The run-up to Tax Day brought plenty of speculation about what HMRC might announce. Come the day, one of the less heralded – but potentially most significant – developments was the latest rules on uncertain tax positions (UTPs).
It’s fair to say that the changes are causing some confusion among businesses. This was evident when we brought tax leaders together in June for a webinar: Keeping control of your uncertain tax positions.
So what are the new rules? And how can large organisations go about complying with them?
Triggers and exemptions
Under the proposals, a tax treatment is considered uncertain, and should be disclosed to HRMC, if any of the following triggers applies:
- A provision has been recognised in the organisation’s accounts in line with accepted accounting practice, to reflect the possibility that a different tax treatment may be applied to the transaction, to that which formed the basis for the amount included in the associated tax return.
- The tax treatment relies (wholly or in part) on an interpretation or application of the law that’s different to how HMRC would interpret or apply the same law.
- There’s a substantial possibility that a tribunal or court would deem the treatment incorrect in one or more material respects.
However, there are three exemptions to these rules, under which positions won’t need to be disclosed:
1. General exemption
Uncertain amounts included in tax returns aren’t notifiable if it’s reasonable to assume that HMRC already has the relevant information relating to those amounts.
This information includes:
- Interactions with HMRC – e.g. with the firm’s Customer Compliance Manager (CCM).
For large businesses without a CCM, HRMC’s Customer Engagement Team will provide structured opportunities to discuss uncertainties before filing tax returns.
- Information already disclosed to HMRC through formal channels.
This might be under disclosure of tax avoidance schemes rules, international movement of capital reporting, or mandatory disclosure regulations
Guidance on these information requirements is due from HMRC. Businesses will need to consider how this affects their approach to communications with HMRC.
2. Exemption for group transactions
For corporation tax, there’s no requirement to notify in cases where:
- The uncertain amount relates to transactions between members of the same corporate group and;
- The net overall tax advantage to the group would be below £5 million.
3. Exemption for transfer pricing and profit attribution
Earlier HMRC proposals met with widespread feedback that transfer pricing should be excluded from disclosure requirements, as it’s an inherently uncertain area.
The uncertainties surrounding transfer pricing are primarily about how to apply the arms-length principle. The argument goes that this is an economic judgement, not a matter of legal interpretation.
In response, HMRC opted to exclude transfer-pricing and profit-attribution uncertainties under the third trigger. However, treatments for which a provision has been made in the accounts, or which run contrary to HMRC’s known position, remain in scope. As do treatments where the uncertainty relates not to the arms- length principle, but to other aspects of transfer-pricing legislation – for example, whether the participation condition is met.
Financial penalties for not complying with the new provisions will be £5,000 for the first failure to notify, rising to £25,000 for the second and £50,000 for the third.