Notification of uncertain tax treatment - draft legislation released

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

HMRC has released draft legislation and explanatory notes together with a consultation response document concerning the implementation of the notification of uncertain tax treatment (UTT) proposals. These confirm that the government will go ahead with the introduction of its proposals, broadly in line with those put forward in the second consultation document published in March 2021, with effect from April 2022. However, a number of significant changes have been introduced in the draft legislation, including limiting the application of the rules to transfer pricing and reducing the number of triggers for notification.

This is a significant tax development requiring large businesses to notify HMRC when they have included an uncertain tax position in their return filed on or after 1 April 2022.

Background

In March 2020, the government published a consultation document on the introduction of a requirement for large businesses to notify to HMRC uncertainties in the tax treatment of their tax filing position. The consultation, "Notification of uncertain tax treatment by large businesses", set out a proposal 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 proposal was motivated by the need to reduce the "legal interpretation tax gap" ie that part of the tax gap arising from disputes between HMRC and taxpayers where each take a different view of the correct tax treatment but where there is no tax avoidance. For further details, see our article, Notification of uncertain tax treatment by large businesses.

The consultation attracted much criticism for the level of uncertainty inherent in the proposed reporting requirement. The scope of the requirement to report was clearly subject to a great deal of ambiguity and, in principle, required a judgement as to what action HMRC might seek to take in relation to any tax position - covering the full range of taxes. In November 2020, the government accepted that the scope of the requirement needed to be much more clearly defined, and a further consultation followed in March 2021. For details of the second consultation, see our article Notifying uncertain tax treatment: second consultation.

The second consultation proposed restricting the rules, at least initially to corporation tax, income tax (including PAYE) and VAT only. In addition, the government proposed to make the concept of an "uncertain tax treatment" more objective by introducing a series of triggers for notification and increased the proposed de minimis to £5m.

Further consultation response

The main change announced in the consultation response is to the triggers to be included in the draft legislation for notification. In particular, the government proposes to reduce the number of triggers from seven to three. The three triggers will be where:

• the accounts have a provision to reflect the probability that a different tax treatment will be applied. This aims to capture those instances where a taxpayer has recognised it is more likely than not that the filing position will not be sustained.
• The taxpayer's treatment has diverged from HMRC's known position (ie those issues set out in HMRC published materials or views expressed directly to the taxpayer)
• There is a substantial possibility that the taxpayer's adopted tax position would be overturned by a tribunal or court or where the tax analysis is highly fact-dependent and therefore HMRC cannot express a view in published material of general application. 

The third of these triggers is new and is largely designed to replace a number of the triggers proposed in the second consultation. For example, conflicting advice (trigger G in the second consultation) would be an indicator that this applies. It also addresses new products or transactions of the type envisaged by trigger D in the second consultation and will also pick up the instances where there is no known HMRC position and genuine uncertainty about the correct tax outcome (trigger F). The consultation response argues that the new trigger is in line with what large businesses' tax teams already commonly consider.

However, following feedback on the scope of the rules, the consultation response confirms that transfer pricing will only be within the scope of the notification requirements to a limited extent. Due to the inherent uncertainty involved in transfer pricing calculations, the government accepts that transfer pricing should not be subject to the same tests. Instead, the government proposes to exclude uncertainties regarding the application of the arm's length principle from the requirement to notify, except where the application of the arm's length principle is contrary to HMRCs known position or a provision is made to recognise the uncertainty.

The government agrees and accepts that for a successful regime HMRC will need to provide access to discuss uncertainties with HMRC, either:

• with the business's Customer Compliance Manager (CCM)
• by ensuring businesses without a CCM have opportunities to discuss uncertainties
• through a prompt pre-transaction clearance process.

Other aspects of the regime will be implemented as previously proposed, including the application of a £5m de minimis threshold (rather than using a materiality test). The threshold test will be exceeded if it is reasonable to conclude that, by bringing the uncertain amount into account the taxpayer would obtain a tax advantage (widely defined) compared to the tax treatment based on an expected amount (for example, that based on HMRC's published position) and the aggregate value of any such related tax advantages is more than £5m. Further details will be provided in guidance to be published concerning the calculation of the threshold, for example in relation to specific regime issues such as VAT scenarios where a third party can reclaim the VAT charged by a separate entity. In addition, the draft legislation makes it clear that intra-group transactions may be netted off for corporation tax purposes when applying the threshold.

Next steps

The new notification requirement will have effect for returns within scope that are due to be filed on or after 1 April 2022.

The government will consult on the draft clauses and responses should be sent by 13 September 2021 to: uncertaintaxtreatmentconsultation@hmrc.gov.uk

The government has also indicated that it will shortly provide draft guidance on how HMRC will operate the regime and what businesses will need to do.