will the new notification requirement apply to?

The new requirement will only apply to large businesses. 

The threshold for classification as a large business will be the same as the threshold used for the Senior Accounting Officer (SAO) and Publication of Tax Strategies regimes, i.e. turnover above £200 million and / or a balance sheet total over £2 billion. 

It is intended that the new regime will apply to partnerships and LLPs that meet this threshold as well as corporates (which is a departure from the scope of the SAO regime).

What taxes will be covered?

The notification requirement will cover the same taxes and duties as the SAO regime, namely corporation tax, income tax (including PAYE), VAT, excise and customs duties, IPT, SDLT, SDRT, bank levy and PRT.

What is an uncertain tax treatment?

The consultation describes an uncertain tax treatment as one where the business believes that HMRC may not agree with their interpretation of the relevant legislation, case law or guidance (including how it applies to the facts in a particular case).  There is no requirement for an avoidance motive.   

The legislation will draw on International Accounting Standards, specifically IFRIC23, to help define uncertain treatments and scope the requirement to notify.  There will, though, be a couple of key differences.  First, IFRIC23 requires an assessment of whether it is probable that a tax authority (including a court) will ultimately accept an uncertain tax treatment (i.e. it is concerned with the final outcome), whereas the proposed notification requirement only requires an assessment of whether HMRC are likely to challenge the treatment.  Secondly, IFRIC23 only applies to income taxes, whereas the new requirement will cover a much broader range of taxes.

“Uncertain tax treatment” will be defined in legislation, but HMRC also intend to provide guidance setting out examples of general issues that they consider to be uncertain and would expect to be notified, for example:

  • adoption of a tax treatment which is under dispute in the courts;
  • adoption of a treatment which is contrary to HMRC’s stated view in a VAT Brief of Statement of Practice; and
  • adoption of a treatment where HMRC clearance was requested and not given.

HMRC suggest that the guidance could cover limited examples of specific common areas of dispute as well, such as:

  • the application of a VAT rate other than the standard rate to goods or services which have not previously been supplied (e.g. a new product) or a change of rate of goods or services from the standard rate to a non-standard rate; and
  • the capital / revenue divide for corporation tax purposes.

The proposal is that the decision about whether a tax treatment is uncertain should be made at the time the notification is made.  If a tax treatment becomes uncertain after that date then the business won’t be required to revisit it.  However, if the tax treatment is ongoing then a notification would be required for subsequent years.

Will all uncertain tax treatments need to be notified?

The consultation proposes that uncertain tax treatments which (individually or combined in accordance with the principles set out in IFRIC23) do not meet a de minimis threshold (in terms of tax at stake) will not be notifiable.  The suggested de minimis is £1 million, although this is one of the points on which comments are invited.

The consultation suggests that there will also be exceptions for anything which is disclosable under DOTAS or DAC6 and for uncertainties which are the subject of formal discussion with HMRC. In addition, the obligation to notify will not apply if HMRC agree with a taxpayer in writing that they already have sufficient information.  There will not, however, be a formal exception where the taxpayer has sought an advance clearance from HMRC (although HMRC note elsewhere in the consultation that they would not consider something to be uncertain if HMRC have provided a clearance).

How will notification work?

The proposal is for a single, annual process which encompasses all of the relevant taxes (modelled on the SAO regime).  No return would be required if there is nothing to notify.

The suggestion is that the level of detail should be similar to that required under the SAO regime as well.  The consultation document does not expand on this, beyond indicating that notifications should include a “concise description of issues identified” and an indication of the amount of tax relating to the uncertainty. 

What if taxpayers fail to comply?

The government proposes to incorporate a penalty regime similar to that under the SAO regime, with penalties of £5,000 payable by an entity for failure to notify HMRC of the person liable to make the notification and separate penalties of £5,000 for failure to provide the annual notification.  HMRC have asked for views on who should be liable to pay this second penalty.

How does this compare to the requirements in the US and Australia?

As mentioned earlier, although HMRC suggest that they are following the approach taken by other tax authorities, the UK proposals are further reaching than the requirements in either the US or Australia.

In particular, both the US and Australia only require notification of uncertain corporate tax treatments and both look to the ultimate outcome not solely the likelihood of challenge. 

The US notification requirement is limited to circumstances where the taxpayer has reserved for a tax position in its audited financial statements, whilst the Australian requirement is to disclose positions that are about as likely to be correct as incorrect or less likely to be correct than incorrect.  Whilst the proposal is that the UK rules will draw on IFRIC23, they will require notification of tax positions where no accounting provision is required and (depending on the definition of “uncertain tax treatment”) potentially where the view taken by the taxpayer is more likely to be correct than incorrect.

Some final thoughts

At the very least this requirement will place an additional administrative burden on internal tax functions, already stretched by the ever expanding list of tax compliance requirements.  How significant that burden is will depend on how “uncertain tax treatment” is defined.  Whilst HMRC guidance is helpful, it is not a substitute for appropriately scoped legislation.  

Listing a treatment as uncertain could also be seen as inviting a challenge from HMRC.  It will be interesting to see what approach HMRC take to discussing uncertain treatments with taxpayers.  Taxpayers will need to think carefully about the information included in their notification and ensure they have appropriate advice and documentation to support their positions.

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