Notification of uncertain tax treatments revisited
By Susan Cattell, Head of Tax Technical Policy
30 April 2021
Susan Cattell outlines the second HMRC consultation on proposals that large businesses should be required to notify HMRC of uncertain tax treatments; changes have been made since the first consultation, but unresolved issues remain.
The first consultation
The first consultation in 2020 began at stage 2 of the consultation process, omitting stage 1 which would have required HMRC to set out clearly the problems it was seeking to address and provided an opportunity for stakeholders to identify options to meet HMRC’s objectives in the most effective way. The proposals were poorly targeted, involved a highly subjective definition of ‘uncertain’ tax treatments and would have imposed unnecessary burdens on all large companies and partnerships, including the compliant majority.
ICAS submitted a response to the first consultation and gave evidence to the House of Lords Economic Affairs Committee which considered the proposals (and criticised them in its final report).
ICAS welcomes the 12 month deferral of implementation and the publication of a second consultation; the proposals have been revised, taking account of some of the issues raised in response to the first consultation. However, unresolved issues remain. ICAS will be responding to the new consultation and welcomes Members’ views on the revised proposals.
Scope and implementation
The second consultation notes that the government now intends the notification requirement to apply to transactions in returns due to be filed after April 2022. Legislation will be included in Finance Bill 2021-22.
The basic requirement to notify uncertain tax treatments in returns filed by large businesses (companies, partnerships and LLPs) is retained. The threshold for what is a large business, and therefore within the scope of the requirement, continues to be modelled on the Senior Accounting Officer regime and the Publication of Tax Strategies regime. Businesses are therefore in scope if they have either, or both, of: a turnover above £200 million and a balance sheet over £2 billion.
In an important change from the original proposals the taxes within scope have been considerably reduced – the requirement will now only apply to corporation tax, income tax (including PAYE) and VAT. This has facilitated an improvement in the timing of notifications. Instead of notification being required once a year for all taxes, at the same time as the Senior Accounting Officer certificate, the timing will be aligned with the date when the last relevant return for the financial year in question is due.
Exception for matters discussed with HMRC
There will be an exception from the requirement to notify where businesses have already discussed the area of uncertainty with HMRC. As the consultation puts it: “if HMRC is already aware of the uncertainty, and how the business plans to treat it for tax purposes, the business will not be required to bring it to HMRC’s attention again through the notification process, unless the business treats the transaction contrary to HMRC’s recommendation.”
On the face of it this appears to be an improvement on the original proposals, for compliant businesses which already engage with HMRC; the previous consultation talked about agreement in writing (with the Customer Compliance Manager for businesses with a CCM), whereas the new wording might suggest a more informal approach. However, it is not clear how this would work in practice. Apparently, the same level of detail will be expected in the ‘discussions’ as will be required in a notification. How will the business prove that this level of detail has been provided – or what HMRC recommended in response – unless there is a formally agreed note of a call or meeting?
Feedback from our members indicates that large companies within the BRR+ regime want to engage with their CCM in real time to discuss any areas of uncertainty – but HMRC resource constraints mean that this is often not possible. Unless these constraints are addressed, companies could find themselves disclosing (and trying to discuss) uncertainties but being unable to engage with the CCM or obtain a ‘recommendation’ before the reporting deadline and therefore disclosing again through the notification process.
Some businesses within scope for the requirement will not currently have CCMs. ICAS suggested in our response to the first consultation that any business affected by the proposals should be given a CCM. Instead, the second consultation notes that HMRC will provide a method for the necessary discussions to occur, so that businesses without a CCM are not disadvantaged. There is no detail on how this will work in practice, but it is difficult to see how such businesses will avoid being disadvantaged – given that they will need to ensure they comply with the notification regime but will not apparently be given the advantage of working regularly with the same CCM, who should be able to develop an understanding of their business.
What is an uncertain tax treatment?
This was the most controversial aspect of the first proposals. The suggested definition was unclear and subjective. The revised proposals aim to be more objective, with a series of triggers covering scenarios which will require notification:
a) Results from an interpretation that is different from HMRC’s known position.
b) Was arrived at other than in accordance with known and established industry practice.
c) Is treated in a different way from the way in which an equivalent transaction was treated in a previous return and the difference is not the result of a change in legislation.
d) Is in some way novel such that it cannot reasonably be regarded as certain.
e) In respect of which a provision has been recognised in the accounts of the company or partnership, in accordance with Generally Accepted Accounting Practice (GAAP), to reflect the probability that a different tax treatment will be applied to the transaction.
f) Results in either:
- A deduction for tax purposes greater than the amount incurred by the business, or
- Income received for which an equivalent amount is not reflected for tax purposes,
unless HMRC is known to accept this treatment.
g) Has been the subject of professional advice, that is not protected by legal professional privilege:
- which is contradictory, in terms of tax treatment, to other professional advice they have received, or
- which they have not followed for the purpose of determining the correct treatment of a given transaction.
HMRC’s ‘known’ position will be important for triggers a), c) and f). This is stated to include something from:
- guidance, statements, court decisions or other material (whether of HMRC or a Minister of the Crown) that is in the public domain, or
- dealings in writing with HMRC by or in respect of the company or partnership in question.
Reporting threshold
Another problematic aspect of the original proposals was the absence of any materiality threshold – instead a £1m threshold was proposed for uncertain treatments (individually or combined).
This proposed threshold has been increased to £5m with a two-stage test to calculate whether it has been exceeded, and notification is required:
- Step 1: Is the total tax impact of the tax treatment £5m or above? The total tax impact includes both deductions against taxable income and the non-inclusion of receipts for tax purposes.
- Step 2: if the (biggest) tax difference between the customer’s treatment and HMRC’s expected treatment is more than the £5m threshold, then a notification is required, otherwise it is not.
The consultation indicates that whilst the government has concerns about a materiality threshold, predominantly around inequitable treatment of businesses of different sizes, it is open to further exploration of the possibility and invites respondents to make any additional points in support of one.
Better targeting
The ICAS response to the first consultation called for better targeting of the measure. The impact assessments for both consultations suggest that the predicted yield from the measure is very small compared to the ‘legal interpretation’ component of the 'tax gap' it is aimed at addressing - or to the size of the large businesses within scope. The intended target of the proposals appears to be a small number of entities which do not engage constructively with HMRC, but even the revised proposals will impose burdens on the compliant majority.
ICAS suggested that better targeting could be achieved by providing that businesses would only be within the notification regime where they receive a high risk rating under BRR+ and/or providing that businesses will only be within the regime where HMRC issues a notice or direction. The new consultation mentions this suggestion but comments that there are challenges associated with it because BRR+ is a non-statutory process, ratings are determined by HMRC (with no right of appeal) and only businesses dealt with by HMRC’s Large Business Directorate are part of the process. The consultation asks whether there is an objective alternative to using BRR+ ratings that could exempt low-risk businesses.
ICAS would like your views
ICAS will be responding to the new consultation and welcomes Members’ views on the revised proposals. Please send us your feedback and comments by emailing tax@icas.com.