Autumn budget 2021: further changes to notification of uncertain tax treatments

Under the new rules large businesses will have to notify HMRC when they take a tax position in their returns for VAT, corporation tax, or income tax, including PAYE, that is uncertain.

The government said in its autumn budget announcement that uncertain treatments will be defined by reference to two criteria: that a provision has been made in the accounts for the uncertainty, or that the position taken by the business is contrary to HMRC’s known interpretation, as stated in the public domain or in dealings with HMRC.

Draft legislation published in July had included a third trigger of where there is a substantial possibility that a tribunal or court would find the taxpayer’s position to be incorrect in material respects. This will not be included in the legislation at this stage, although HMRC has now said that the government is committed to further consideration of this third trigger and could add it to the legislation later.

“The regime is controversial because, although there is an exemption where HMRC are already aware of the uncertain tax treatment adopted by the large business, the new rules will still result in added compliance costs for businesses which are already open and transparent with HMRC,” said Steven Porter a tax disputes expert at Pinsent Masons, the law firm behind Out-Law.

The government first consulted on the new rules in March 2020. There was considerable criticism that the test of uncertainty in the original proposals was too subjective because it required a business to decide whether a tax position was one that HMRC may challenge or was likely to challenge. The government delayed the introduction of the new rules from April 2021 to April 2022 to reconsider the proposals.

A second consultation was issued in March 2021. This set out seven 'triggers' for uncertain tax treatment, including where the underlying transaction is novel, where the tax treatment differs from that in a previous return and where contradictory professional advice has been obtained. By the time draft legislation was published in July 2021 the seven triggers had been reduced to three.

The objective of the new rules is to reduce the legal interpretation portion of the tax gap by flagging, at an early stage, uncertain areas which may not be apparent from tax returns. HMRC estimates that £3.2 billion of the estimated £5.8bn of the 2019-20 tax gap is attributable to large businesses.

“Considering the size of the tax gap which HMRC believes is attributable to large business, the amounts the regime is projected to raise are relatively modest with the highest projection being £35 million in 2023-24,” Porter said.

“This is less than the £50m originally projected for 2023-24, as adjusted for the delay in introducing the rules, so it seems businesses were wise to be concerned about the scope of the original proposals,” he said.

Large businesses are deemed to be those with a turnover above £2m per annum or a balance sheet total over £2bn, or both. This is calculated on a group basis. The regime will apply to UK partnerships, UK resident companies and overseas companies with a UK permanent establishment.

Notification will be required annually, at the same time as annual returns, such as corporation tax returns and for returns that are not annual, such as VAT returns, the notification is required when the last return for the financial year is due.

There will be a £5,000 penalty for failure to notify, with an escalating penalty for repeated failures to notify across multiple notification periods.