With effect from 1 April 2022, certain large businesses are required to notify HMRC where they have adopted an uncertain tax treatment (UTT) in a tax return filed on or after 1 April 2022.  The new regime applies to Corporation Tax, Value Added Tax or Income Tax (via Self-Assessment or PAYE). 

To coincide with the introduction of the legislation (as part of Finance Act 2022), HMRC have published updated guidance on the UTT requirements to assist businesses understand when there is a need to notify HMRC and how to report. We have taken a look at the key requirements of the UTT legislation; how it will operate, how businesses can qualify for exemption from notification, and provided some early observations as to the practicalities of complying with the regime. 

Background

The UTT requirement applies to all qualifying large companies/groups (wherever incorporated) and partnerships (wherever formed) 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 in VAT, corporation tax, or certain income tax (partnership and PAYE) returns filed on or after 1 April 2022.

A UTT is classified by the legislation to exist where one of two criteria (“triggers”) are met; 

• a provision has been made in the accounts for the uncertainty,
• 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).

Given that many areas of tax law involve careful consideration of the facts and making judgments thereon, a degree of uncertainty has always been associated with assessing the “right amount of tax”. A basic example would be, whether expenditure on an asset is capital or revenue expenditure - in certain circumstances this can present a wide range of different tax outcomes. 

In revising their guidance, HMRC has addressed a number of concerns raised when the first draft guidance was published during the process of bring this legislation onto statute. The latest revision does seek to provide greater clarity and more examples as to whether tax positions need to be disclosed under the UTT regime.

Quantum of Uncertainty

The requirement to notify HMRC 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 (in certain circumstances) and an exemption from corporation tax notification for certain UK-UK group transactions (where the group tax advantage is a net nil). We will explore these aspects in more detail below.

HMRC’s stated policy objective for introducing the legislation is the promotion and early identification of tax uncertainties, with the aim of significantly increasing the speed with which the customer’s tax position can be resolved.  Many large businesses already have an open and transparent relationship with HMRC, identifying and resolving tax uncertainties through proactive engagement with HMRC through their Customer Compliance Manager (CCM) and as part of their Business Risk Review relationships.  Therefore, while “tax certainty” has long been a request of business from Government, it remains to be seen to what extent HMRC have the specialist resource and bandwidth to deliver on these stated aims. 

HMRC guidance

 The Uncertain Tax Treatment guidance reflects HMRC’s view of how the legislation should operate and provides a number of helpful clarifications and examples of how the requirement will operate in practice. 

Next steps

The notification regime is now live and applies to relevant tax returns filed after 1 April 2022. Therefore, all transactions for qualifying companies and partnerships should be considered in light of the legislation.

Those businesses preparing tax provisions and dealing with tax uncertainty now have a clear legislative framework and threshold within which to assess the tax outcomes. Indeed those who conclude that their tax fact pattern enables (in their view) a tax advantage to be achieved as a result of a departure from HMRC’s stated position to be taken, should firstly consider whether and how they intend to access the general exemption from notification, or what level of evidence will be required in support of a reportable notification. Professional adviser support and guidance as to how to navigate this new reporting landscape is likely to be desirable to most businesses. HMRC’s approach to dealing with the notifications will also be a matter of keen interest.

If you have any queries or would like to discuss this issue further, don't hesitate to get in touch with me at stuart.thomson@jcca.co.uk or your usual Johnston Carmichael contact.