Notification of uncertain tax treatments: What do large professional services firms need to know?
Since 1 April 2022, there are new rules which require large partnerships and companies to report uncertain tax treatments (UTT) of items in their tax returns to HMRC. Disputes over the ‘legal interpretation’ of tax rules account for a sizeable chunk of the UK’s ‘tax gap’ (£5.8bn for 2019/20 as estimated by HMRC) and this new requirement is intended to help HMRC both quantify the value of such interpretation differences and reduce the number of cases where contentious disputes arise.
The business has to notify HMRC when its tax position is uncertain on any specific issue, broadly where it is not clear that the business’s treatment is correct. It is designed to encourage large businesses to discuss areas of uncertainty with HMRC in real time before filing tax returns. Most large businesses have a Customer Compliance Manager (CCM) at HMRC, so this tends to happen already, but the new rules put this approach on a legal footing.
The rules apply for all tax returns due to be filed on or after 1 April 2022 – so a reporting requirement could arise for transactions that have already happened. The requirements cover uncertainties for:
The notification requirement applies separately in relation to each relevant tax.
There is an ‘uncertain tax treatment’ if one or both of the following triggers apply:
1) Accounting provision - a provision has been recognised in the accounts of the company or partnership to reflect the probability that a different tax treatment will be applied to a transaction to which the amount relates
2) HMRC’s known position - The business’s approach to the treatment is contrary to the way in which it is known that HMRC would interpret or apply the law. Here “known” means contained in HMRC published guidance, statements or other material, or from dealings by, or in relation to, the taxpayer with HMRC.
A company or partnership is within scope of the rules in any financial year if, in the previous financial year, it had either (or both) of:
Where a company is a member of a group (51% test), the £200 million turnover and £2 billion balance sheet total limits cover the whole group. However, partnerships are not considered to be part of a group, so the limits always apply to individual partnerships (ie they are considered on a stand-alone entity basis) and their corporate members and/or corporate subsidiaries are considered separately.
The legislation takes a risk-based approach so is focused on large discrepancies – hence notifications will only be required from qualifying businesses if the tax at stake is £5 million or more. This limit is applied per uncertain amount and is only aggregated with any related uncertain amounts in the same period, ie those relating to the same tax and substantially the same uncertainty. For example, if there is corporation tax of £6 million at stake in respect of one uncertain amount, a notification may be required. If the amounts at stake are corporation tax of £3 million and PAYE of £3 million, notification will not be required.
Finally, a general exemption applies if the business has already informed HMRC of its tax treatment in respect of the uncertain amount by, for example, giving full details to its CCM or making a clearance application. If it has done so, the business should obtain confirmation from HMRC that the exemption is met to ensure that a separate notification is not required.
As with all compliance obligations, the new notification requirement has general deadlines for notifying HMRC – these broadly follow the relevant tax return filing deadline.
There are significant fixed ‘failure to notify’ penalties as follows:
It will not come as a surprise that the operation of the rules to partnerships is not straightforward. We have actively engaged with HMRC in order to obtain some certainty for large partnerships.
If your firm meets the size criteria to fall within the UTT rules, then it is important that leaders in the business and those handling the firm’s tax reporting are aware of the rules and the sorts of tax issues that may trigger the need to report to HMRC. Key management issues to consider will also include:
Read our UTT guide for further details on how our award winning Tax Assurance and Risk Management team can help your business to develop a governance and risk framework to manage your business’s obligations under the UTT rules.