Notification of uncertain tax treatments – updated HMRC guidance
Updated draft HMRC guidance gives further details on how UTT notification will operate, including the general exemption and the de minimis.
Updated draft HMRC guidance gives further details on how UTT notification will operate.
HMRC have published updated draft guidance on the new requirement for large businesses to notify HMRC of uncertain tax treatments adopted. The guidance gives further details of how the requirement will operate, including how businesses can qualify for exemption from notification and the practicalities of notifying. Given that the notification regime starts for returns due to be filed on or after 1 April 2022, and will therefore apply to transactions happening now, businesses need to begin to consider how they will approach this.
A requirement is being introduced for qualifying large companies and partnerships (broadly companies and partnerships with UK turnover greater than £200 million per annum or a UK balance sheet total over £2 billion) to notify HMRC where they have adopted an uncertain tax treatment (UTT) in VAT, corporation tax, or certain income tax (partnership and PAYE) returns due to be filed on or after 1 April 2022.
For these purposes, an UTT is defined by reference to two ‘triggers’. Broadly, that a provision has been made in the accounts for the uncertainty, or that the position taken by the business is contrary to HMRC’s known interpretation or application of the law (as stated in the public domain or in dealings with HMRC). The stated aim of the UTT measure is to promote early identification and disclosure of tax uncertainties by in-scope large businesses to HMRC, with the aim of significantly increasing the speed with which the customer’s tax position can be resolved.
The requirement to notify is subject to a £5 million de minimis threshold (per tax, per year) and two exemptions – a general exemption based on advance disclosure to HMRC (which meets certain requirements) and an exemption from corporation tax notification for certain UK-UK group transactions.
Many areas of tax law involve judgmental points which might therefore be regarded as inherently uncertain; e.g. whether particular items are capital or revenue, or some transfer pricing related matters. The revised guidance makes clearer that whether points need to be disclosed depends on the mechanical triggers, so for example on whether HMRC’s guidance on factors relevant to these subjective questions have been considered. Interestingly the draft guidance now includes an example of where transfer pricing is uncertain by virtue of not being in accordance with HMRC’s known position, which illustrates that transfer pricing uncertainties will not be exclusively confined to the provisions trigger.
HMRC initially issued draft guidance in August 2021 following the first iteration of draft legislation. On 18 January 2022 HMRC published new draft guidance which reflects the latest version of the draft legislation and provides a number of helpful clarifications and examples of how the requirement will operate in practice. Some of the key points from this include:
Form and content of notification
Notifications will be made via a digital form which will be accessible from within the business’s Government Gateway account. Agents will be able to submit these on behalf of taxpayers if required. A separate notification form is required for each tax. If there is more than one uncertainty for a tax e.g. VAT, these can be included on the same form but must be disclosed separately.
At this stage the draft guidance gives little detail on the content of the notification. Among the information that HMRC note may be required to be included are a description of the transaction/tax issue, a brief explanation of the uncertainty, brief reference to any relevant statute, case law and HMRC guidance to which the uncertainty relates, and an indication of the amount of tax advantage relating to the uncertainty. It is disappointing that the updated guidance does not include any sample explanations of uncertainty (which are, for example, provided in the guidance notes to US Schedule UTP Form 1120) that provide more clarity on the level of detail HMRC expect to be provided. This is particularly so as the rules operate in such a way that an understanding of the notification requirement is needed in order to properly assess whether an exemption from notification is available. More positively, however, the updated guidance did add the word ’brief’ before explanation and reference in the requirements listed above.
HMRC’s known position
Within the guidance there is a list of publications which do or do not contain HMRC’s known position. Following stakeholder feedback, explanatory and technical notes have been moved from not needing to be considered to now needing to be considered.
There is also greater clarity on what steps HMRC would expect a taxpayer to go through in seeking to identify whether there is a ‘known position’ and what to do where there is more than one ‘known position’.
Where two (or more) HMRC publications set out a contradictory position, the guidance advises the taxpayer should take the most recently updated to be HMRC’s known position.
As noted in the previous iteration of the guidance this trigger does not apply where there is no known position.
£5 million de minimis threshold
Notably the guidance confirms that where there is an uncertain tax treatment adopted in relation to VAT output tax, for the purposes of determining whether the ‘tax advantage’ amount exceeds £5 million, “netting of input tax against output tax is inappropriate”. This had previously been unclear from the draft legislation however, there are examples in the guidance to illustrate this.
Similarly, for corporation tax, the guidance confirms that where the amount of income leading to chargeable profits is uncertain, amounts of group relief that are utilised or could be utilised, or repayments of directors’ loans to close companies, are to be ignored.
A new page of guidance, UTT14310, gives further details on the requirement to notify where the UTT results in a ‘tax advantage’ in the form of a loss.
The general exemption
The guidance provides welcome further information on how businesses can utilise the general exemption. Information is taken to be available to HMRC (paragraph 18(2)) if it is provided by another specified regulatory requirement (e.g. the disclosure of avoidance schemes rules), or ‘in dealings with HMRC’. In respect of the latter, HMRC encourages seeking exemption through early engagement and the guidance helpfully states that “HMRC’s aim is to provide assurance to customers that they have provided the appropriate types of information in sufficient detail to achieve exemption”.
The guidance notes that large businesses can discuss uncertain tax treatments with their Customer Compliance Manager (CCM), or if they do not have a CCM they can approach the Mid-Size Business Customer Support Team via HMRC’s website. Taxpayers will be required to provide similar level of detail as would be required in a formal UTT notification and HMRC will confirm when the general exemption has been met but they note that this does not mean confirmation of the tax treatment.
Discussions with HMRC prior to 1 April 2022 in respect of uncertainties in returns which will be filed after 1 April 2022 may satisfy the general exemption. HMRC advise that taxpayers keep a record of such interactions as evidence of the disclosure having been made, and that they aim to indicate to HMRC during such discussions that they intend to satisfy the general exemption.
It is welcome that the guidance also now confirms that where a non-statutory clearance application has been submitted, provided that the business treats the transaction in accordance with how it was outlined in the clearance request, then it need not notify. However, if there is a change in either the transaction or its tax treatment HMRC would need further information and uncertainty remains as to the degree of change required before the exemption would cease to be available.
Interaction with Senior Accounting Officer (SAO) and Business Risk Review (BRR)
For businesses within the SAO rules, the guidance notes that HMRC would not ordinarily expect an SAO certificate to automatically be qualified due to a UTT notification. This is on the basis that the primary focus of SAO is ensuring companies have effective accounting processes in place, whereas UTT is identifying specific uncertain transactions.
Similarly, the making of a UTT notification would not automatically mean that a business could not be ‘low risk’ under HMRC’s BRR process. However, HMRC also note that they would expect low risk businesses to engage with them in real time, and that when giving a risk rating it will be “important to consider the nature of any notification, or notifications, and what it is indicating about a customer’s approach to tax compliance and engagement with HMRC in line with the Low Risk Criteria in TCRM3660”.
What happens after notification?
The guidance suggests that upon filing of a notification an automatic receipt of submission will be given. HMRC will then risk assess notifications and will contact some taxpayers depending on the outcome of this risk assessment to establish further details. The guidance also indicates that taxpayers making notifications will at some stage receive confirmation of whether the notification has been validly made however the timing of this is not clear at this stage.
To incentivise early dialogue, HMRC note that where taxpayers “who notify formally ask HMRC for early certainty about whether the tax treatment adopted can be agreed, HMRC will assist if possible but will not prioritise this over supporting customers who engage early and seek exemption in good time.”
HMRC are inviting businesses to provide feedback on the draft guidance until 1 February. They intend to publish the final version of the UTT technical guidance by 28 February 2022 and we can expect this to include final confirmation of the notification content.
Given that the notification regime starts for returns filed on or after 1 April 2022, transactions being undertaken now may require to be notified – particularly for corporation tax. While the final details of what needs to be reported in a notification are still to be confirmed by HMRC, businesses need to begin to consider whether and how they intend to access the general exemption from notification now and collate evidence that is fit for purpose.
If you would like to discuss this further please speak to your usual KPMG contact.