The notification of uncertain tax treatment regime is a new compliance obligation that requires businesses to notify HMRC where they have adopted an uncertain tax treatment (UTT). Jon Garrett and Edward Brown explain how these rules may affect your business.
The rules will take effect for relevant returns that are due to be filed on or after 1 April 2022, so may apply to transactions and events that are taking place now. As such, businesses should ensure they are prepared and consider whether the rules impact them.
Who do the rules apply to?
The requirement affects ‘large’ businesses, wherever they are incorporated. This broadly comprises companies and partnerships (including LLPs) with a UK turnover in excess of £200 million per annum and/or a UK balance sheet total of over £2 billion. The turnover and balance sheet totals of relevant companies or partnerships are aggregated in 51% of group situations.
A threshold tax advantage of £5 million applies, such that businesses will only be required to notify HMRC if the net value of the tax advantage exceeds this threshold. This is subject to apportionment when the relevant financial period is less than 12 months.
Which taxes are included?
The taxes within the scope of the rules are corporation tax, VAT, and income tax (when in a PAYE or partnership return).
The £5 million threshold for notification applies separately in respect of each of these taxes and on a per-uncertainty, per-tax return basis. Significantly, if the tax treatments are substantially the same, they should be aggregated.
What are the triggers for notification?
The scope of the notification requirement for the UTT regime has changed markedly since it was first announced at Budget 2020. There were initially seven proposed conditions that would make a UTT notifiable to HMRC, but following the outcomes of two consultations, these have been reduced to two triggers contained in the legislation in Finance Bill 2021/22.
The two triggers that may necessitate a notification to HMRC are:
1 where a provision has been made in the accounts for the uncertainty, or
2 when a tax treatment has been adopted which is contrary to HMRC’s known position. This is based on guidance, statements of practice or other HMRC material that is of general application and in the public domain, or from dealings with HMRC specifically relating to the business, whether or not these concern the specific transaction.
It is possible that more than one of the conditions will be met for a given transaction.
A third trigger, where there is a substantial possibility that a tribunal or court would find the taxpayer’s position to be incorrect in material respects, will remain under consideration for possible inclusion within the rules at a later date. This trigger was particularly broad and hard to define, so its removal is welcome but the rules remain broad enough to catch numerous scenarios.
What are the exemptions?
Certain scenarios may fall within an exemption from the requirement to notify, including a general exemption where HMRC already has all, or substantially all, of the information relating to the notification amount available to them. Importantly, this applies to formal disclosures made through statutory and non-statutory clearances and disclosure of tax avoidance scheme (DOTAS) notifications, as well as less formal routes, including discussions with the customer compliance manager (CCM). There's also a specific exemption for corporation tax transactions within groups of companies where the net tax advantage to the group is less than the £5 million threshold.
A further exemption was considered where the uncertain treatment related to transfer pricing and for attribution of profits to a UK permanent establishment of a non-UK resident company, but these exemptions have not been included in the Finance Bill 2021/22 – as such, these scenarios are potentially notifiable.
Are there penalties for non-compliance?
Penalties may apply for not notifying HMRC within a specific time period, for not submitting a notification when required, and/or for submitting an incomplete notification. An escalating fixed penalty regime applies for each tax with: the penalty for a first failure being £5,000, rising to £25,000 for a second failure within a three year period and £50,000 for a third failure within a three-year period.
A penalty may not be imposed if HMRC or a tribunal are satisfied that there is a reasonable excuse for the failure to notify. However similarly to other parts of the legislation, reasonable excuse specifically excludes insufficient funds and the reliance on another person.
How do businesses report uncertain tax treatments to HMRC?
It seems likely that many businesses will aim to ensure they fall within the general exclusion to notify. When a notification is required, HMRC have previously indicated that businesses can provide details via a digital form, which will be available to access from April 2022. This will require the business to input details of the uncertainty including the tax regime, notification triggers under which the disclosure is made, a description of the transaction, reference to any relevant statute or case law, and the amount of tax advantage relating to the uncertainty. We anticipate that updated guidance will be provided to further address the reporting requirements in the coming weeks.
What should you do now?
The rules impose new obligations and complexities on businesses and the compliance burden on those impacted is likely to increase. A review process will be required covering all in scope taxes to identify potentially reportable items, and early engagement will be vital to achieve this. Businesses will need to determine whether any identified uncertain tax treatments meet the notification criteria, whether any exemptions apply, and if the threshold is met. Going forward, your business will need to track the relevant reporting deadlines throughout each year, which will be different for all in scope taxes. This will need to become an ongoing business process.
Businesses need to notify HMRC where the rules apply and the £5 million tax advantage threshold has been breached, but the calculation in comparing the position taken in the tax return and an appropriate comparator may become complicated. It will differ depending on which (or both) of the two triggers has prompted a notification to HMRC and we can foresee this getting particularly complicated for VAT, the threshold test for which is likely to be particularly sensitive to the notification regime.
Compliance with the regime may be smoother for clients with a CCM, partly due to existing open communication in place with HMRC, and also because the general exemption to notify where HMRC is already aware of the uncertainty includes the CCM being aware of the uncertainty. For businesses without a CCM, the most recent guidance states HMRC will utilise their existing customer engagement team to allow them to discuss uncertainties, and also benefit from this exemption, but resource constraints as well as further detail and timeframes remain to be seen.
To further discuss the notification of uncertain tax treatments, get in touch with Edward Brown.