As HMRC finalises its guidance on notification of uncertain tax treatments, Business Tax Faculty Manager Richard Jones highlights the most significant points.
Finance Act 2022 includes provisions requiring large businesses to notify HMRC of positions they have taken in tax returns filed on or after 1 April 2022 that they consider to be ‘uncertain’. The legislation itself includes a number of uncertainties, many of which are thankfully explained in HMRC’s guidance, published in its Uncertain Tax Treatments by Large Businesses Manual.
But first, what has changed?
I wrote an article on the uncertain tax treatment provisions for the November 2021 issue of TAXline, based on the proposed draft legislation as it stood at that time. Between then and the legislation receiving Royal Assent, a number of changes were made. The most significant of these was the removal of the third notification criterion (the substantial possibilities test), although HMRC intends to keep this prospective criterion under review.
That just leaves two alternative criteria for something to be considered uncertain:
- a provision has been made for an additional tax liability in the accounts of the business (‘provision criterion’); and/or
- the business takes a position in a return that is contrary to HMRC’s known position (‘known position criterion’).
- One of the issues identified with the provision criterion is that it might be met at some point after the deadline for making the notification. This is most likely for PAYE and VAT returns. The normal deadline for notifications relating to such ‘non-annual returns’ is the deadline for the last relevant return in respect of the financial year of the business.
Example
A business has a 31 December financial year end. It submits a full payment submission (FPS) relating to its December payroll on 23 December 2023. As originally drafted, the legislation required the business to notify HMRC of any uncertainties in its PAYE returns for payroll periods in the 2023 financial year by 23 December 2023.
If the business has not made a notification for its 2023 PAYE returns and then subsequently files accounts for the year ended 31 December 2023 on 30 June 2024, including a provision for additional PAYE liabilities, the provision criterion may not have been met until some point between 31 December 2023 and when the accounts were filed on 30 June 2024. To deal with such cases, the legislation has been changed such that when the provision criterion is met after the normal notification deadline, the deadline is pushed back to the same date, but in the following financial year (ie, 23 December 2024 in this example).
It is good to talk
Moving on to the guidance, this includes an introductory section that makes it clear that HMRC’s intention for the regime is to encourage businesses to discuss tax uncertainties with their Customer Compliance Manager (CCM) or contact HMRC’s customer support team for mid-sized businesses in real time, rather than waiting to make a notification. If sufficient information is provided and documented at the time, this would allow the business to take advantage of the general exemption from formal notification in relation to the uncertainty concerned.
While HMRC is careful to stress that such upfront discussions are distinct from agreeing the tax treatment adopted, it “will normally aim to give a view on a transaction and/or issue with significant tax implications pre-filing where that is possible”.
Scoping it out
The taxes in scope are corporation tax, income tax (paid by partners on business profits and by employees on their remuneration) and VAT. Corporation tax includes the supplementary charge paid by oil companies, charges on loans by close companies to their participators and the equivalent charge relating to benefits conferred on participators. Corporate interest restriction disallowances are also included, but the banking surcharge and levy and charges under the controlled foreign company rules are excluded.
Bringing certainty to uncertainty
The areas in which businesses and advisers will need most help interpreting are the criteria for a tax treatment to be treated as uncertain.
One of the remaining uncertainties relating to the provision criterion is whether it only applies to provisions made where the business considers that it is more likely than not that a tax liability will arise over and above that included in its returns. That seems to be what the legislation and the guidance is saying, but it is important to remember that accounting provisions could be made where the business believes that an additional liability is less likely, which, it would appear, would not then trigger a notification obligation.
For the purposes of the known position criterion, HMRC has reclassified some types of its publications as ones that businesses can rely on in determining its position, including explanatory and technical notes relating to legislation. The only two that it explicitly excludes are advice provided via HMRC forums and submissions HMRC makes in litigation. The guidance also confirms that HMRC’s position can be ascertained from other dealings businesses have with it, including:
- discussions with its CCM;
- discussions with an HMRC Tax Specialist; and
- a written view of the correct tax treatment from HMRC.
However, any views expressed directly to a particular taxpayer or regarding a particular situation will not apply to other taxpayers or to other situations.
HMRC has also updated its guidance on the position where a business makes a statutory or non-statutory clearance. Where it either explicitly agrees or disagrees with the tax treatment set out in the clearance application, this can be taken as the expression of a known position by HMRC, unless the treatment or transaction actually undertaken is substantially different to that on which the clearance was requested. The guidance is silent on whether a refusal by HMRC to provide a non-statutory clearance because there are no genuine points of uncertainty confirms that the position is certain and that a notification is not required.
One of the biggest problems stakeholders have identified is the fact that HMRC’s guidance on a particular matter sometimes changes over time, or there are contradictory pieces of guidance in the public domain. How should businesses and advisers determine which of these is HMRC’s known position? The guidance helpfully provides a few rules of thumb on this.
- If HMRC’s position is ‘not known’, then there is no requirement to notify. However, it is not entirely clear what ‘not known’ means and there will always be room for interpretation. HMRC states that where it gives general guidance on a tax issue and there is no guidance on the nature of the facts HMRC would consider relevant when applying that general guidance, then there is not a clearly expressed known position for these purposes. Overall, this is still very subjective and I hope that HMRC will take a sympathetic view of businesses that have done their level best to establish HMRC’s position on a matter when it comes to charging penalties.
- Where two HMRC statements are contradictory, the known position is to be taken as the most recently published statement of the known position. However, it is not clear what ‘published’ means and what happens if it is difficult to determine which was published first.
What is your threshold?
Notification is only required where the ‘tax advantage’ arising from the issue in the year for a relevant tax is £5m or more.
HMRC has confirmed that the tax advantage calculation in relation to VAT output tax is not to be offset by any input tax credit, either within a VAT registration or between VAT registrations, even where there is a direct and immediate link, or the transactions are within the same corporate group. Similarly, any uncertain input tax treatment should be considered in isolation to any related output tax declared when determining the amount of the tax advantage.
It has also clarified that where both uncertainty criteria are met but result in different-sized tax advantages, the business should notify under the criterion that results in the largest tax advantage that exceeds the £5m threshold test. Where there are alternative HMRC known positions, the business should use that which results in the lowest tax advantage and compare that with the advantage under the provisions criterion.
There is still no guidance on how to deal with situations where the accounting provision is an average of multiple alternative tax positions.
Where two different taxes are in scope in relation to an uncertainty, the amount for each tax per financial year is considered separately in determining whether the threshold is met in each case and a notification is required for each tax that exceeds its threshold.
There is also detailed guidance on how to deal with situations where the uncertainty relates to a corporation tax loss. The requirements differ depending on whether the uncertain amount in the relevant return or the expected amount reflected in HMRC’s position on the accounting provision is a loss (or both). Also, when considering uncertain corporation tax profits, group relief used or available to use against chargeable profits is ignored.
Notification requirements
The guidance sets out the details that need to be provided on the online notification form and confirms that agents can complete this on their clients’ behalf. However, there are no examples given of explanations of the uncertainty concerned.
HMRC has confirmed that notifications or failures to notify have no direct read across to a business’s HMRC risk rating, although this would indicate to HMRC the approach the business takes to tax compliance and engagement with HMRC in line with the low-risk criteria. Furthermore, the guidance states that an unresolved uncertain tax treatment issue is unlikely to have any consequences relating to senior accounting officer certification.
General exemption
As explained above, if HMRC is already aware of the uncertainty and how the business plans to treat it, then the business need not bring it to HMRC’s attention again through the notification process. This includes discussions that businesses have had with HMRC before April 2022.
To protect its position, it is recommended that any business documents the discussions it has with HMRC (pre- and post-April 2022) and makes it clear that it expects the general exemption to apply. It is HMRC’s responsibility to confirm whether the exemption has been met. The Tax Faculty has requested that such confirmations are always given by HMRC to the business in writing.
Penalties and reasonable excuse
The guidance includes a useful table that shows how the value of penalties escalates from £5,000 to £25,000 and £50,000 for successive failures over a three-year period. Penalties arise on a per tax basis, meaning that a business with repeated failures across multiple taxes could suffer substantial monetary costs.
Detailed guidance in the first draft relating to reasonable excuse for compliance failures has been removed and replaced with a link to the relevant guidance in HMRC’s Compliance Handbook Manual. This ensures that any reader is following the most up-to-date guidance in this area, but there are also issues relating to the submission of online forms that would have been useful to address here, such as the possibility of leniency where a business inadvertently fails to complete a particular box in the form.
About the Author
Richard Jones, Business Tax Manager, Tax Faculty