Uncertain tax treatment regime: consultation on extension

HMRC has published a consultation on extending the circumstances in which taxpayers are required to disclose any uncertain tax treatment (UTT) in their tax returns. The consultation proposes that the requirement to disclose an uncertain tax treatment should be extended to individuals and trustees, a range of additional taxes and that a further trigger based on the position where HMRC's view is not known should be added. In addition, the government proposes to tighten the existing exemption which applies where a business reasonably believes that HMRC is already aware of the uncertainty.

Background

The requirement to notify HMRC where a taxpayer takes an uncertain tax position was introduced by FA 2022 for returns filed after 1 April 2022. The purpose is to provide HMRC with early notification of potential issues with returns as well as attempting to reduce the "legal interpretation" portion of the tax gap. It requires large businesses to notify HMRC of legal interpretation uncertainties where the tax advantage exceeds £5m and satisfy either or both of the following criteria:

• the business is taking a position that is contrary to HMRC's known position, as published in guidance or in direct dealings with HMRC, or
• the business has made a provision in their accounts to reflect that their interpretation may not be successful if challenged.

The requirement applies for the purposes of and applies to corporation tax, VAT and income tax (including PAYE).

A third trigger was originally proposed where there was a substantial possibility that a tribunal or court would find the treatment to be incorrect in one or more material respects. This was not pursued at that time because it was considered too subjective.

The consultation notes that there have so far been 30 notifications under the regime involving potential tax at risk estimated at £1bn and that a recent review indicates that compliance costs with the new regime for businesses have been limited.

New trigger

The consultation notes that the narrow nature of the two conditions requiring a notification under the regime means some businesses are not required to make HMRC aware of uncertainty in their tax affairs. "For example, if a business is uncertain of the correct tax treatment to be applied, and HMRCs position is not known, there is no requirement to make a notification, yet uncertainty remains."

Accordingly, now that the regime has been embedded for three years, the government proposes introducing an additional trigger (or triggers) to require legal interpretation uncertainties to be notified where HMRC's position is not known and there is more than one credible interpretation. The intention is "to capture the spectrum of behaviours that exist in the legal interpretation portion of the tax gap - from genuine uncertainty to speculative interpretations that have a low chance of success, and do not produce the outcome intended when the legislation was enacted".

In particular, the government intends the new trigger to catch interpretation uncertainties not currently captured under the existing triggers because, for example, they relate to a new or novel product or process not covered by HMRC guidance.

The consultation proposes introducing an trigger that captures the following situation: (a) where there is more than one credible legal interpretation and (b) HMRC's view is not known.

The consultation argues that this formulation is less subjective than the earlier proposed trigger (whether there was a substantial possibility a court or tribunal will find the treatment to be materially incorrect), although accepts that there will always be an element of judgement when assessing legal interpretations, but this approach strikes an appropriate balance between clarity and flexibility.

However, as transfer pricing calculations inherently involve a degree of judgement, it is proposed that they are excluded from this trigger.

Additional taxpayers

The rules currently only apply to large business: corporates and partnerships. The consultation proposes to extend the rules to individuals and trusts.

The consultation notes that the total tax gap for wealthy individuals was estimated at £2.1bn in the 2023 to 2024 tax year and over half of the tax gap attributable to wealthy individuals comes from legal interpretation of the law. Wealthy individuals often have complicated tax affairs covering multiple taxes and adopt complex and sophisticated tax planning. The proposal is to limit the application of the rules to target only high value uncertain legal interpretations where the tax advantage exceeds £5m. The consultation suggests that, unlike for "large" companies and partnerships, there will be no further size requirement for individual taxpayers beyond the £5m tax advantage threshold.

The government takes the view that the same considerations also apply to trusts. Accordingly, the proposal is to include all trusts within scope, regardless of the type of trust, and a legal interpretation is notifiable where it satisfies any of the criteria to notify and there is a difference between the trust's interpretation and the alternative interpretation which creates a tax advantage of more than £5m tax.

Where an individual is a partner in a partnership, only legal interpretations made by the partner will be considered within scope of the rules. A partner will not have to notify of legal interpretation uncertainties that satisfy the criteria made by the partnership.

Where a trust is a partner in a partnership or owns shares in a company, only legal interpretations made by the trust will be considered within scope of UTT. A partner will not have to notify of legal interpretation uncertainties that satisfy the criteria, made by the partnership, nor will a shareholder in a company have to notify of legal uncertainties made by the company.

Additional taxes

A recent evaluation concluded that these rules have been successful in helping to identify legal interpretation uncertainties. Accordingly, the government proposes extending the rules beyond corporation tax, income tax and VAT. It is proposed that the scope is extended to include SDLT, NICs and payments under the Construction Industry Scheme (CIS). With the government proposing to bring individuals within scope, it is also proposed to include IHT and CGT within scope.

As regards IHT, the consultation recognises the timing of notification may prove difficult since in most situations the legal interpretation is formed at the tax‑planning stage, whereas the tax outcome may crystallise much later, for example, on death. In addition, lifetime transfers, including potentially exempt transfers and transfers into trust, may involve planning that ultimately has no tax consequence (for example, where PETs fall outside the 7‑year period). Accordingly, the consultation invites views on whether it would be workable or meaningful for the notification requirement to apply at a point other than death, and how unnecessary or disproportionate notifications could be avoided.

Furthermore, if the rules are extended to a range of additional taxes, then taxpayers may need to consider multiple filing timetables. A single arrangement could trigger several separate notifications at different times, depending on the taxes involved. The consultation recognises that this could create unnecessary burden, increase the risk of missed deadlines, and lead to piecemeal notifications arising from the same underlying transaction. To reduce complexity, one option is to introduce a single annual UTT notification due date that would be used across all relevant taxes.

Exemption

An exemption from notification currently applies where it is reasonable for a business to believe that HMRC is already aware of the uncertainty.

The government proposes to tighten this exemption to require the taxpayer to hold confirmation from HMRC acknowledging that the uncertainty has been brought to its attention.

Comments

It is perhaps not surprising that HMRC has returned to the scope of the UTT disclosure rules. The original proposals were much wider than those eventually enacted and it was made clear that the government at the time remained committed to developing an additional notification requirement to capture uncertainties not covered by the two enacted triggers.

This consultation will run for 12 weeks from 12 March 2026 until 4 June 2026. Responses should be sent by 4 June by e-mail to: uncertaintaxtreatmentconsultationresponses@hmrc.gov.uk.