Yesterday marked the deadline for responses to the HMRC consultation document "Notification of uncertain tax treatment by large business". This is the proposal that large businesses should be required to notify HMRC of uncertain tax positions in returns filed from April 2021.
The broad concept will be familiar to many international groups. As HMRC - no doubt in an effort to be reassuring - point out, the US and Australia already have comparable regimes. And both US GAAP (FIN 48) and IAS (IAS 12 + IFRIC 23) apply similar principles to the accounting disclosure of uncertain tax positions.
However, as HMRC themselves point out, there is one key difference with the HMRC proposal. And in my view, it is the difference between a workable proposal and a potentially unworkable proposal. As HMRC note at paragraph 3.7 of the consultation document:
"IFRIC23 requires an assessment of whether it is probable that a tax authority (including a court) would accept an uncertain tax treatment. It therefore looks to the ultimate outcome, and not solely the likelihood of challenge by HMRC. This measure differs in this respect as it proposes an assessment, not of the ultimate outcome, but to identify and notify uncertainties that HMRC is likely to challenge."
So the other measures work because they require the taxpayer to assess what outcome is more likely than not. That is something taxpayers and their advisers are competent to do. Generally those measures will assume that all relevant information has come to light, so a taxpayer can't use likeklihood of discovery (or not) to get it over the line, but they are an objective assessment of the technical merits of the taxpayer's position.
Whereas HMRC want a regime that will require notification of positions that "HMRC is likely to challenge", regardless of technical merit. How is a taxpayer supposed to determine that?
Here, the devil will be in the detail and the hope is that HMRC will listen to the no doubt many consultation responses that will say if this measure is needed at all (which must be open to debate) then notification needs to be determined by reference to clear, objective triggers such as filing contrary to HMRC's published view on a position.
Anything else is likely to lead to confusion and be counter-productive. If it is not based on public information, it will act as a disincentive to obtain appropriate advice, which is surely not what HMRC want. Would a taxpayer seek advice to confirm their view that a particular payment is a deductible revenue expense, say, if there were a risk the adviser may say they are aware of HMRC currently challenging the deductibility of a similar payment for another client and the acquisition of that - non-public - knowledge triggered a notification requirement? That would put advisers in a rather awkward spot too. It shouldn't be the case that providing full advice to a client, based on appropriate experience, leaves the client in a worse position than if they had not sought advice or had perhaps spoken to a less experienced adviser.
And if it is not based on taking a position contrary to a readily discernible HMRC "house view", it will be a capricious regime. HMRC is not a single being with a single view, any more than most law or accountancy firms are. Surely this can't require taxpayers to predict how their particular tax inspector (CCM) is going to view the position. But that also raises the question of what does it mean for HMRC to "challenge" a position.
Is HMRC likely to challenge the position if you think your tax inspector (CCM) is likely to open an enquiry into it, albeit you expect that to be resolved in your favour once appropriate specialists get involved and all the facts come out? Or if you think it will be resolved in your favour once it goes through the appropriate HMRC governance boards? Or if you think that having taken advice from Counsel, and considered their Litigation and Settlement Strategy, HMRC will accept your position? Is it only a "challenge" if, having gone through all of that, HMRC would be prepared to litigate?
If we are to have this regime then the notification triggers will need to be clearly defined in legislation and based on objectively discernible facts, available to all, and not on the basis of predicting how one or more specific individuals may behave.