Notification of uncertain tax treatments: What do large professional services firms need to know?

July 2022

What is the requirement?

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:

• Corporation tax - Company tax return
• Income tax or corporation tax – Partnership tax return
• Income tax – PAYE return
• VAT – VAT return.

The notification requirement applies separately in relation to each relevant tax.

What is an uncertain tax treatment?

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.

Which businesses fall within the rules?

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:

• turnover of more than £200m and/or
• a balance sheet total of more than £2bn.

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.

What reporting deadlines and penalties apply?

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:

• £5,000 for first failure in respect of a relevant tax
• £25,000 for a second failure in respect of same relevant tax
• £50,000 for subsequent failures.

Are there particular issues for large partnerships?

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.

• HMRC has confirmed to us that uncertainties that affect direct tax liabilities of partners are intended to be within scope of UTT. This has now been clarified in HMRC guidance.
• HMRC has also confirmed to us its view that any uncertainties over how profits are shared between partners for tax purposes are within scope of UTT. This would include, for example, any uncertainty over the application of the mixed membership partnership rules.
• We have discussed with HMRC the added difficulty of quantifying the tax value of any UTT with tax liabilities of individual partners being dependent on personal allowances, rate bands, other income and reliefs etc. HMRC has acknowledged this and confirmed that the legislation envisages that calculating the tax value is not always black or white. The threshold test relies on it being “reasonable to conclude” that the value of any tax advantage exceeds £5m. This allows some pragmatism to be applied but it should be noted that HMRC’s preference is for businesses to err on the side of caution.

What should businesses do next?

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:

1. Does the business have tax governance processes in place to ensure that all uncertain tax treatments across all heads of tax will be identified?
2. Where uncertain tax treatments are identified, how will these be quantified, and a view formed on whether notifiable?
3. How should any notifications be managed and the overall relationship with HMRC be maintained?

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.

For help and advice, please contact Jitendra Patel or your usual BDO Professional Services contact.