To notify or not to notify? The potential perils of uncertain tax treatments
By Susan Cattell, Head of Tax Technical Policy
11 June 2021
Susan Cattell outlines the key points from the ICAS response to the second HMRC consultation on proposals that large businesses should be required to notify uncertain tax treatments; the fundamental flaw in the original proposals has not been addressed.
Why was a second consultation needed?
The summary of responses published in March 2021 showed that other stakeholders shared many of the ICAS concerns about the proposals. Implementation was deferred to allow time for a second consultation on revised proposals. The Government now intends the notification requirement to apply to transactions in returns due to be filed after April 2022 with legislation to be included in Finance Bill 2021-22.
ICAS response to the second consultation
The revised proposals attempted to take account of some of the issues raised in response to the first consultation. The taxes within scope have been 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.
However, the ICAS response notes that the fundamental flaw in the original proposals – that they were poorly targeted - has not been addressed. The Government and HMRC appear to be seeking to address a problem with a minority of uncooperative large businesses - as illustrated by the predicted yield, which is very small compared to the legal interpretation part of the tax gap or to the size of the large businesses in scope. Even in its revised form, the notification requirement will affect the entire large business population and impose unnecessary burdens on the cooperative majority.
Proper targeting is essential
If the Government decides to go ahead with implementation, the requirement should be amended so that it only applies to the minority of uncooperative large businesses – not to all large businesses. One possibility might be to extend the Finance Act 2016 legislation (in schedule 19, part 3) which already imposes sanctions on uncooperative large businesses, to include the notification requirement as an additional sanction.
The compliant majority want to work constructively in real time with HMRC but are experiencing increasing difficulties in doing so, due to HMRC resource constraints. We expect that the proposed requirement will generate unnecessary (and in some cases duplicate) disclosures which will waste time and resources for compliant businesses and HMRC, and increase pressure on both.
The consultation recognises that HMRC will require additional resources to consider the notifications and caseworkers to enquire into them. It would be far more constructive, and more likely to achieve the stated objectives, if additional resources were directed to the existing Customer Compliance Manager (CCM) and Business Risk Review regime instead. The majority of large businesses would then be able to engage with HMRC in real time, reliably and consistently, with a greater likelihood of resolving uncertainties quickly – and HMRC could also increase its engagement and compliance activities with currently uncooperative large businesses.
Other significant points covered in the ICAS response were:
The main exemption
The main proposed exemption from the notification, which is intended to assist cooperative large businesses, is that businesses which are already discussing uncertainties with HMRC (primarily their CCM) will generally not be required to notify them again, as long as the same level of detail is provided in the discussions as would be required if a notification had to be made. However, there is no information about how this might work in practice – given that businesses are already finding it increasingly difficult to engage with HMRC, due to HMRC resource constraints. There are also unanswered questions about evidence and disclosures (for example, via clearance applications) which are not dealt with by the CCM.
The exemption is inadequate and likely to create additional pressure on HMRC CCM resources, from prudent large businesses wanting additional discussions of areas of possible uncertainty and evidence of discussions having taken place – and duplicating disclosures through formal notifications where they cannot be certain disclosure is adequate.
The position will be even worse for businesses within scope which do not have a CCM; the proposed alternative, mentioned in the consultation, lacks any detail but would inevitably leave them at a disadvantage. Any business brought within the proposed notification requirement should also be given a CCM and brought within the Business Risk Review process.
Cooperative large businesses should be completely excluded from the notification requirement, so that they do not need to devote any time and resources to considering exemptions and whether they might need to notify.
What is an uncertain tax treatment?
The suggested definition in the original proposals was unclear and subjective. The revised proposals aim to be more objective, with a series of triggers covering scenarios which will require notification.
However, there remain areas of subjectivity and considerable uncertainty and we expect that there will still be large numbers of notifications which err on the side of caution, or duplicate information already disclosed. It therefore remains unlikely that the proposals will help HMRC to achieve its intended objectives. Time and resources will be wasted sifting through notifications from businesses which already engage constructively with HMRC – rather than targeting efforts at the uncooperative minority.
The ICAS response discusses concerns with triggers (d) and (g) and with determining HMRC’s ‘known position’ which affects triggers (a), (c) and (f). One of the main concerns highlighted is the proposal that a ‘known position’ would include something from guidance statements, court decisions or other material (of HMRC or a Minister of the Crown) that is in the public domain. This is far too wide. We do not believe it is reasonable to expect businesses to be aware of and keep track of so much material, some of which may not be readily accessible or widely known about (for example, published minutes of stakeholder forum meetings). Businesses need clarity around exactly which material they would be expected to consult and monitor for updates.
HMRC should therefore provide a detailed list of material – which should be restricted to formal publications that are well known and readily accessible, for example, HMRC manuals, VAT Notices and Revenue and Customs Briefs. First tier tax tribunal decisions should be explicitly excluded - it would not be reasonable for businesses to be expected to track these, particularly as FTT decisions are not binding.
The reporting threshold
Another problematic aspect of the original proposals was the absence of any materiality threshold – instead a £1m threshold ‘per financial year’ was proposed for uncertain treatments (individually or combined).
The proposed threshold has been increased to £5m with a new two-stage test to calculate whether it has been exceeded, and hence notification is required. However, there is still no element of materiality. The consultation requirement refers to notification requirements in other jurisdictions, including Australia. However, the Australian requirement only applies to corporation tax and includes a materiality threshold.
The Government is apparently reluctant to introduce a materiality threshold because this would involve different treatment applying to different businesses, depending on size. However, trigger (e) already effectively brings in materiality – but is apparently considered to be acceptable.
Other problems relating to the threshold in the UK are linked to the inclusion of VAT. Excluding VAT would help, but if it continues to be in scope, more explanation and examples need to be provided around how the threshold and triggers should be applied.
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 take into account when preparing responses. Details of current consultations on tax issues can be found on the following websites:
Please send us your feedback and comments by emailing tax@icas.com.