Notification of uncertain tax treatments regime moves a step closer with launch of second consultation.
As expected, Tax Day saw the publication of a second consultation on notification of uncertain tax treatments by large businesses. This is a great example of why businesses should engage with consultations on tax policy as it is clear that the Government has acted on the feedback received as part of the first consultation. A 12-month delay in implementing the requirement had already been announced and the revised proposals set out in the second consultation involve substantial changes to almost all aspects of the original proposal. Of particular interest to the large businesses within the scope of this measure will be the seven triggers which HMRC are proposing would be used to identify what tax treatments are uncertain. Responses to the second consultation are due by 1 June 2021, which is a relatively tight timeframe aimed at allowing draft legislative clauses to be published over the summer.
The second consultation sets out and seeks views on a revised policy design which takes into account responses received to the previous consultation. The measure is expected to apply from April 2022.
Policy objectives and scope
The policy is aimed at helping to reduce the legal interpretation portion of the Tax Gap (£4.9 billion per the 2020 report) and HMRC believe that the measure will enable them to “identify and clarify uncertainties earlier than they would otherwise be identified (if at all) and identify businesses that are pushing the legal boundaries, to create a level playing field”. The revisions made to the proposals are aimed at balancing the objective of speed and efficiency of intervention by HMRC with the additional compliance burden placed on large businesses.
Businesses in scope
There are no major changes to report on the businesses in scope. Suggestions that entities that are signatories to the Banking Code of Practice should be excluded from the regime have not been adopted as the Government is of the view that it is not necessary to explicitly exclude such businesses, although there will be no need to separately disclose arrangements subject to Code clearance.
The second consultation confirms the Government’s intention is that the notification requirement will apply to partnerships and LLPs that satisfy the size criteria as well as corporates. The size criteria remain unchanged with businesses that have turnover above £200 million or a gross balance sheet total above £2 billion expected to be within the scope of the measure.
The consultation clarified that an asset manager business’s turnover and balance sheet threshold calculation should not include the attributes of fund portfolio companies. The Government’s intention is that collective investment schemes which meet the turnover or asset test will be excluded from the scope of the legislation.
Businesses without a Customer Compliance Manager
An important point which has been acknowledged in the second consultation is that not all the businesses within the scope of the measure have a HMRC Customer Compliance Manager assigned to oversee their tax affairs. HMRC have recognised that to ensure equal treatment it is important that these businesses have an equivalent channel through which they can discuss any uncertainties with HMRC so they are not required to make notifications. It will be interesting to see how many businesses there are in this category (the consultation suggests very few) and what measures HMRC will put in place to level the playing field.
Taxes in scope
The range of taxes in scope was originally proposed to be modelled on the Senior Accounting Officer regime but it is now proposed that notification will only cover Corporation Tax, Income Tax (including PAYE) and VAT.
Key areas under consultation
The key areas of focus for the consultation are: (i) the definition of uncertain tax treatment; (ii) the threshold for notification; (iii) exclusions from the requirement to notify; and (iv) the proposed penalty for non-compliance.
Definition of uncertain tax treatment
The most significant concern with the original proposal was that the definition of an uncertain tax treatment was not sufficiently clear and a more objective definition was needed to enable taxpayers to assess whether they need to notify.
The second consultation seeks to address this concern by proposing seven triggers for identifying whether a tax treatment is uncertain. This is the most critical aspect of the consultation and businesses will want to study the detail carefully here.
Some of the triggers should come as no surprise to those familiar with the US and Australian notification regimes – they focus on: (i) treatments for which the accounting treatment recognises there is an uncertain tax position; and (ii) where a taxpayer adopts a position contrary to HMRC’s known position per published guidance or private correspondence with that taxpayer.
However, there are a number of additional triggers which widen the scope of the measure considerably. Of particular note is the trigger based on where there is a new or novel product, transaction or business structure where there are various ways that it can be treated and HMRC’s position is not known. Also potentially contentious is a trigger based on having received conflicting or unsupportive advice, with the risk that the regime disincentivises taxpayers from seeking objective advice or taking account of a range of views.
The consultation acknowledges that transfer pricing remains a difficult area and invites comments on the appropriateness of each of the proposed seven triggers for determining when transfer pricing positions are uncertain. The timing of the consultation on transfer pricing documentation does not appear to be a coincidence and businesses will want to carefully consider the combined effect of these two significant measures.
Threshold for notification
An important change which will be welcomed by businesses is the proposed increase in the de minimis threshold from £1 million to £5 million. The applies consistently across all three taxes in scope and is based on the tax amount.
A two-stage test is proposed which looks first at determining if the total tax impact of the tax treatment is £5 million or above and then secondly whether the (biggest) tax difference between the taxpayer’s treatment and HMRC’s expected treatment is more than the £5 million tax threshold. Where HMRC’s position is unknown, or the taxpayer is unable to calculate the difference between their position and HMRC’s, then the step one test would be applied.
Proposed penalty for non-compliance and administrative requirements
There have been some refinements to the administrative requirements, most notably that separate notifications will be made for Corporation Tax, Income Tax and VAT and these will be timed to coincide with the due dates for annual returns or the last periodic return for the tax year where returns are not annual. Another welcome development is that the proposed £5,000 penalty for non-compliance will be levied on the business rather than an individual with the exception of partnership returns.
If you have comments you would like to be considered for inclusion in KPMG’s response to the consultation, please speak to your usual KPMG contact. Affected businesses should also consider submitting their own response to HMRC.
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