Notification of uncertain tax treatment: draft guidance

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HMRC has published for consultation draft guidance on the application of the uncertain tax treatment rules which are due to be implemented with effect from April 2022. The guidance is an important element in the design of this new requirement and it is hoped that the guidance may help provide the certainty that businesses need to ensure that it can be applied effectively.

The draft guidance aims to provide helpful examples over the application of the rules in a number of scenarios, in particular covering the three main tests of what amounts to an uncertain tax treatment. Nevertheless, some uncertainty will persist, especially over the question whether there is a “substantial possibility” that the tax treatment adopted is incorrect.

The consultation on the draft legislation will close on 14 September 2021.

Background

The original proposal to introduce a requirement for large businesses to notify to HMRC uncertainties in the tax treatment of their tax filing position was published in March 2020. This 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 in order 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 scope of the proposed 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. As a result of criticism of this ambiguity, 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. Draft legislation followed in July 2021, as to which see Notification of uncertain tax treatment - draft legislation released.

What is an uncertain tax treatment?

When introduced, these provisions will require large businesses to notify HMRC when they have included an uncertain tax position in their return. The definition of an “uncertain tax treatment” depends on either:

• An amount being included in the entity’s accounts to reflect the probability that a different tax treatment will be applied to the transaction
• A provision for tax being based on a treatment different to HMRC’s known interpretation of the law or
• It is otherwise reasonable to anticipate that, if a tribunal or court were to consider the way in which the amount was arrived at, there is a substantial possibility that the treatment would be found to be incorrect.

The guidance published by HMRC will be important in providing certainty for affected businesses over the way in which HMRC will apply these tests.

What does the guidance say about the meaning of uncertain tax treatment?

The draft guidance covers the full scope of the new rules, including the threshold tests and de minimis amounts etc. However, the most interesting aspects of the guidance relate to tests for determining whether a tax treatment is uncertain.

As regards HMRC’s known interpretation of the law, the guidance provides a list of types of publications that do or do not indicate HMRC’s known position for the purposes of this criterion. In particular, and unsurprisingly, HMRC Manuals, Statements of Practice, Public Notices and Revenue & Customs Briefs are confirmed as setting out HMRC’s known position as well as any other publications which set out HMRC’s view of tax compliance risk in relation to certain transactions are covered. In addition, correspondence between the taxpayer and HMRC about transactions (covering statutory and non-statutory clearances and advice provided by HMRC on specific transactions) will fall into this category. However, the guidance confirms that other material such as advice provided via On-line HMRC forums, submissions HMRC makes in litigation and explanatory and technical notes relating to legislation will not be taken as setting out HMRC’s known position.

The draft guidance acknowledges that HMRC guidance may become out of date (despite there being a process of updating). In these circumstances, more recently published guidance is less likely to be outdated and is expected to take precedence over older guidance where there is a potential conflict.
Where it is obvious that HMRC guidance is outdated or contradictory, and other notification criteria do not apply, a notification is not required by the legislation. However, a mere belief by the qualifying company or partnership that the guidance is wrong will not in itself mean that notification is not required. In addition, the draft guidance states that notification is still required where there is legal uncertainty that HMRC’s view is correct, for example, where the Upper Tribunal has found HMRC’s view to be incorrect, but that judgement is being appealed.

As regards the “substantial possibility” criteria, the draft guidance does not seek to put a specific figure on what amounts to “substantial”. However, it does confirm that the phrase ‘substantial possibility’ is intended to capture those instances where there are two or more competing treatments such that there is real uncertainty about which is correct. “This criterion is aimed at the issues which sit below the threshold for making a provision as it is more likely than not that the treatment adopted will be sustained upon examination, but there remains a substantial possibility that a court or tribunal could still find it to be incorrect.”

The guidance does, however, provide a number of indicators including where the judgement over the tax treatment is “fairly balanced”, there is genuine doubt over how the law should be interpreted, different advisors recommend different tax treatments or the entity’s risk management process recognises there is a high risk the filing position will not be sustained.

What does the draft guidance say over the threshold test?

The legislation contains a de minimis or threshold for the application of the notification rules. There is only a requirement to notify if there is a “tax advantage” of £5m or more. The amount of the tax advantage is determined by a comparison of the uncertain amount with the expected amount. The £5 million threshold applies separately to each relevant tax in each 12 month period.

In a VAT context, the guidance states that the tax advantage calculation in relation to output tax is not to be offset by any input tax credit, either within a VAT registration or between VAT registrations, even where there is a direct and immediate link, or the transactions are within the same corporate group. Similarly, any uncertain input tax treatment should be considered in isolation to any related output tax declared when determining the amount of the tax advantage.

The draft guidance contains a number of specific examples over the application of the legislation in this and other contexts. However, VAT Example Two, dealing with a supply of group services from an overseas subsidiary, appears to calculate the VAT advantage obtained by VAT grouping the overseas entity using a local branch on a net basis, contrary to the statements elsewhere in the guidance.

In addition, the draft guidance covers a number of the administrative aspects of the rules including notification requirements, penalties and reasonable excuse.

Comments

Comments on the draft guidance should be sent to uncertaintaxtreatmentconsultation@hmrc.gov.uk by 14 September 2021.