Notification of uncertain tax treatment by large businesses
HM Revenue & Customs (HMRC) has released a consultation document regarding a new requirement on the Notification of uncertain tax treatment by large businesses. The sizes of businesses falling within the rules are much the same as those within the Senior Accounting Officer (SAO) regime; global groups with annual revenues exceeding EUR 750 million, as well as smaller UK entities, could potentially be affected. The new notification rules will require businesses to disclose annually where there may be tax positions taken where the business believes that HMRC may not agree with their interpretation of the legislation, case law, or guidance.
Key points from the consultation
The rules will require large businesses to notify HMRC where they have adopted an uncertain tax treatment. The aim is to improve HMRC’s ability to identify issues where businesses have adopted a different ‘legal interpretation’ to HMRC.
The requirement will only apply to ‘large businesses’ – the exact definition of these is yet to be confirmed, but is likely to be broadly aligned to the current threshold tests for SAO and Corporate Tax Strategy publication (although these have slight differences already). Essentially, the test will be based on the GBP 200 million UK turnover and GBP 2bn UK balance sheet test, but could also include the EUR 750 million global revenues parameters within the Tax Strategy legislation. Note this this applies to partnerships and LLPs as well as corporates.
It remains to be seen whether smaller businesses may be affected by the proposals by reference to the Tax Strategy reporting, e.g. UK businesses with a turnover of less than GBP 200 million that are part of a global group with annual revenues exceeding EUR 750 million.
Currently, the government proposes that the notification should be a single, annual process which encompasses all of the relevant taxes. A return or certificate would not be required if there is no uncertain tax treatment to notify. This is different to SAO that requires a nil return (ie when there are appropriate tax accounting arrangements). HMRC may still opt to request nil returns in the final rules.
The timing of notification follows the same submission deadlines as the SAO rules, ie 6 months or 9 months after the year end, aligned with the statutory accounts filing deadline.
The details that a business must provide in its notification also align with the SAO rules requiring a concise description of the technical issue and an indication of the tax at stake. However, aspects of the consultation also refer to certain principles of IFRIC 23 applying to the notification requirement. It is unclear whether these are intended to form part of the narrative of a submission or simply the principles to apply when preparing it - the level of detail and content for the notification requires further clarification.
A financial threshold applies: uncertain tax treatments, either individually or combined, of GBP 1 million or more will be notifiable by the business.
The consultation recognises that interpretations of tax law can generate a range of results which might each be consistent with law: some will hinge on specific facts, some may be judgement from genuine uncertainty, some may be more deliberate in pushing boundaries.
The proposals draw on the principles of IFRIC 23 that requires an assessment of whether it is probable that a tax authority (including a court) would accept an uncertain tax treatment. It looks to the ultimate outcome, and not solely the likelihood of challenge by HMRC. However, it is important to understand that the notification requirement differs to IFRIC 23 as it proposes an assessment not of the ultimate outcome, but to identify and notify uncertainties that HMRC is likely to challenge. Whilst many businesses will think about the likelihood of HMRC challenge when adopting filing positions, clearer guidance on this will be required to support businesses with translating that into a formal notification.
There is no indication from this proposal that HMRC’s interpretation is always to be regarded as correct, or that a difference in legal interpretation would be more likely to be considered to be avoidance or evasion, or that HMRC is the final arbiter. The objective is more to provide HMRC with timely and accurate information regarding tax treatments adopted by large businesses which HMRC may disagree with, and identify areas of law that are unclear.
Interaction with other disclosure requirements
To avoid duplication, the proposals state that any tax issue reported under the Disclosure of tax avoidance schemes (DOTAS) rules – DASVOIT for VAT – or EU rules on disclosure of cross-border tax avoidance schemes (DAC6) is excluded from the notification requirement. It is also not expected to be necessary to notify anything under formal discussion already - for example, an ongoing enquiry. In addition, if HMRC clearance is sought and granted on a specific tax issue, there is no expectation that the matter would be notified to HMRC. In this regard, HMRC - through its Customer Compliance Managers (CCMs) - can agree that no notification is required if it is believed they have sufficient information in advance of the notification requirement.
Penalties for non-compliance
Again, this aligns with the SAO regime, with a proposed GBP 5,000 penalty for an entity failing to notify HMRC details of the person liable to notify, and GBP 5,000 on the person liable to notify, or the entity, where they should have notified but failed to do so. It is not clear how the ‘failure to notify’ aligns with the nil return option.
There will be debate about the extent to which a tax treatment is uncertain at the time notification submission is required. For example, what happens if a tax treatment later becomes uncertain; will businesses be expected to revisit their stance (unless the tax treatment is ongoing which could cause a further notification requirement), and how will this interact with the proposed penalty regime.
It seems quite possible that larger businesses that do not have a CCM will be at a disadvantage. Having a CCM who has built up an understanding and a relationship with the business is a clear advantage in terms of processing and addressing notifications.
Read the consultation document.