Notification of uncertain tax treatment by large businesses

Update: For a full review of the government’s proposals, see our article Notification of uncertain tax treatment by large businesses: a review.

The Government has released a consultation document on the introduction of a requirement for large businesses to notify to HMRC uncertainties in the tax treatment of their filing position for tax purposes. The consultation, “Notification of uncertain tax treatment by large businesses”, follows on from the Budget 2020 announcement by the Chancellor. For further details of our Budget coverage, see “Budget 2020”.

The proposal is for all large businesses to be required to notify HMRC of any tax position that they take which HMRC is likely to challenge, subject to a £1m de minimis. The administrative features of the regime will be similar in some ways to that of the Senior Accounting Office (SAO) regime and, indeed, there will be personal responsibility placed on an individual within affected organisation to ensure compliance with the potential for personal penalties to be imposed for failures to comply.

The consultation, and the administrative requirement it proposes, will raise many questions for businesses and their tax compliance functions. The scope of the requirement is clearly subject to a great deal of uncertainty and, in principle, requires a judgement as to what action HMRC might seek to take in relation to any tax position – covering the full range of taxes. It will be important for businesses to actively engage with the consultation to ensure that the obligation is ultimately workable. From HMRC’s perspective, there is clearly a risk of being inundated with clearance requests from businesses seeking certainty, unless any guidance they produce is sufficiently helpful to provide businesses with the certainty that they need.

Proposal

The consultation document points out that the “legal interpretation tax gap” in the 2019 edition of ‘Measuring tax gaps’ is £6.2bn (18% of the overall tax gap) and the majority of the legal interpretation tax gap is attributable to large businesses. The aim of the consultation and any measures to follow is to reduce this tax gap.

The legal interpretation tax gap is defined as losses “where the customer’s and HMRC’s interpretation of the law and how it applies to the facts in a particular case result in a different tax outcome, and there is no avoidance”. Specifically, this includes the interpretation of legislation, case-law, or guidelines relating to the application of legislation or case-law. Examples given in the consultation include categorisation such as an asset for allowances or VAT liability of a supply, the accounting treatment of a transaction, or the methodology used to calculate the amount of tax due as in transfer pricing, or VAT partial exemption.

Accordingly, and as announced at the March 2020 Budget, the Government intends to require large businesses to notify HMRC where they have adopted an “uncertain tax treatment”. This proposal is designed to improve HMRC’s ability to identify issues where businesses have adopted a different legal interpretation to HMRC’s view. The consultation document sets out the framework for that requirement and seeks views on a range of implementation issues. Whilst the Government acknowledges the difficulties in drawing up this requirement, it also points to the fact that the tax authorities in the USA and Australia have required notification of uncertain Corporate Tax treatment for several years, so this will be familiar to large groups with international reach.

Equally, however, the consultation recognises that the measure is not intended to promote any assumption that HMRC’s interpretation is always correct, nor that HMRC is a final arbiter of disputes relating to tax law. The measure aims to ensure that HMRC is aware of all cases where a large business has adopted a treatment with which HMRC may disagree and accelerate the point at which discussions occur on uncertain tax treatment.

Which businesses are affected?

The requirement will only apply to large businesses. The threshold for what is a large business, and therefore within scope of the notification measure, will be based on other regimes that apply this threshold including the Senior Accounting Officer (SAO) regime and Publication of Tax Strategies (PoTS) regime.
Businesses fall within these regimes if they satisfy either or both of:

• turnover above £200m
• balance sheet total over £2bn.

It will also apply to partnerships and LLPS that meet these criteria.

Which taxes are covered?

The requirement will be for notifications in respect of Corporation Tax, Income Tax (including PAYE), VAT, Excise and Customs Duties, IPT, SDLT, SDRT, Bank Levy and Petroleum Revenue Tax. These are also the taxes and duties currently in scope of the SAO regime.

What is an uncertain tax position?

The consultation recognises that an “uncertain tax position” may arise from a wide range of scenarios, from a taxpayer making a judgement on a position of genuine uncertainty to a taxpayer taking a position “with the deliberate intention of pushing the boundaries of the law to their advantage”. The intention is to catch all such scenarios. But, the Government recognises the potential complexity in designing an objective requirement to notify and will, therefore, draw to some extent on the accounting position.

International Accounting standards, namely IFRIC23 requires an assessment of whether it is probable that a tax authority (including a court) would accept an uncertain tax treatment. It, therefore, looks to the ultimate outcome and not to the likelihood of challenge by HMRC. The measure proposed in the consultation differs in that it proposes an assessment not of the ultimate outcome but of uncertainties that HMRC are likely to challenge.

The consultation states that the following IFRIC23 principles will also apply to the requirement to notify:

• whether an entity considers uncertain tax treatments separately;
• the assumptions an entity makes about the examination of tax treatments by HMRC; and
• how an entity considers changes in facts and circumstances, and perhaps even subsequent case law.

It is proposed that the decision about whether a tax treatment is uncertain is made at the time the taxpayer is required to submit a notification. If a tax treatment becomes uncertain after that date (perhaps due to changes in case law) there would not be an expectation to revisit that year. However, if the tax treatment is ongoing, then a notification would be required in the subsequent year.

There is an expectation that HMRC will provide guidance over the meaning, for example in the context of common areas of dispute.

What needs to be notified?

Large businesses will need to notify where they have adopted an “uncertain tax treatment”. However, there is no intention to duplicate existing regimes and so there will be exceptions where, for example, a transaction is disclosable under the Disclosure of Tax Avoidance Schemes rules or under DAC6.

It will not be necessary for businesses to disclose any uncertainty which is the subject of formal discussion with HMRC or where an HMRC officer agrees with a customer in writing that they have sufficient information in advance of the deadline for disclosing an uncertain tax position. Perhaps surprisingly, there will be no formal exception for instances where an uncertain tax treatment has been the subject of a clearance request to HMRC. However, if HMRC has provided clearance and there have been no changes in relevant facts or circumstances, then the business will be able to assume that there is no uncertainty in relation to the specific clearance given and the specific legislation referred to.

There will also be a de minimis threshold in order to ensure that the requirement does not put disproportionate burdens on businesses. The proposal here is that only uncertain tax treatments which, individually or combined (using the principles set out in IFRIC23 as to whether an entity considers uncertain tax treatments separately) amount to a maximum of £1m or more in the tax outcome, will not notifiable. The de minimis threshold of £1m will be per financial year (accounting period for Corporation Tax) per treatment (or combined treatments, as per IFRIC23 principles on whether an entity considers uncertain tax treatments separately) will apply. Consideration was given to a requirement that the uncertain tax treatment should be notifiable on if considered “material” (as with the Australian model), but considers that a simple £1m threshold is simpler and more appropriate.

Who should notify and how?

The proposal is that the notification should be a single, annual process which encompasses all of the relevant taxes. A return or certificate would not be required if there is no uncertain tax treatment to notify. The Government therefore proposes to make the notification process similar to that used by the SAO regime, but also applying to partnerships that satisfy the reporting criteria. The SAO regime currently provides for the certification to be made 6 or 9 months after the end of the accounting period of the company.

However, since VAT and PAYE returns (in particular) do not necessarily align with the accounting period, transactions with uncertain tax treatments which occurred within the tax year (or VAT tax year) preceding the date the certification is due would be notifiable as part of that certification.

As with the existing SAO regime, there will be a requirement for “a concise description of issues identified”. In addition to the description, the notification would also require an indication of the amount of tax relating to the uncertainty. Where tax uncertainties arise after a transaction has taken place, the Government accepts that such this does not necessarily require a voluntary disclosure (unless it also impacts future transactions).

The consultation is not specific on who should report within an organisation, simply noting that the person making the judgement about whether a particular tax treatment is uncertain, and therefore whether notification is required, could be a person other than the SAO. However, it is clear from the penalty regime (below) that there is an expectation that businesses will be required to notify to HMRC an individual within the organisation responsible for compliance with this obligation. In particular, since large partnerships and LLPs are included within the notification requirement but do not currently require a SAO, they will have to put in place separate measures. Clearly, however, it will be important for all businesses to put in place internal compliance measures to enable the SAO or other responsible person to comply with the requirements.

Penalties

The Government proposes to use a penalty regime similar to that existing under the SAO regime. The government proposes, therefore, penalties of:

• £5,000 on the entity for failing to notify HMRC details of the person liable to notify.
• £5,000 on the person liable to notify, or the entity, where they should have notified but failed to do so..

Comment

The consultation will run until 27 May 2020 and responses should be sent to uncertaintaxtreatmentconsultation@hmrc.gov.uk.

The consultation indicates that HMRC will be keen to hold or attend meetings with interested parties to discuss these proposals – though clearly the current Covid-19 situation will impact whether and if so how such meetings may be held. The intention at this stage is for the Government to publish its response, along with draft clauses, in late summer 2020 with legislation introduced in the Finance Bill 2020/21 applying to returns filed after April 2021.