Putting aside for now whether this new notification regime is necessary and apt to reduce what HMRC refer to as the tax gap attributable to legal interpretation and quantify at £4.9bn, it is encouraging to see that the model is much improved from the original starting point. Inevitably, though, some concerns about this measure remain and further details are awaited in guidance.
Where corporation tax, VAT, PAYE, and income tax self assessment returns have filing dates on or after 1 April 2022, large businesses (those with turnover above £200 million per annum or a balance sheet total over £2 billion or both) will have to notify HMRC of uncertain tax treatment of any amounts in those returns. This means that transactions taking place now are potentially within scope. The summary of responses to the consultation notes that some respondents complained about the apparent retrospectivity of this but the government does not consider the proposal to be retrospective as it does not change the tax consequences of the transaction, rather “it imposes a duty to notify that is prospective for treatments that are already uncertain under the tax code”.
Uncertain tax treatment triggers
The identification of uncertain tax treatment relies on a number of triggers which, in the draft legislation open for consultation until 14 September, have been reduced from seven to three:
- A provision has been recognised in the accounts to reflect the probability that a different tax treatment will be applied.
- The tax treatment relies on an interpretation or application of the law not in accordance with HMRC’s “known” position.
- It is reasonable to conclude that there is a “substantial possibility” that, if the matter came before a tribunal or court, it would be found that the tax treatment was incorrect in one or more material respects.
As HMRC’s published guidance has an important role to play when taxpayers are looking to establish HMRC’s known position for the second trigger, that guidance must be clear and up to date. So a positive consequence of this new measure is that we should see some improvements to, and increased clarity of, technical guidance.
The third trigger is a new one. Conflicting advice (previously a trigger in itself) would be an indicator that the third trigger applies but what is a “substantial possibility” for these purposes? What measure of probability are we looking at here? The explanatory note published alongside the draft legislation explains that the third trigger is aimed in particular at tax positions which fall below the ‘more probable than not’ test for making a provision under trigger one. There will be some overlap between the first and third triggers but as the first is the clearest and most straightforward trigger, there is no need to consider the third trigger if the first is satisfied.
The summary of consultation responses describes the Australian Tax Office’s reportable tax positions regime as having a test with a similar reference point. That regime requires taxpayers to report instances where, considering the relevant authorities, the position taken is as likely to be correct as incorrect, even if it is reasonably arguable, or where it is less likely to be correct than incorrect. So on this basis it looks like a 50% or more chance of being incorrect would be notifiable but the guidance will hopefully provide more clarity on this. Once again, we await guidance to clarify the meaning of imprecise legislation!
Notification threshold and exemptions
Businesses will only have to notify of uncertainties that exceed a £5m threshold (increased from £1m originally proposed). The difference between the position taken in the return and the appropriate comparator (the amount provided for, the amount based on HMRC’s known position, or the potential outcome of litigation) must exceed £5m. The same or similar transactions must be aggregated to reduce the administrative burden of taxpayers having to notify same or similar tax issues separately, whilst also ensuring that the threshold of £5m is not undermined where there are equivalent transactions all relying on the same uncertain tax treatment.
There are a number of exemptions. For example, there is no need to notify if HMRC has already been notified (e.g. under another reporting regime or in dealings with HMRC); and for corporation tax, where the net difference across a group is less than £5m.
Transfer pricing uncertainty is not reportable unless triggers one or two are satisfied and the uncertainty regards the choice or application of a transfer pricing method. Anything related to the technical legal application of the rules, for example whether parties are in scope of the transfer pricing rules in the first place, is not excluded.
Guidance to follow
Guidance will be published in draft for consultation “in the coming weeks”. The guidance will cover how HMRC will operate the regime including: specification of the information required in a notification, how the threshold rules will operate (including where same or similar transactions are required to be aggregated and how to approach the calculation of the tax impact in different scenarios), intra-group transactions, and tax regime specific issues (such as VAT scenarios where a third party can reclaim the VAT charged by a separate entity).
The aim of this measure is to encourage discussions about uncertain tax treatments sooner and reduce the time taken to identify and settle disputes.