Notification of uncertain tax treatment: revised HMRC draft guidance

Update: For the final version of the guidance, see our article Uncertain tax treatment rules: final guidance.

HMRC has published revised draft guidance for the uncertain tax treatment legislation currently going through Parliament as part of the Finance (No 2) Bill. The revised draft guidance has been published in response to comments on the original draft guidance published in August 2021 and also subsequent changes to the draft legislation, most notably the reduction in the number of triggers from three to two.

The guidance is extensive and will take some time to digest fully. However, it is immediately clear that there are a number of issues that are now covered in more detail, including international scope, expectations in relation to knowledge of HMRC’s position, the general exemption which applies when HMRC are aware of the uncertainty, the relevance of court decisions contrary to HMRC’s published position, VAT netting off and the interaction between the UTT regime and other regulatory and administrative regimes.

In relation to the scope of the rules, the draft guidance now specifically addresses the position of non-resident entities. It states that the rules apply to corporates wherever incorporated or tax resident and, as such, UK branches and permanent establishments of non-UK resident companies and partnerships are within scope if the other threshold criteria are met.

In response to concerns around the scale of HMRC guidance and difficulty for taxpayers in identifying relevant guidance, HMRC has sought to provide a degree of reassurance. The revised guidance says that HMRC recognise that there is a large volume of published material and “the UTT regime is not intended to act as a series of tripwires leading to penalties”, where a business took a reasonable approach to establishing HMRC’s position. HMRC has discretion over UTT penalties, and the penalty regime contains provision for reasonable excuse. HMRC expects a level of familiarity with its published material, and that a business would want to ascertain whether HMRC is likely to take a different view from the position included in a return. The guidance lists a number of factors that it would consider including:

• whether HMRC guidance on the issue is easy to find, for example by being in a guidance manual which is clearly relevant to the matter in question;
• whether a search using relevant search terms finds HMRC’s published view on the issue concerned; and
• whether the tax issue concerned is novel, contentious, high-value or high-risk, such that a careful examination of HMRC’s view would be warranted.

However, in a move that extends the scope of material that taxpayers must consult, the revised guidance now indicates that HMRC would regard both explanatory and technical notes on new legislation as setting out HMRC’s known position. Given the highly technical nature of such material, this appears to be an unnecessary and disappointing extension.

The amended draft guidance contains additional and revised examples in a wide range of situations. For example, the draft guidance now includes specific sections dealing with how the calculation of the tax loss should be approached in relation to situations involving losses or group relief.

Another area clarified is in relation to the relevance of tribunal decisions. The examples make clear that HMRC would not regard reliance on an Upper Tribunal decision contrary to HMRC’s published position as a reason not to notify under the rules. HMRC take the view that notification would still be required under the rules unless HMRC had indicated that they accepted the decision and changed their guidance.

The revised guidance also provides much clearer examples indicating that, in determining whether the threshold for reporting has been met, that it is not possible to net off liabilities for VAT purposes. So for example, it would not be possible to net off additional input VAT recovery where treating a supply as taxable rather than exempt would result in a failure to report output VAT. Equally, the fact that, in the absence of VAT grouping, supplies between two fully taxable businesses within a group would net off, would not prevent a notification obligation arising if it were unclear that the conditions for VAT grouping were met.

Another area where the guidance has been enhanced is in relation to the qualification under the general exemption that HMRC is already aware of the uncertainty. If HMRC is already aware of the uncertainty and how the business plans to treat it, then the business need not bring it to HMRC’s attention through the notification process under the UTT legislation. The guidance indicates that where a business approaches HMRC via its CCM to provide information and discuss an uncertain tax issue, HMRC will confirm when the general exemption has been met. There is also guidance on the interaction of this example with clearance applications.

For uncertainties included in returns due on or after 1 April 2022 but which are notified to HMRC prior to 1 April 2022 (for example via discussion with a CCM), taxpayers will not need to notify again after the regime comes into effect. However, taxpayers should aim to indicate to HMRC in pre-April 2022 interactions that they are seeking to satisfy the requirements and to meet the general exemption and keep a record of the interaction as evidence.

The guidance also clarifies the interaction between the UTT rules and other regulatory and administrative features of the tax system. It confirms that there is no direct read across from a notification being made to a risk rating applied to a large business by HMRC. This means for example that making a notification does not automatically mean a business cannot be low risk. It would depend on the nature of the notification. However, HMRC expects low risk businesses to discuss transactions or issues with significant tax implications in real time and to manage communications with HMRC collaboratively. The guidance also confirms that if there is a UTT issue and it is unresolved at the time an SAO certificate is due it is unlikely to have any consequences on SAO certification. The primary focus of SAO is ensuring companies have effective accounting processes in place, whereas UTT is identifying specific uncertain transactions. HMRC wouldn’t ordinarily expect an SAO certificate to automatically be qualified due to a UTT notification.

The revised draft guidance is open for comments for a very short period – two weeks from Tuesday 18 January 2022 until Tuesday 1 February 2022 – though HMRC have indicated that if businesses need further time to respond then they will do their best to accommodate this.

To read our full review of the new uncertain tax treatment rules as they were introduced in the Finance (No 2) Bill, see our article "Notification of uncertain tax treatment by large businesses: a review".

If you would like to discuss the new rules or have any immediate comments that you would like us to make to HMRC please contact Jo Crookshank.