HMRC wants large businesses to notify if tax arrangements legally questionable

HMRC is consulting on proposals, first advanced in the Budget, that the UK’s largest businesses will be required to notify HMRC where they have adopted an uncertain tax treatment, in a bid to close the £6.2bn legal interpretation tax gap

The proposal is designed to improve HMRC’s ability to identify issues where businesses have adopted a different legal interpretation to HMRC’s view.

The notification requirement will be legislated in Finance Bill 2020-21 and apply to uncertain tax treatments in returns filed after April 2021.

HMRC says large business currently seek clearance and agreement in advance of undertaking transactions with an uncertain tax treatment where there is a statutory clearance procedure, but this is voluntary.

Where disagreements do arise, they can lead to protracted debate and ultimately to litigation – meaning substantial cost and time for both parties, and significant uncertainty for the wider community.

The new notification requirement will only apply to large businesses, including partnerships and LLPs as well as corporates.

The threshold will be modelled on the senior accounting officer (SAO) and the publication of tax strategies (PoTS) regimes.  Businesses fall within these regimes if they satisfy either or both of a turnover above £200m and/or a balance sheet total over £2bn.

Notifications will be required in respect of corporation tax, income tax (including PAYE), VAT, excise and customs duties, insurance premium tax, stamp duty land tax, stamp duty reserve tax, bank levy and petroleum revenue tax.

The policy will draw on IFRIC237, to help define uncertain tax treatments, as there are similarities. 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. The new 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.

It is proposed that the decision is made about whether a tax treatment is uncertain at the time businesses are required to submit a notification.

If a tax treatment becomes uncertain after that date (perhaps due to changes in case law) there would not be an expectation to revisit that year. However, if the tax treatment is ongoing, then a notification would be required in the subsequent year.

Uncertain tax treatments which, individually or combined (using the principles set out in IFRIC23 as to whether an entity considers uncertain tax treatments separately) amount to a maximum of less than £1m in the tax outcome, will not be notifiable.

While ‘uncertain tax treatment’ will be defined in legislation, HMRC will also provide clarity over certain general issues that it considers to be uncertain, and would expect to be notified. Such examples will be provided in public guidance.

Examples are the adoption of a tax treatment which is under dispute in the court; adopting a treatment which is contrary to HMRC’s stated view in a VAT brief or statement of practice; or adopting a treatment where HMRC clearance was requested and was not given.

The government proposes that the notification should be a single, annual process which encompasses all of the relevant taxes, similar to that used by the SAO regime. A return or certificate would not be required if there is no uncertain tax treatment to notify.

The penalty regime would also be modelled on that existing under the SAO regime, namely £5,000 on the entity for failing to notify HMRC details of the person liable to notify and £5,000 on the person liable to notify, or the entity, where they should have notified but failed to do so.

The consultation closes on 27 May 2020.

Notification of uncertain tax treatment by large businesses, issued 19 Mar 2020

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