Large businesses to notify HMRC of uncertain tax treatments
The government is introducing new rules from 1 April 2022 which require large businesses to notify HMRC when they take an uncertain tax position. HMRC has published draft guidance on the rules which have been laid out in Draft Finance Bill 2022.
Who is affected by the new rules?
The new rules on uncertain tax treatment (UTT) apply to large businesses and specific taxes. It applies to both companies and partnerships that meet the threshold criteria.
A business will fall within the regime if it has:
- A UK turnover above £200 million, and/or
- A UK balance sheet total over £2 billion.
The taxes within scope of the requirement to notify are Corporation Tax, Income Tax (when returned in a Partnership or PAYE return), and VAT.
When is a tax treatment deemed to be uncertain?
A tax treatment will be uncertain if it meets one of three tests.
Broadly, the tests cover:
- where a provision has been made in the business’s accounts under GAAP in respect of an uncertain tax outcome;
- where the position taken represents a divergence from HMRC’s known position; and
- where there is a substantial possibility that a tribunal or court would rule against the position taken by the taxpayer.
Where at least one of these criteria is met, there is only a requirement to notify if there is a tax advantage of £5 million or more. The amount of the tax advantage is determined by a comparison of the uncertain amount with the expected amount.
The definition of the expected amount is essentially the amount that a business will have to account for if the UTT applied is found to be incorrect.
The threshold test is met where it is reasonable to conclude that the tax advantage obtained as a result of taking the UTT into account will exceed £5 million in the relevant period for the relevant tax.
The £5 million threshold applies separately to each tax in each 12-month period.
What is a tax advantage?
For UTT purposes a tax advantage in relation to income tax or corporation tax includes:
- a relief or increased relief from tax;
- a repayment or increased repayment of tax;
- avoidance or reduction of a charge to tax or an assessment to tax;
- avoidance of a possible assessment to tax;
- deferral of a payment of tax or advancement of a repayment of tax;
- avoidance of an obligation to deduct or account for tax.
A business obtains a tax advantage in relation to VAT if:
- in a prescribed accounting period, the amount by which the output tax accounted for by the business is less, or is accounted for later, than would otherwise be the case;
- the business obtains a VAT credit when it would otherwise not do so or obtains a larger credit or obtains a credit earlier than would otherwise be the case;
- in a case where a business recovers input tax as a recipient of a supply before the supplier accounts for the output tax, the period between the time when the input tax is recovered and the time when the output tax is accounted for is greater than would otherwise be the case;
- in a prescribed accounting period, the amount of the business’s non-deductible tax is less than it otherwise would be;
- the business avoids an obligation to account for VAT.
Notification must be made on or before the filing deadline of the relevant return that is due after 1 April 2022. The notification requirement applies separately in relation to each tax.
To notify HMRC of an uncertainty, a business can provide details via a digital form which will be accessible from within the business’s Government Gateway account.
The UTT notification form will be available to access from April 2022 to notify HMRC of any uncertainties relating to relevant returns due after 1 April 2022. Notifications may therefore relate to transactions or tax treatments that occur prior to April 2022.
The deadlines for notifying HMRC of a UTT are as follows:
- where the relevant return is an annual return, the notification must be given on or before the date on which the return is required to be made;
- where the relevant return is not an annual return, the notification must be given on or before the date on which the last relevant return for the financial year in question is required to be made.
A business is not required to notify HMRC regarding a UTT amount included in a return, if it is reasonable to conclude that HMRC already have available to them all, or substantially all, of the information relating to that amount.
A business is liable to a penalty if it fails to notify HMRC of a UTT. Where there are multiple failures in respect of a notification requirement for a relevant tax only one penalty is chargeable.
The penalty amount varies according to whether it is:
- a first failure, resulting in a fixed penalty of £5,000, where the business has not, in any of the preceding three financial years, been assessed to a notification penalty in respect of the same relevant tax;
- a second failure, resulting in a fixed penalty of £25,000, where the business has been assessed to a first failure notification penalty and not already incurred a second penalty in the preceding three financial years in respect of the same relevant tax;
- a further failure, resulting in a fixed penalty of £50,000, where the business has been assessed to a second penalty or further failure penalty in the preceding three financial years in respect of the same relevant tax.
We will monitor developments relating to the introduction of these new rules and provide updates on any changes to the guidance. Please get in touch if you would like further information.