Proposed requirement to notify HMRC of uncertain tax treatments
By Susan Cattell, Head of Tax Technical Policy
3 September 2020
Susan Cattell outlines the key points made in the ICAS response to the consultation on HMRC proposals that large businesses should be required to notify uncertain tax treatments.
Effective tax policy requires good consultation
ICAS has submitted a response to the HMRC consultation on the Notification of uncertain tax treatment by large businesses. ICAS supports the consultation process set out in the Tax Consultation Framework, which is intended to ensure that change is well targeted, and the likely impacts are understood. Unfortunately, this consultation began at stage 2 of the process. It would have been preferable to have started at stage 1, with a clear explanation of what HMRC wants to achieve and the problem it is seeking to address. This would have provided an opportunity to identify options that do not impose unnecessary burdens on all large companies and partnerships – unlike the current proposals.
The proposals
The consultation proposes the introduction of a requirement to notify uncertain tax treatments in returns filed by large businesses after April 2021. The threshold for what is a large business, and therefore within the scope of the requirement, is based on the Senior Accounting Officer regime. Partnerships and LLPs, as well as large companies, would be included. HMRC envisages that the population would include all businesses handled by its Large Business group – but also some of the larger groups within Mid-Sized Business. ICAS believes that any business affected should have a Customer Compliance Manager – so HMRC would need to appoint CCMs for those within scope who do not already have one.
An uncertain tax treatment is defined as one ‘where the business believes that HMRC may not agree with their interpretation of the legislation, case law or guidance.’ This is unclear and subjective. Businesses could be subject to a penalty for failing to disclose a treatment which is challenged by HMRC – even though ultimately the treatment is determined by the courts to be correct. Combined with other aspects of the proposals, this is likely to lead to disclosures HMRC do not want, from compliant businesses erring on the side of caution.
Large businesses and HMRC’s Business Risk Review process
Feedback from our members working for large corporates, or advising them, indicates that the new Business Risk Review process and the associated collaborative working with HMRC, mean that these companies already proactively disclose any areas of uncertainty to their CCM. Most want to engage with HMRC in real time to address uncertainty – but HMRC resource constraints already mean that this is not always possible. We are concerned that the impact of the proposed requirement on HMRC resources could adversely affect collaborative working and make it harder for some large businesses to achieve the real time engagement they would like.
HMRC states in the consultation that its approach is not to disadvantage the ‘compliant majority’. The proposed notification requirement will impose additional costs and administrative burdens on the majority of compliant large businesses, due to the unclear definition of uncertain tax treatment and the resulting risk of inadvertently failing to notify. Many will take a prudent approach in making notifications, which will tie up HMRC resources and is unlikely to assist HMRC in identifying cases which do require close scrutiny.
The way forward: better targeting
If the government decides to proceed with the measure, ICAS believes that it should be targeted at the minority of businesses which do not engage constructively with HMRC. This could be achieved by providing that businesses would only be within the notification regime where they receive a high risk rating under the new BRR - and/or providing that businesses will only be within the regime where HMRC issues a notice or direction.
HMRC suggests that the proposed notification requirement is intended to tackle the ‘legal interpretation gap’ of £6.2 billion (in the 2019 edition of ‘Measuring Tax Gaps). However, the assessment of impacts suggests that the predicted yield from the measure is very small compared to this gap or to the size of the large businesses currently within scope. It appears likely that the intended target of the proposals is a small number of entities. This reinforces our view that the measure should be better targeted.
ICAS would like your views
ICAS responds to many tax-related consultations issued by HMRC and H M Treasury. We welcome input on open consultations, which we will take into account when preparing responses. Details of current consultations on tax issues can be found at HMRC Consultations and HMT Consultations.
Please send us your feedback and comments by emailing tax@icas.com.