HMRC has been issuing both accelerated payment notices (APNs) and follower notices (FNs) to many businesses that have used disclosed tax avoidance arrangements on its hit list; an updated list of the reference numbers for the schemes that are affected was published in April 2016. Therefore, many companies may now need to revisit how they report the tax liabilities on such arrangements in their accounts.
Both IAS 12 and FRS 102 (section 29) require current tax to be measured using the tax rates and tax laws that have been enacted or substantively enacted at the period end. Deferred tax is similarly measured based on tax rates and laws expected to apply when the deferred tax is realised or settled, where those tax rates and tax laws that have been enacted or substantively enacted at the period end.
In some circumstances, it may not be clear how a particular requirement of tax law applies to a specific transaction, meaning that the tax amount included in the annual accounts may be based on certain assumptions or estimates. In most cases where tax avoidance arrangements were used, the company will be under tax investigation and will have received an APN demanding payment of back taxes (even though the tax dispute itself is far from finalised). Such circumstances will result in a degree of uncertainty in the calculation of tax charges and balances when the financial statements are being finalised.
Neither IAS 12 nor FRS 102 (section 29) explicitly addresses these circumstances. Preparers might consider the requirements relating to provisions (ie IAS 37 and FRS 102 (section 21)) and apply those by analogy. IAS 12 specifically requires any tax-related contingent liabilities and contingent assets to be disclosed in accordance with IAS 37. FRS 102 requires disclosure of information to enable evaluation of the nature and financial effect of the current and deferred tax consequences of recognised transactions and other events. Both IFRSs and FRS 102 require disclosure of key sources of estimation uncertainty where there is significant risk of a material adjustment in the next financial year (IAS 1 and FRS 102 (section 8.7)). In addition, UK companies that prepare a strategic report must provide a description of their principal risks and uncertainties, which may include taxation risks.
Where a company has received an FN as well as an APN, it is likely that there will be some certainty over the final liability, although HMRC does not always calculate past liabilities accurately. However, where only an APN has been received and the dispute has yet to go through the courts, there will be an immediate tax liability that could eventually be unwound if HMRC’s challenge to the original tax arrangement eventually fails in court. Alternatively, the company may wish to achieve tax certainty by exiting the arrangement and negotiating a settlement with HMRC.
The IFRIC issued a [Draft] IFRIC Interpretation Uncertainty over Income Tax Treatments in 2015. The comment period ended on 19 January 2016 and the staff are currently analysing the comment letters received.
Finally, the Financial Reporting Council (FRC) announced in December 2015 that it will conduct a thematic review of companies’ tax reporting to encourage more transparent recording of the relationship between the tax charges and accounting profit. The required disclosures are key to helping users understand the significant factors that could affect that relationship in the future. As part of this review, the FRC indicated that it plans to take a particular interest in:
- The transparency of tax reconciliation disclosures and how well the sustainability of the effective tax rate is conveyed, and
- Uncertainties relating to tax liabilities (and assets) where the value at risk in the short term is not identified.
Companies that have used tax schemes in the past should take expert advice on their current and future tax liabilities, how to resolve the ongoing dispute with HMRC and how the tax position must be reported in their accounts.