Uncertain Tax Treatment Announcement for Major UK Corporations
In a move aimed at enhancing tax transparency, large businesses in the UK are now required to notify HM Revenue and Customs (HMRC) about uncertain tax treatments. This new rule, effective from April 1, 2022, applies to UK businesses and partnerships that prepare UK tax returns and use uncertain tax treatment in those returns.
A large business is defined as one with either a turnover above £200 million and a balance sheet total over £2 billion, or solely with a balance sheet total over £2 billion.
An uncertain amount is where provision has been recognized in the accounts to reflect the probability that a different tax treatment will be applied, or the tax treatment applied relies on an interpretation or application of the law that is not in accordance with HMRC's known position.
The rule is intended to make HMRC aware if a large business has adopted a treatment contrary to their known position. It is important to note that the rule does not apply if HMRC already have substantial information relating to that amount.
Businesses must check that they have given HMRC all the information that would be covered by notification. They should also document any discussions with HMRC to prevent the obligation to notify from arising.
Two uncertain amounts are related if they are included in the same return, relate to the same tax, and the tax treatment applied in arriving at one amount is substantially the same as the tax treatment applied in arriving at the other amount.
Notifications should be made by way of a digital form, and there are penalties for Uncertain Tax Treatment (UTT) failures. These penalties range from £5,000 for the first failure to report to £50,000 for any subsequent failure in the 3-year period in relation to the same tax. The penalties are appealable, and there is a 'reasonable excuse' defence.
The UTT rules apply when a return is delivered by a large business which includes an 'uncertain amount' in respect of a liability for corporation tax, income tax, or VAT. However, companies in groups are not required to notify uncertain amounts in relation to corporation tax if they relate to intra-group transactions, and the net effect is that the value of tax advantages obtained by the group as a whole does not exceed the £5 million threshold.
The estimated £3.9 billion of the UK’s 'tax gap' for 2022-23 is attributable to legal interpretation, most of which involves disputes with large businesses. This new rule is part of HMRC's ongoing efforts to reduce this gap.
HMRC has published guidance on the UTT rules in a dedicated UTT manual, which includes a list of the types of material that HMRC considers to form part of its "known positions". If HMRC's position is not known or is unclear, there is no requirement to notify them under the known position criterion.
In addition, HMRC will provide written confirmation that the exemption has been met where a business has approached it specifically to address the UTT risk. Any changes to a transaction, or to its tax treatment, following discussions with HMRC must be notified. Failure to do so will invalidate the exemption.
This new rule is a significant step towards enhancing tax transparency and ensuring that large businesses operate within the bounds of HMRC's known positions. It is crucial for businesses to understand these rules and comply with them to avoid penalties.
