Notification by large businesses of uncertain tax positions
The Government is pushing ahead with plans to introduce legislation requiring certain large businesses to make notification to HMRC of uncertain tax positions, applicable from 1 April 2022. Following two rounds of consultation with stakeholders, HMRC has published guidance to assist taxpayers in interpreting the new rules, while draft legislation has been included in the Finance Bill 2022 (and comments were invited until 13 September 2021).
While the scope and impact of the new rules has been reduced in the latest iteration of the draft legislation, large businesses will need to be mindful as the date of enforcement draws nearer.
Background and policy objectives
The rules, first announced in the 2020 Budget, are intended to bring forward the discussion between taxpayers and HMRC of uncertain tax positions. The idea is to reduce the scope on which accounting for tax relies on legal interpretation, to reduce the claiming of unjustified tax losses and to discourage avoidance and time-consuming litigation.
The scope of the new rules has been limited following a fairly sizeable level of opposition at the consultation stage. Only corporation tax, VAT and income tax (including amounts collectible under PAYE) are in scope; notable omissions are Diverted Profits Tax and the Bank Levy.
Meaning of 'Uncertain tax position'
Previously the net was cast very wide so as to include within the new rules essentially any tax position which HMRC was likely to challenge. The Government has backtracked on this – the rules will now broadly apply where one or more of the below triggers arises:
- the business has recognised a provision in its accounts, in accordance with GAAP, to reflect the probability that a different tax treatment will be applied to the relevant transaction;
- the business has applied a tax treatment which relies on an interpretation or application of the law that is not in accordance with the way in which it is known that HMRC would interpret or apply the law; or
- it is reasonable to conclude that, if a tribunal or court were to consider the tax treatment applied by the business, there is a substantial possibility that the treatment would be found to be incorrect in one or more material respects.
While triggers a) and b) have a reasonable amount of objectivity against which taxpayers can judge whether a position is uncertain, trigger c) is likely to be quite problematic. It appears intended to hoover up cases which would previously have fallen within now deleted triggers (following the redrafting of the rules), but taxpayers should be wary of its potential breadth (including as to the meaning of the word substantial). It is likely that trigger c) will need to be considered in many situations.
Which entities are targeted and how do they notify?
The rules apply to companies and partnerships which have either UK profits of at least £200m per year or UK assets of at least £2bn. Groups are assessed on a group-wide basis. (For non UK-resident entities or groups, only the profits or assets attributable to UK activities within, are within the scope). In addition, there is a de minimis threshold whereby a business must obtain a tax advantage in a year of at least £5m from adopting the uncertain tax position in order for there to be a notification requirement. Note that this applies per tax, so an apparent advantage for VAT would not be aggregated with one for corporation tax.
The notification must be done separately for each relevant tax. Where the relevant tax is reported on an annual basis (e.g. corporation tax), the notification is due on or before the date when that annual return is due. For taxes with periodic reporting (e.g. VAT), the notification is due on or before the date on which the last relevant return for the financial year in question is required to be made. As to what exactly must go in the notification, this is expected to be explained in guidance to be published by HMRC in the near future.
Exemptions from notification
Helpfully, there is a general exemption from having to notify an uncertain tax position where it is reasonable for the business to conclude that HMRC already have all or substantially all of the relevant information that would have been provided. This might be in communication under another set of disclosure rules (such as DOTAS) or in less formal communication with HMRC with a business' customer compliance manager. It is hoped that this will ease the administrative burden on affected businesses.
Further, there is no obligation to notify where the tax advantage in question arises from intra-group transactions and the net tax effect is below the £5m threshold. Certain uncertainties relating to the application of the transfer pricing rules and to attribution of profits to a UK permanent establishment are also excluded.
While there is an initial £5,000 penalty for a failure to notify a non-exempt uncertain tax position, there is also a sliding scale to punish repeat offenders (particularly given that this measure is aimed at those businesses with substantial profits and assets). Further penalties are:
- £25,000 for a second failure (within three years) in respect of the same tax; and
- £50,000 for a further failure (within three years) in respect of the same tax.
A business may appeal a penalty on the basis of a reasonable excuse.
Large businesses within these rules should take steps very soon to ascertain whether any of the above triggers will apply to their tax affairs and discuss these with HMRC. In particular, businesses with novel business strategies or those who are active in digital or technologically advanced fields or undergoing major transition should consider at an early stage the application of these rules. The time period is also notable in that the rules apply for tax returns filed on or after 1 April 2022 (so many businesses may have notifiable transactions in the current financial year).
This article is for general information only and does not, and is not intended to, amount to legal advice and should not be relied upon as such. If you have any questions relating to your particular circumstances, you should seek independent legal advice.