Uncertain tax positions: draft legislation published

However, in response to feedback, the government has changed the triggers for reporting. This is set out in a consultation response document and draft legislation, which was published alongside further draft legislation for next year’s finance bill.

“It is disappointing that the government is forging ahead with these proposals which will cause considerable administrative burdens for large businesses, with comparatively little increase in revenue for the Treasury,” said Steven Porter, a tax disputes expert at Pinsent Masons, the law firm behind Out-Law. “However, at least it has listened to feedback and made the rules more workable than they were originally.” 

“The draft finance bill documents don’t include the estimated revenues from this measure. However, the last consultation document estimated the measure would raise a peak of £45 million in 2023-24. This isn’t much considering HM Revenue & Customs (HMRC) estimates that £4.9 billion of the tax gap is attributable to legal interpretation. It doesn’t look proportionate considering the added administrative burden for all large businesses,” Porter said.

Under the proposed new rules, from 1 April 2022 large businesses will be required to notify HMRC of any ‘uncertain amounts’ included in tax returns relating to corporation tax, VAT or income tax, including amounts collected via PAYE.

The new regime is intended to reduce the legal interpretation portion of the tax gap – the difference between the tax HMRC collects and what it thinks is due. Legal interpretation tax losses arise where HMRC and the taxpayer disagree about what the law means, resulting in a different tax outcome, but where there is no avoidance.

The new rules define an amount as an “uncertain amount” if one or more of three triggers are satisfied. The first trigger is that a provision has been made in the business’s accounts in accordance with GAAP to reflect the probability that a different tax treatment will be applied to the transaction to which the amount relates.

The second trigger is that the tax treatment of the amount relies wholly or partly on an interpretation or application of the law that is not in accordance with the way in which it is known that HMRC would interpret or apply the law.

The third trigger is that it is reasonable to conclude that, if a tribunal or court were to consider the tax treatment of the amount there is a substantial possibility that the treatment would be found to be incorrect in one or more material respects.

“Although HMRC has sought to limit the scope of the notification requirements by applying a £5m threshold below which uncertain tax treatments do not need to be notified, the regime will still impose significant burdens and challenges on large businesses,” said Hatice Ismail, a corporate tax expert at Pinsent Masons.

“These challenges include having to identify what the ‘known’ position of HMRC is for the purposes of the second trigger, given a broad definition in the draft legislation of when HMRC’s position is treated as ‘known’, and the potential difficulty in calculating the ‘expected amount’ in relation to an ‘uncertain amount’ for the purposes of applying the £5m threshold test,” she said.

The draft legislation provides that HMRC’s position on a matter is taken to be ‘known’ by a business if it is apparent from guidance, statements or other material of HMRC that is of general application and in the public domain, or dealings with HMRC by or in respect of the business, whether or not they concern the amount in question or the transaction to which the amount relates.

The threshold test is met if it is reasonable to conclude that, by bringing the uncertain amount into account the business would obtain a tax advantage it would not obtain if the uncertain amount were the ‘expected amount’, and in the relevant period, the aggregate value of all tax advantages that would be obtained by bringing the uncertain amount and any related uncertain amounts into account is more than £5m.

The ‘expected amount’ is defined according to which trigger is satisfied. It will be the amount that it is reasonable to conclude the uncertain amount would be if the tax treatment applied was the treatment for which provision has been recognised in the accounts, the tax treatment that is in accordance with HMRC’s known practice or the tax treatment that the court or tribunal would find to be correct.

Ismail said: “It is helpful that the triggers have been slimmed down and become more focussed on matters of legal uncertainty rather than differences of opinion relating to valuation or calculation that are unrelated to legal uncertainty. A specific provision that largely excludes transfer pricing is also helpful in this regard.”.

Transfer pricing adjustments are to be excluded from the regime unless a provision in the accounts is made for the uncertainty or the treatment diverges from known HMRC practice.

“Triggers one and three appear to overlap but trigger three, which looks at how a tribunal or court might view a transaction, appears to have a lower threshold for being met than making an accounting provision for an uncertain tax outcome under trigger one, although there is no percentage threshold specified in the draft legislation for trigger three,” Ismail said. “Trigger one appears to be included, notwithstanding applying in narrower circumstances than trigger three, because it is obvious to the taxpayer that a trigger for notification has been met where a provision for an uncertain tax position has been made in the accounts.”

No notification to HMRC is required where HMRC has already been provided with all, or substantially all, the information about the uncertainty that would have been notified. The scope of this exemption will need to be clarified by guidance, but it appears broad enough to cover sufficiently detailed discussions about the uncertain tax position that the taxpayer has had with its Customer Compliance Manager (CCM), Ismail said.

“HMRC should make it clear by way of guidance, or preferably in the legislation itself, that it is not critical for the purposes of the exemption that HMRC has to have been previously made aware of the amount that would be notified, as opposed to the facts and tax treatment adopted,” she 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.

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. These have been abandoned, with the seven triggers having been distilled down to three in the latest proposals.