The HMRC has published guidance for the notification of uncertain tax treatment (NUTT). The Tax Faculty's business tax manager, Richard Jones, discusses some of the unanswered questions around this regime and examines the criteria for applying the uncertain tax treatment.
Over the summer, draft legislation and guidance were published in relation to the new requirement for large businesses to notify HMRC of uncertain tax treatment they have adopted in their corporation tax, income tax and VAT returns. The notification of uncertain tax treatment (NUTT) regime will require large businesses (companies and partnerships) to make a notification if a relevant return is delivered to HMRC that includes an amount that is ‘uncertain’.
The NUTT regime in overview
The draft legislation, published 20 July 2021, sets out three criteria for a treatment to be considered uncertain. If any of these criteria are met, a notification is required, unless the general or a specific exemption applies. In HMRC’s second consultation document on NUTT, seven triggers (A-G) were mooted; consolidation to just three criteria is a significant and welcome simplification. There will be some difficulties around the application of these criteria though, as highlighted opposite.
Broadly speaking, a business falls within NUTT for a financial year if, in the previous financial year, it had either or both of the following:
- relevant UK turnover of more than £200m; and
- a relevant UK balance sheet total of more than £2bn.
Entities within groups (broadly, a 51% effective group) need to aggregate the UK turnover and UK balance sheet total of all other entities within the group to determine whether one or both of these thresholds are met.
UK resident entities must take their worldwide figures as their UK turnover and balance sheet total respectively. Where any entity is non-UK resident, its UK turnover or balance sheet total is the amount that, on a just and reasonable apportionment, is attributable to its activities within the charge to UK corporation tax (for companies) or to any permanent establishment it has in the UK (for partnerships). Application of this subjective test could lead to some interesting arguments about whether a business falls within the size criteria.
The taxes within the scope of NUTT are corporation tax, income tax (when returned in a partnership business or PAYE return) and VAT. Separate notifications are required for each tax and each entity must make its own notifications (except that the representative member of a VAT group should make VAT notifications for the whole group).
Where the tax return concerned is an annual return (eg, a corporation tax return), the notification must be given on or before the date on which the return is required to be made. For non-annual returns (eg, quarterly VAT returns) the notification must be given on or before the date on which the last return period ending in the financial year is due.
HMRC’s guidance gives the example of a company with an accounting year end of 31 December and VAT quarters that follow the calendar year. In that case, the last VAT return for the financial year ends on 31 December and is due to be submitted by 7 February of the following year. Hence, if there are any uncertain VAT amounts in any of the VAT returns for that year, they need to be notified by the first 7 February following the end of the year.
The regime applies to relevant returns that need to be made on or after 1 April 2022. These examples illustrate how this applies in practice.
- A company has an accounting year-end date of 30 June. Its corporation tax return for the year ended 30 June 2021 will be due by 30 June 2022. Hence, any uncertain position included in this return will need to be notified by 30 June 2022, assuming all other conditions are met. It is therefore possible that the company has already taken positions that need to be notified.
- The same company has VAT quarters that follow the calendar year. The first VAT return that needs to be submitted after 1 April 2022 is the return for the quarter ended 31 March 2022, which must be submitted by 7 May 2022. The final VAT return for the company’s financial year (ending 30 June 2022) is due on 7 August 2022, so notification of any uncertainties in these two VAT returns (but not in earlier ones, as they are outside scope) would also be due by 7 August 2022.
- The company also pays its employees on the 25th of each month and files its full payment submission on the same day. Hence, the first PAYE return that falls within the rules is for the month ended 25 April 2022. However, as the financial year of the company does not end until 30 June 2022, notification is not required until 25 June 2022 for any uncertainty arising in any PAYE returns for April-June 2022.
Uncertainties around uncertainties
The primary difficulty lies in the criteria around what constitutes an uncertain tax treatment. While HMRC’s draft guidance is easy to read, it leaves many questions unanswered.
Criterion 1 – provision for tax uncertainty made in the accounts
This applies where a provision has been recognised in the accounts of the qualifying company or partnership in accordance with GAAP to reflect the probability of an additional tax liability arising on a transaction.
Many businesses within the regime will prepare accounts in accordance with IFRS, applying IAS 12, following the guidelines in IFRIC 23. Those guidelines set out how to reflect uncertain income tax treatments in an entity’s accounts where it concludes that it is not probable that a treatment taken, or expected to be taken, in a tax return will be accepted by the relevant tax authority. I assume that this criterion has been formulated using IFRIC 23 as a model and that a treatment which is uncertain but will probably be accepted by the tax authority will not need to be notified.
Several questions remain:
- Should the notification cover any additional deferred taxes provided for or just current taxes?
- If the entity uses the expected value method to account for a range of possible tax outcomes in relation to a particular transaction, what value and what details about those potential outcomes should the business disclose?
This second point is particularly important because transfer pricing issues have not been scoped out of this criterion. Businesses may find themselves notifying many more transactions than HMRC has the capacity to investigate.
Criterion 2 – HMRC’s known position
This criterion applies where a tax treatment has been adopted that relies on an interpretation of the law that differs from HMRC’s known position. The draft guidance states that HMRC’s position is taken to be known if it is apparent from guidance and other material readily available in the public domain, or from the business’s correspondence with HMRC (such as discussions with its customer compliance manager or a written view from HMRC of the correct treatment). The guidance sets out an example list of the types of publication that indicate HMRC’s known position. Surprisingly, explanatory and technical notes relating to legislation are excluded.
HMRC accepts that its guidance can sometimes be out of date or contradictory but provides little guidance on how to deal with this. HMRC only accepts that a notification is not required where the guidance is obviously outdated or contradictory. ICAEW’s Tax Faculty has suggested HMRC accepts that where a business has done its best to ascertain HMRC’s position and reasonably concluded that no notification is required, it would have a reasonable excuse for not making a notification.
Criterion 3 – Substantial possibility
This criterion is met where there is a substantial possibility that a hypothetical tribunal or court would find a position taken in the business’s return to be incorrect in at least one material respect. HMRC’s draft guidance includes some example factors that indicate that the substantial possibility test has been met. However, most of these (such as whether different advisers recommend different tax treatments or the business’s risk management process recognises a high risk of the filing position not being sustained) relate to the views of parties other than a hypothetical court, which seems a little counter-intuitive. Perhaps a better way to consider this test is whether the business can envisage an alternative treatment to the one adopted that has realistic merit.
The threshold test
An uncertain position only needs to be notified where the related tax advantage is £5m or more. The tax advantage is the difference between the ‘uncertain amount’ (the amount actually accounted for by the business in its relevant tax return) and the ‘expected amount’ (the amount that would need to be accounted for if the treatment were found to be incorrect).
This sounds like a straightforward test, but could be hard to apply in practice where:
- there is more than one alternative treatment to the one adopted in the tax return (especially relevant where criteria 1 or 3 apply);
- for criterion 1, where the provision made includes both current and deferred taxes; or
- the tax advantage arising is a deferral rather than a reduction in tax.
HMRC’s guidance suggests that where more than one criterion applies, each with a different expected amount, the amount to be used is the one that gives the biggest tax advantage. Presumably this principle also applies where there are multiple alternative treatments under the same criterion, although this is not clear.
Where two uncertain amounts are related, they must be aggregated in determining whether the £5m threshold test is met. Two amounts are related if:
- the amounts are included in a return or returns of the same description for the same relevant period;
- the amounts relate to the same relevant tax; and
- the tax treatment applied in arriving at one amount is substantially the same as the tax treatment applied in arriving at the other amount(s).
HMRC’s guidance provides little assistance on ‘substantially the same as’. However, it confirms that although national insurance contributions (NIC) are not a relevant tax within scope of NUTT, they are aggregated with an uncertain income tax treatment in determining the expected amount where the NIC treatment is substantially the same as the related income tax treatment.
It is not entirely clear, but it appears that other taxes are considered separately. For example, only related corporation tax amounts would be aggregated with other corporation tax amounts.
Under the general exemption, no notification is required where it is reasonable to conclude that HMRC has all the information relating to an uncertain amount. The implication is that the business must have already pointed out the uncertainty to HMRC. Crucially, it is HMRC’s view that information has not been made available to it where it is provided by another group company or partnership.
HMRC’s guidance states that one of the ways that information may be provided is via a statutory or non-statutory clearance request. However, where clearance was not granted by HMRC but the transaction was still implemented “notification of an uncertain tax treatment will likely still be required”– a little counter-intuitive.
The following specific exemptions apply:
- For corporation tax only, there is an exemption for intra-group transactions where the overall net tax advantage is below the £5m threshold.
- Where only criterion 3 is met, no notification is required for:
- transactions involving the attribution of profits to a non-UK resident company; or
- uncertainties regarding the pricing of related party transactions (ie, transfer pricing arrangements).
At the Autumn Budget on 27 October 2021, it was announced that the third criterion triggering a notification – where there is a substantial possibility that a tribunal or court would find the taxpayer’s position to be incorrect in material respects – would not apply from when the notification of uncertain tax treatment rules come into force on 1 April 2022. However, this criterion is being considered further by the government and may be included from a later date.
About the author
Richard Jones, Business Tax Manager, Tax Faculty