Consultation outcome

Notification of uncertain tax treatments by large businesses (second consultation) - summary of responses

Updated 20 July 2021

Foreword

The government is committed to ensuring that individuals and businesses pay the tax they owe, and has made significant inroads into reducing the tax gap, which now stands at a record low at 4.7%. This is good progress, but there is still further to go to protect revenue for public services.

One of the major drivers of the tax gap is the differing legal positions taken by some large businesses and HMRC regarding tax due. This ‘legal interpretation’ portion of the tax gap is estimated to be £4.9 billion, and accounts for 16% of the overall tax gap.

The evidence shows that the majority of the legal interpretation gap arises from disputes between HMRC and large businesses. Businesses and HMRC spend significant time and money identifying and settling disputes in relation to uncertain tax treatments. These disputes occur where the taxpayer and HMRC interpret the law or its application differently, and that then results in a different tax outcome. This can reflect genuine difference of opinion, and abuse or tax avoidance is not necessarily involved.

These tax treatments create uncertainty for businesses and HMRC, and in some cases result in businesses paying less tax than they should. The new requirement to notify will provide HMRC with accurate and more timely information to inform their interventions. This will help them to identify and resolve uncertain tax treatments sooner. As a new requirement, the changes will increase administrative burdens, though in a way designed to be fair and proportionate.

The government is consulting on draft legislation to implement the measures outlined in this document, and intends to introduce this legislation in the next Finance Bill, ahead of implementation in April 2022. The government recognises the importance of guidance in helping taxpayer’s get their tax right, and will provide accompanying guidance to support businesses as they become accustomed to the new regime.

I am very grateful to respondents for the time they took to provide submissions to the consultation, which HMRC have carefully considered. The government is making further changes to the design of the policy in order to minimise uncertainty and the administrative burden on taxpayers. It is right that the government continues to take action to tackle the tax gap, but that it does so in a way that is fair and proportionate.

Rt Hon Jesse Norman, Financial Secretary to the Treasury

1. Executive Summary

1.1 At Spring Budget 2020, the government announced that large businesses would need to notify HMRC of uncertain tax treatments. Uncertain tax treatments are treatments that are contrary to HMRCs known position or where there is uncertainty about how a transaction should be treated for tax purposes.

1.2 A consultation, Notification of uncertain tax treatment by large businesses ,was launched in March 2020 to seek views on how the regime should operate.

1.3 In November 2020, the government announced that:

• HMRC would consult further on the policy details of the proposal, and
• implementation would be deferred for 12 months and would apply to returns due on or after 1st April 2022

1.4 A second consultation was launched in March 2021 that reflected the responses received to the previous consultation. Key changes to the proposal included:

• changing the definition of “uncertain tax treatment” to a series of more objective triggers
• increasing the threshold above which uncertain tax treatments must be notified, from £1m to £5m
• reducing the taxes in scope of the regime to Corporation Tax, VAT, PAYE and Income Tax Self-Assessment
• clarifying exclusions from the requirement to notify

1.5 The policy objective of this proposal is to reduce the legal interpretation portion of the tax gap by requiring large businesses to provide HMRC with timely and accurate information concerning a tax treatment that is uncertain, for example where HMRC’s interpretation is different from the one used. This will enable HMRC to identify uncertain tax treatments earlier, and will level the playing field between open and transparent businesses that already tell HMRC about uncertainties and businesses that do not.

1.6 The tax gap presents a significant risk to the Exchequer. The legal interpretation tax gap as stated in the 2020 edition of Measuring Tax gaps amounted to £4.9 billion. The notification regime is intended to encourage more large businesses to engage with HMRC on areas of uncertainty. This will support HMRC’s current approach to managing relationships with large businesses, which looks to provide certainty, clarity, proportionality and speed of resolution. The government intends for the regime to reduce the number of cases where disputes or disagreements arise late in the day and/or lead to litigation, as this can be costly and time consuming for both parties involved. It will also reduce the risk that an incorrect treatment is not identified in time for formal compliance enquiries to be undertaken, which results in irrecoverable losses to the Exchequer.

1.7 The consultation sought views on the proposed amended notification regime, in particular from large businesses and agents representing large businesses, to assess the changes proposed and to understand the potential impacts these changes will have on businesses.

1.8 Most respondents welcomed the changes made to the proposal and agreed that the definition of uncertain tax treatment was more objective than the previous proposal. However, there continues to be a range of concerns, mainly in relation to the triggers being too wide and creating an onerous administrative burden.

1.9 Some respondents still felt that the government had failed to set out a clear rationale for the policy and questioned whether the proposal is the best means to reduce the legal interpretation tax gap. Some, but not all, respondents felt that the additional administrative burden significantly outweighed the expected yield from the proposal.

1.10 HMRC is grateful to all those who have responded to the consultation. The government has considered these responses in the further development of the policy and has made the following further changes to address the concerns raised:

• reduced the number of tests, from seven to three, that will trigger a requirement to notify. This should help to reduce the administrative burden, by reducing the number of checks large businesses will have to make to assure themselves that they are compliant with the new regime
• refined two of the triggers proposed in the second consultation: where a provision has been made for a different tax treatment, and where the business has adopted a different treatment from HMRC’s known interpretation
• proposing a new trigger to deal with uncertainties, including those over how the law applies to a set of facts. Businesses will be required to notify HMRC where there is a substantial possibility that a court or tribunal would disagree with the treatment adopted
• refined the penalty for failure to notify an uncertain tax treatment so that a larger penalty may be charged for repeated failures

1.11 Most respondents agreed:

• that the government needs to act to close the legal interpretation portion of the tax gap
• that the £5m threshold was appropriate for both direct and indirect taxes, and preferable to a materiality threshold
• with the proposed rules to calculate the threshold
• that the Business Risk Review (BRR+) process was not appropriate as a basis to exclude low-risk businesses
• that a notification should be required for each tax in scope, rather than a single notification, and be required when the return is due
• that tax neutral inter-entity transactions should be excluded
• that the information required in a notification should be specified in guidance
• that responsibility for notifications in relation to a partnership should fall to the nominated partner

1.12 The government will consult on the draft clauses (published today, 20 July 2021). It will also provide draft guidance, in the coming weeks, on how HMRC will operate the regime and what businesses will need to do.

2. Introduction

Background to the consultation

2.1 The proposal for the Notification of uncertain tax treatment by large businesses will require large businesses to notify HMRC where they have adopted an uncertain tax treatment. Uncertain tax treatments are treatments that are contrary to HMRC’s known position or there is uncertainty about how a transaction should be treated for tax purposes.

2.2 The second consultation asked a number of questions designed to explore views on the proposed notification regime, building on the responses to the previous consultation and the changes that had been made to the proposed regime. It particularly sought views and input from large businesses, agents and representative bodies of large businesses.

2.3 The legal interpretation tax gap as stated in the 2020 edition of Measuring Tax gaps amounted to £4.9 billion. Although losses arise from all customer groups, a majority of the legal interpretation tax gap is attributable to the large business customer group. While HMRC has been successful in managing large business tax risks, with the tax gap for those businesses reducing from £7.65 billion in 2005 to 2006 to £5.3 billion in 2018 to 2019, the legal interpretation element of the tax gap has proved difficult to tackle, and it has been a challenge for HMRC to identify differences in legal interpretation sooner, or at all in some cases.

2.4 HMRC’s Large Business directorate works with around 2,000 of the UK’s largest and most complex businesses to make sure they pay the correct amount of tax at the right time. A senior professional called a Customer Compliance Manager (CCM) is assigned to each of the UK’s largest businesses. CCMs are experts in their field and build an in-depth knowledge of the business and the sectors it operates in. They are also supported by tax specialists for all regimes, and can call on data analysts, solicitors, audit specialists, trade sector experts and accountants.

2.5 Businesses and HMRC can spend significant time and money identifying and settling legal interpretation disputes. This can create uncertainty for businesses and HMRC over whether the right amount of tax is paid. The aim of this measure is to encourage discussions about uncertain tax treatments sooner and reduce the time taken to identify and settle disputes.

2.6 HMRC expect the new regime to lead to a range of beneficial outcomes:

• HMRC will identify uncertain tax treatments that are not yet known about and identify them at an earlier stage, maximising the opportunity for informal resolution and preventing some disputes falling out of time
• HMRC will use the notifications to improve its understanding of the notifying businesses, tailoring its engagement with them to prioritise discussions, open enquiries as necessary, and resolve any disputes earlier
• the data HMRC gains from notifications will allow better identification and prioritisation of the greatest risks
• HMRC will identify the need for changes in law or guidance at an earlier stage, to give greater certainty
• the regime will level the playing field between businesses who are already open and transparent with HMRC, and those who are not. HMRC will welcome a behavioural shift under which more businesses fall into the former category

2.7 The regime is not intended to prevent taxpayers taking a different interpretation of the law from HMRC; the government accepts HMRC is not always right in its interpretation. But this measure will help HMRC deploy its resources to tackle genuine risks in the most cost-effective way, enabling it to focus litigation on the most effective cases, and providing certainty earlier for HMRC and taxpayers.

2.8 HMRC’s intention in developing this measure is to ensure that those businesses that are open and compliant should have minimal additional compliance costs; as they are already discussing any uncertainties with HMRC they will not have to notify again under this regime. However, the government accepts that many affected businesses may want to put new processes in place to check that they are complying with the new regime.

Summary of responses

2.9 This document sets out a summary of responses received in respect of the consultation, which was published on 23 March 2021 and closed on 1 June 2021.

2.10 HMRC held 15 meetings and received 34 written responses from businesses, agents and representative bodies. HMRC are grateful to all those who engaged in discussions on the proposal and those that submitted responses, recognising the time and effort that went into them. The responses and external discussions have helped HMRC to further understand respondents’ views and concerns, and the impacts and risks for large businesses.

2.11 HMRC has summarised the views of respondents in this document and they have been used to inform the further development of the policy.

2.12 The following chapters present the responses received to the questions asked in the consultation, the government’s response, and next steps. Annex A provides a list of respondents.

3. Responses

3.1 This chapter summarises the responses to the 21 questions asked in the consultation. This consultation set out the changes to the proposal resulting from responses received to the previous consultation, and sought views particularly on:

• the definition of uncertain tax treatment

• the threshold for notification

• the exclusions from the requirement to notify

• the proposed penalty for non-compliance

Policy objectives

Question 1: Do you support the government taking action to close the legal interpretation portion of the tax gap?

3.1 Chapter 2 of the consultation explained the background to the tax gap and the reason for this proposal. It also set out how the proposal sought to address the legal interpretation portion of the tax gap.

3.2 There were 34 responses to this question.

3.3 Most respondents agreed that the legal interpretation portion of the tax gap needs to be reduced, although a minority questioned whether, if what the government was ultimately seeking to do was to improve taxpayer compliance, the legal interpretation element of the tax gap was an appropriate measure. Some questioned whether this proposal was the best way to achieve a reduction in the tax gap.

3.4 Many respondents expressed concerns that the additional administrative burden outweighed the anticipated additional tax revenue.

3.5 The expected additional administrative burden would be caused by:

• businesses having to scrutinise transactions to determine whether there is uncertainty that would need to be notified
• the triggers being too wide in scope, for example, requiring businesses to research voluminous (and sometimes not current) HMRC guidance
• the triggers were not sufficiently clear to provide businesses with certainty over whether a trigger, and therefore a requirement to notify, was met

3.6 Many respondents also expressed concern about whether HMRC would be able to manage, in a timely manner, an increased demand from businesses to have informal discussions on matters of uncertainty, especially for those large businesses within scope of the proposal who do not have a CCM. There was concern that businesses without a CCM would be disadvantaged.

Government response

3.7 The government wants to reduce the legal interpretation element of the tax gap and believes the new regime will improve HMRC’s ability to do that, by identifying uncertain tax treatments that HMRC would not otherwise identify, or identifying them earlier. This will enable HMRC to take action as appropriate (for example challenging the treatment, changing the guidance, or seeking a change to the law). The government is seeking to improve compliance through the measure, by encouraging more businesses to tell HMRC about uncertain tax treatments informally as part of an open and transparent relationship.

3.8 The government appreciates the concerns raised by respondents regarding the additional administrative burden. To address these concerns, the government proposes to reduce the number of triggers that need to be considered and also make the fewer, remaining triggers clearer and more objective.

3.9 All respondents said that most large businesses already discuss areas of uncertainty with HMRC. The legislation will be clear that a business that discusses a particular uncertain tax treatment with HMRC will not have to notify that treatment again under this regime.

3.10 The government will provide those large businesses that do not have a dedicated CCM with a route to discuss uncertainties, so that they are not disadvantaged.

Question 2: If you do not agree with the government’s proposed course of action, what alternatives do you suggest to address the problem?

3.11 There were 34 responses to this question.

3.12 There were many suggestions of alternatives to the current proposal and also suggestions on how to improve the current proposal. The following suggestions reflect common themes.

3.13 Some respondents suggested that uncertainties would be removed, and eliminate the need for the proposed regime, if the legislation was simplified and HMRC’s guidance was current and clear (and changes to the guidance were referenced).

3.14 Rather than introducing the proposed regime, some respondents suggested resources would be better utilised in conducting more enquiries, thus policing existing legislation more effectively rather than introducing new legislation and increasing the administrative burden. Others suggested extending or adapting an existing regime (e.g. DOTAS).

3.15 Some respondents suggested that uncertainties would be reduced if additional resources were allocated to provide an improved means for businesses to discuss uncertainties with HMRC, either by having more CCMs (and CCMs for businesses within scope that currently do not have one) or an enhanced clearance process.

3.16 Several respondents suggested an alternative course of action to better target the requirement to notify, by:

• targeting areas known to be a problem by requiring notifications on specified transactions (a similar approach to the one taken by the Australian Tax Office (ATO))
• targeting businesses known to be uncooperative or that do not have an open relationship with HMRC (effectively excluding low-risk businesses from the requirement to notify)

3.17 A couple of respondents recommended re-visiting an earlier stage in the consultation process.

3.18 Several respondents suggested implementing the regime in a reduced capacity, either restricting the initial taxes involved (for example, corporation tax only) or the businesses to which the requirement will apply (for example, those with a CCM).

3.19 All respondents suggested changes to the triggers and reducing the number of triggers, which will be covered under question 5 of this document.

Government response

3.20 The government welcomes these suggestions and accepts there are areas of uncertainty and complexity in the law that need addressing. This new regime will not prevent those areas from being addressed by other means, but it should provide richer evidence of those areas requiring clarification whilst also identifying previously unknown issues.

3.21 The government considers that the new regime will allow HMRC to deploy its existing resources more effectively, by identifying more legal interpretation risks earlier than they would otherwise be able to.

3.22 The government agrees and accepts that for a successful regime HMRC will need to provide access to discuss uncertainties with HMRC, either:

• with the business’s CCM
• by ensuring businesses without a CCM have opportunities to discuss uncertainties
• through a prompt pre-transaction clearance process

3.25 The government is reluctant to limit the regime to specified areas of uncertainty (an approach which is taken by the ATO, for example), as this would not identify uncertainties that are unknown to HMRC.

Exemptions

Question 3: Is there an objective alternative to using BRR+ ratings that could exempt low-risk businesses?

3.23 There were 21 responses to this question.

3.24 There were mixed responses to this question. Some respondents suggested that the BRR+ process could still be used to exclude low-risk businesses from the regime, with some suggesting that an appeal process could be introduced to put the BRR+ process on a statutory basis.

3.25 Other respondents agreed that, although they would prefer low-risk businesses to be excluded from the regime, the BRR+ process was not a suitable mechanism to do this because it is non-statutory and only applies to HMRC’s large business customers.

Government response

3.26 The government does not believe it is appropriate to use the BRR+ process to exclude low risk businesses from the regime for the reasons outlined in paragraph 2.30 of the consultation.

3.27 A low-risk business is one that is open and transparent with HRMC, and therefore will be discussing uncertainties or obtaining clearances. If they are doing this, they will be exempt from having to notify the uncertainties or clearances already discussed, because HMRC will already be aware of the possible uncertainty and/or they would have obtained assurance about the tax treatment of the matter.

Question 4: Should there be other specific exemptions from the notification requirement?

3.28 There were 20 responses to this question.

3.29 Most respondents recommended that transfer pricing should be excluded from the regime. Some respondents also recommended that VAT Partial Exemption matters should be excluded.

3.30 Other exemptions suggested are:

• New legislation enacted but HMRC yet to issue guidance
• VAT uncertainties from leaving the EU
• Those signed up the banking code of practice

Government response

3.31 Due to the inherent uncertainty involved in transfer pricing calculations, the government agrees that transfer pricing should largely be removed from the proposed regime. This is covered in more detail in the response to question 9.

3.32 The government does not believe a specific exemption is necessary where there is new legislation and HMRC has yet to issue guidance. This will not be caught by the second trigger (where the treatment is contrary to HMRC’s known interpretation) and HMRC would want to know about it if the other triggers were engaged.

3.33 Similarly, with VAT uncertainties from leaving the EU, if HMRC’s guidance is not clear about the current position (for example because the law itself is unclear and is being reviewed) then the second trigger will not be engaged and there will be no requirement to notify under that trigger.

3.34 Those banks signed up to the banking code of practice will already be discussing areas of uncertainty with HMRC and therefore are unlikely to need to make notifications, without specifically being excluded.

Defining an uncertain tax treatment

Question 5: Do you think that the triggers are sufficiently objective?

Question 6: Can you suggest ways to make them more objective and certain?

3.35 Most respondents amalgamated these two questions, and this document does the same.

3.36 All responses replied to these questions.

3.37 Responses are addressed by each trigger:

Trigger A Results from an interpretation that is different from HMRC’s known position.

3.38 Most respondents supported this trigger in principle, saying it was much clearer and more objective than the test proposed in the first consultation. Many respondents also said that with some further improvements to the design of this trigger, it might cover a large proportion of the situations where HMRC would want to be notified, thus reducing the need for some other triggers.

3.39 However, all respondents expressed concern about identifying HMRC’s known position from the voluminous guidance and materials that HMRC produces, and other possible sources of information, commenting it is too wide and burdensome on businesses and significantly increases the administrative burden. Respondents said HMRC should define and limit the places where businesses are expected to go to locate HMRC’s known position, and that HMRC should ensure the published position is current.

3.40 Many respondents were keen to avoid the need to search the body of case law to determine HMRC’s known position. Some queried whether, if HMRC was unsuccessful in litigation, a treatment that accorded with the court’s decision would require notification.

3.41 Many respondents said that the existence of this trigger meant that some of the other triggers were not required, because the trigger A would capture the uncertainty.

Trigger B Was arrived at other than in accordance with known and established industry practice.

3.42 Most respondents said that this trigger overlaps with trigger A, in that an industry practice would not usually exist without HMRC’s input.

3.43 There was also a concern that not all businesses in an industry might have access to this information and that there are often various trade bodies within an industry perhaps offering different tax approaches.

Trigger C Is treated in a different way from the way in which an equivalent transaction was treated in a previous return and the difference is not the result of a change in legislation, case law or a change in approach to accord with HMRC’s known position.

3.44 Most respondents were comfortable with this trigger but recommended a definition of the time frame within which previous treatments need to be considered.

3.45 “Equivalent transaction” also needs to be defined.

3.46 Respondents commented that often there was a change in facts which meant a change in treatment.

Trigger D Is in some way novel such that it cannot reasonably be regarded as certain.

3.47 Almost all respondents felt that this trigger was too subjective and/or too wide, and should be removed. They said it would be difficult to determine what is novel, or that a huge number of treatments could be said to be novel, and so the trigger could result in excessive notifications.

3.48 Many respondents said that “cannot reasonably be regarded as certain” is a very low bar for notification and would capture a very large number of transactions.

Trigger E In respect of which a provision has been recognised in the accounts of the company or partnership, in accordance with Generally Accepted Accounting Practice (GAAP), to reflect the probability that a different tax treatment will be applied to the transaction.

3.49 The majority of respondents thought that this trigger was objective and would capture uncertainties. However, some responses advised that provisions are also made for reasons other than uncertainty of legal interpretation.

3.50 There were also concerns about the timing difference between the transaction and the provision being made.

Trigger F Results in either:

• a deduction for tax purposes greater than the amount incurred by the business, or

• income received for which an equivalent amount is not reflected for tax purposes, unless HMRC is known to accept this treatment

3.51 This received a mixed reaction: some respondents felt this was easy to understand and apply while others thought it was subjective and burdensome. Although “economic cost” was not included in the trigger, it was mentioned in paragraph 3.24 of the consultation. This raised concerns about subjectivity with some respondents, who that it felt more like an avoidance test, and thought there could be difficulties applying it to VAT. Many respondents suggested that these uncertainties would be caught by trigger A in any event. Others said that with clarification of the scope of this trigger and its principles, it could be successful in tackling direct tax uncertainties.

3.52 Some responses suggested, as part of this trigger, mirroring the obligations within the Code of Practice on Taxation for Banks “unless this is in accordance with the intentions of parliament”.

Trigger G Has been the subject of professional advice, that is not protected by legal professional privilege:

• which is contradictory, in terms of tax treatment, to other professional advice they have received, or

• which they have not followed for the purpose of determining the correct tax treatment of a given transaction

3.53 Many respondents indicated that this trigger would encourage legal advice over advice from accountants and therefore distort the tax advice market.

3.54 Concern was expressed by many respondents that this trigger could discourage businesses from seeking additional advice. Additional advice is often sought because the facts of the transaction have changed, or where it is thought that more specialist advice is required. Therefore, respondents suggested that businesses could be disadvantaged by seeking a second opinion and this trigger should be removed.

3.55 Some respondents suggested that this trigger should not apply if the adopted treatment aligns with HMRC’s known position, even if differing professional views have been received on the point. It should also be limited to circumstances where the taxpayer has adopted a more favourable tax position.

3.56 Some respondents also thought that this trigger would be caught by other triggers.

Government response

Trigger A Results from an interpretation that is different from HMRC’s known position.

3.57 The government is pleased that the positive responses to this proposed trigger enable it to proceed with confidence to include it as a legislative test for reporting an uncertain tax treatment.

3.58 The government recognises that it will need to be very clear what is meant by HMRC’s known interpretation and where this is set out. Customers will rely on HMRC’s published guidance to determine HMRC’s known position for the purposes of complying with this trigger, so it is important that guidance is up to date. Guidance is updated regularly and HMRC is confident the majority of its technical guidance is up to date. In recognition of the increased importance of guidance when UTT is implemented, HMRC will look for further opportunities to improve its technical guidance.

3.59 Where there is no known HMRC interpretation, Trigger A will not be met and there will be no requirement to notify under this trigger.

Trigger B Was arrived at other than in accordance with known and established industry practice.

3.60 After taking into account the consultation responses, the government has concluded that this trigger will not be included as a legislative test for reporting an uncertain tax treatment. However, the government is proposing a new trigger, explained below.

Trigger C Is treated in a different way from the way in which an equivalent transaction was treated in a previous return and the difference is not the result of a change in legislation, case law or a change in approach to accord with HMRC’s known position.

3.61 After taking into account the consultation responses, the government has concluded that this trigger will not be included as a legislative test for reporting uncertain tax treatment. However, the government is proposing a new trigger, explained below.

Trigger D Is in some way novel such that it cannot reasonably be regarded as certain.

3.62 After taking into account the consultation responses, the government has concluded that this trigger will not be included as a legislative test for reporting an uncertain tax treatment. However, the government is proposing a new trigger, explained below.

Trigger E In respect of which a provision has been recognised in the accounts of the company or partnership, in accordance with Generally Accepted Accounting Practice (GAAP), to reflect the probability that a different tax treatment will be applied to the transaction.

3.63 The government is pleased that the positive responses to this proposed trigger enable it to proceed with confidence to include it as a legislative test for reporting an uncertain tax treatment.

3.64 The government will ensure that only provisions relating to additional tax potentially payable due to legal interpretation uncertainty will be notifiable.

3.65 There will be some overlap with the new trigger. Nonetheless the government believes there is value in retaining this trigger. Arguably this is the clearest and most straightforward trigger, and taxpayers will not need to consider the other triggers if this one applies.

Trigger F Results in either:

• a deduction for tax purposes greater than the amount incurred by the business, or

• income received for which an equivalent amount is not reflected for tax purposes, unless HMRC is known to accept this treatment

3.66 After taking into account the consultation responses, the government has concluded that this trigger will not be included as a legislative test for reporting an uncertain tax treatment. However, it is proposing a new trigger, explained below.

Trigger G Has been the subject of professional advice, that is not protected by legal professional privilege:

• which is contradictory, in terms of tax treatment, to other professional advice they have received, or

• which they have not followed for the purpose of determining the correct tax treatment of a given transaction

3.67 After taking into account the consultation responses, the government has concluded that this trigger will not be included as a legislative test for reporting an uncertain tax treatment. However, it is proposing a new trigger, explained below.

Proposed new trigger

3.68 The government proposes a new trigger to combine elements of triggers D, F and G. The new trigger aims to deal with uncertainties, including those over how the law applies to a set of facts, where HMRC does not have a known position such that trigger A does not apply. Businesses will be required to notify HMRC where there is a substantial possibility that a court or tribunal would find the treatment adopted to be incorrect.

3.69 Conflicting advice, as set out in trigger G, would be an indicator that this applies without being a trigger event in itself. It would address new products or transactions of the type envisaged by trigger D, while setting a higher level of uncertainty as the requirement for notification. It will also pick up the instances covered by trigger F where there is no known HMRC position and genuine uncertainty about the correct tax outcome.

3.70 The government believes this new trigger is in line with what large businesses’ tax teams already commonly consider. A test using a similar reference point is used by the Australian Tax Office in its reportable tax positions regime, where taxpayers are required to report instances where, considering the relevant authorities, the position taken is as likely to be correct as incorrect, even if it is reasonably arguable, or where it is less likely to be correct than incorrect.

Question 7: Do you think any of the triggers will not capture the uncertain treatments they are intended to identify?

3.71 There were 19 responses to this question.

3.72 Most respondents did not think the triggers failed to capture the uncertainty they are intended to identify. The concern was more that the triggers could potentially capture more than intended and lead to an excessive number of notifications.

Government response

3.73 The government has considered this concern and has reduced the number of triggers that a business must consider and made them narrower in scope.

Question 8: Are there additional triggers that would identify uncertain tax treatments that would not be identified by these triggers?

3.73 The majority of responses did not comment on this question. An additional trigger suggested is where a tax treatment requires substantive actions to be taken by the taxpayer in order to mitigate tax risk (such actions being set out in internal or external tax advice), but those actions are not actions which it is the purpose of the relevant legislation to incentivise.

Government response

3.74 The government is grateful for this suggestion, but in line with the majority of responses, is proposing to reduce the number of triggers. The government believes the new trigger would capture this.

Question 9: Which of these triggers do you consider should apply in respect of transfer pricing uncertainties, and why?

3.75 There were 26 responses to this question.

3.76 Responses ranged from excluding transfer pricing entirely from the regime, to limiting the scope so that only certain triggers would apply to transfer pricing uncertainties.

3.77 Respondents suggested that transfer pricing should be excluded because the proposed regime is to address legal interpretation uncertainties, rather than differences of opinion on pricing or valuations which inherently fall within a range of values.

3.78 Some respondents suggested that triggers A, C and E could apply where certain transfer pricing rules are relevant to a transaction. This could include, for example, uncertainties regarding whether the participation condition is met.

Government response

3.79 The government recognises the concerns raised and proposes to exclude uncertainties regarding the application of the arm’s length principle from the requirement to notify, except where trigger A is satisfied (i.e. where the application of the arm’s length principle is contrary to HMRCs known position) or trigger E (a provision is made to recognise the uncertainty).

Threshold for reporting

Question 10: Do you agree with the threshold of £5m for both direct and indirect taxes?

3.79 There were 30 responses to this question.

3.80 Most responses supported the £5m threshold for both direct and indirect taxes. A small minority felt that £5m was too low for VAT.

3.81 There were a few questions seeking clarity on “same or similar” transactions and this could influence whether the proposed threshold is too low. “Same or similar” is covered in question 12.

Government Response

3.82 After taking into account the consultation responses, the government intends to keep the threshold at £5m.

Question 11: Considering the concerns outlined about a materiality threshold, do you have further points to support one?

3.83 There were 17 responses to this question.

3.84 Most responses did not provide further points in support of a materiality threshold. However, some respondents recommended that if the triggers remained wide, then a materiality threshold should be included, perhaps along the lines of the Australian regime, using the current tax expense.

3.85 Those that did support a materiality threshold said that having one would ensure that matters that do not warrant urgent attention are not allocated an inefficient amount of resource.

3.86 Several respondents said that although materiality is not a common concept in tax legislation, a linkage to accounting is frequently used. They further commented that, given materiality will be part of the audit, the risk of this being artificially inflated or otherwise open to abuse would seem to be low.

3.87 Most respondents supported a fixed threshold amount, as it reduces complexity, but suggested that it is frequently reassessed as more transactions and treatments would fall within scope over time due to natural inflation.

Government response

3.88 The government maintains its position that applying a materiality threshold based on indicators such as turnover or amount of total tax expense could result in unfairness, and would risk HMRC not becoming aware of significant uncertain tax treatments.

3.89 The government has decided not to include a materiality threshold.

Question 12: Do you agree with the proposed rules to calculate the threshold?

3.90 There were 24 responses to this question.

3.91 Most respondents agreed strongly that a threshold was required in order to provide certainty and reduce the administrative burdens associated with the measure. Most respondents agreed with the proposed rules to calculate the threshold.

3.92 Some respondents maintained that a materiality threshold was preferable to a fixed monetary threshold.

3.93 Some respondents were concerned about the need to notify uncertain tax treatments which overall have nil impact on closing the legal interpretation tax gap. This was to avoid notifications which do not contribute towards the policy aim of the legislation.

3.94 Some respondents sought clarity on how the two-step approach could be applied where HMRC’s known position could not be ascertained.

3.95 Some respondents were concerned with how the threshold would be applied in respect of aggregation of ‘same or similar’ transactions.

Government response

3.96 The legislation and accompanying HMRC guidance will provide further detail as to how the threshold rules will operate, including instances of timing differences, intra-group transactions, and specific regime issues such as VAT scenarios where a third party can reclaim the VAT charged by a separate entity.

3.97 The legislation and accompanying HMRC guidance will include rules on how the threshold should be applied where same or similar transactions must be aggregated. The aggregation rule aims to reduce the administrative burden of taxpayers having to notify same or similar tax issues separately, whilst also ensuring that the threshold of £5million is not undermined where there are equivalent transactions all relying on the same uncertain tax treatment.

Question 13: If you do not agree with the proposed rules to calculate the threshold, can you suggest an alternative calculation?

3.98 There were 14 responses to this question.

3.99 Most respondents did not object to the two-step approach to calculating the threshold, with comments focussing more on the detail of how this would work in practice. Some respondents were concerned that details of the two-step approach in the consultation document did not adequately cover situations where the amount of the tax impact itself was uncertain; for example, where an issue had the potential for a range of outcomes, it was considered that it might not be possible to identify the “biggest” tax difference between the taxpayer’s position and HMRC’s known or likely position.

3.100 Respondents commented on the need for clarity in relation to the amounts to be included in calculating the tax impact. One example was whether tax losses should be included where these are available to shelter the potential additional tax liability should HMRC be successful in a litigation challenge.

3.101 Respondents sought clarity in how these aspects are to be approached, particularly where there is a rule on aggregation (for same or similar transactions), where there are timing differences, and where there is a nil net tax impact across a tax grouping.

Government response

3.102 The legislation covering the calculation of the tax impact will specify the inclusion or exclusion of amounts, such as tax losses, when considering the threshold test.

3.103 HMRC guidance accompanying the legislation will include examples of how to approach the calculation of the tax impact in different scenarios.

Method of notification

Question 14: Do you think requiring notification for each tax within scope will be easier to comply with than a single notification?

3.104 There were 27 responses to this question.

3.105 Almost all of the responses supported a notification requirement for each tax within scope, because each tax is usually managed by different personnel working to different timescales and statutory deadlines for e.g. tax return filings.

Government response

3.106 After taking consultation responses into account, the government has concluded that the notification requirement will apply separately to each tax within scope.

Question 15: Do you agree with the notification being required when the return is due?

3.107 There were 27 responses to this question.

3.108 Most responses agreed with the proposal to require any notification at the same time as the return is due. Several responses requested an additional 30 days from when the relevant tax return is due.

3.109 Several responses suggested that notifications could occur pre-transaction to provide earlier certainty of tax treatment.

Government response

3.110 After taking the consultation responses into account, the government has concluded that the notification should be required at the same date as the return is due.

3.111 Businesses can obtain certainty before this by using the clearance process or discussing the matter with their CCM. There will also be nothing to prevent businesses making a notification earlier than when the return is due.

Question 16: Do you agree, for non-annual returns, with the notification being required when the last return for a financial year is due to be filed?

3.112 There were 24 responses to this question.

3.113 Most respondents agreed that for non-annual returns, it is a sensible compromise that the notification should be required when the last return for a financial year is due to be filed. Annual requirements were preferable to more frequent reporting, as it would be too administratively burdensome for businesses to notify more frequently.

3.114 The majority of respondents were generally supportive but commented on the need for clarity about how this would work. Particularly where there are multiple returns filed for a single tax, there is a need for clarity about which return triggers the requirement.

3.115 There were a few suggestions that the notification should be allowed up to 30 days after the return due date, or even a quarter delay, due to resource pressures companies face during return submission periods.

3.116 In contrast, a small number of respondents did not agree and thought this would create a separate reporting deadline from the accounts and the VAT return. They felt this would increase the administrative burden. Particularly regarding VAT, businesses make decisions on VAT treatment of their supplies when they invoice them and would have to revisit each decision when preparing accounts.

Government response

3.117 The government has considered all the responses and decided to require notification when the last return for a financial year is due to be filed. For VAT the requirement will align with the date that the final VAT return is due in that financial year. The government believes this will reduce the administrative burden for taxpayers.

Question 17: Do you agree that tax neutral inter-entity transactions should be excluded?

3.118 There were 26 responses to this question.

3.119 Although some respondents felt this exclusion would be unnecessary, the majority of respondents welcomed it and agreed that tax neutral inter-entity transactions should be excluded for all the taxes within scope. The exclusion was generally welcomed as it should considerably limit the administrative burden on taxpayers. An exclusion would keep UK-UK transfer pricing out of scope. Across groups where the high-level treatment is symmetrical, this should be sufficient to exclude from notification.

3.120 Respondents did note that HMRC should take great care to ensure this is not used as a loophole to work around the notification requirement in certain circumstances.

3.121 Although most respondents agreed with the exclusion, they have noted that more clarity is required as different entities in a group may treat a transaction differently, as they are different trades. A clear definition of ‘tax neutral’ would also need to be provided.

Government response

3.122 The government agrees that certain inter-entity transactions should be excluded from the requirement to notify where there is no net UK tax impact. The legislation will include an exemption and set out the circumstances in which notification will not be required.

Level of detail

Question 18: Do you agree that the information required in a notification should be covered in guidance?

3.123 There were 28 responses to this question.

3.124 Many respondents agreed that the information required in a notification should be covered in guidance but said that there must be clarity on the level of detail required. Respondents stated that information required should be kept to a minimum and it should only require a concise summary of the uncertainty.

3.125 Many respondents disagreed and stated that the information required in a notification should be set out in scrutinised legislation with details of what is required to satisfy that requirement.

Government response

3.126 After considering the consultation response the government has decided that the legislation will provide that notifications must be made by such means and in such form, and include such information, as is reasonably specified by HMRC. This will provide a legislative safeguard that HMRC can only ask for information that it is reasonable for the taxpayer to provide. It will also provide the flexibility for the information specified to be adapted quickly should that be necessary. The level of detail will be specified in guidance.

3.127 The government will consider the suggestions made on the level of detail when deciding on the final list of questions for the notification.

Penalties for failure to report

Question 19: Do you agree failure to notify regarding a partnership return should be charged on the nominated partner?

3.128 There were 18 responses to this question.

Question 20: If the penalty is not on the nominated partner, on whom should the penalty be charged?

3.129 There were 6 responses to this question.

3.130 Most respondents amalgamated these two questions. This document does the same.

3.131 The majority of respondents agreed that the penalty should be charged on the nominated partner.

3.132 Some respondents disagreed, stating that the penalty should be charged on the partnership, not individuals (same as companies). There was concern that making a nominated partner personally liable would not equate to fairness of treatment across the large business population within the scope of this proposal.

3.133 Some stated that as a body corporate, an LLP should be subject to the penalty in its own name, as would be the case for a company.

3.134 Some respondents suggested a penalty for failure to notify should be charged on all relevant partners to be jointly and severally liable.

Government response

3.135 The government appreciates the suggestions made and after considering the responses has concluded, for the reasons set out in the consultation, to retain the position that the person responsible for notification in respect of large partnerships should be the nominated partner.

Assessment of impact

Question 21: Do you have any comments on the assessment of equality, and other impacts?

3.136 There were 18 responses to this question.

3.137 Most respondents expressed concern that the administrative burden to comply with the regime would outweigh the expected yield, and therefore not benefit the economy overall. Furthermore, some respondents held the view that, by imposing reporting requirements that go beyond those of some of the UK’s international competitors, the new regime risks the UK not being perceived as an attractive place to do business. Some respondents suggested that it would make more economic sense for some businesses to pay the £5,000 penalty rather than incur the costs associated with complying with the legislation.

3.138 Several respondents were concerned that there may be transactions occurring pre-1 April 2022 that will be included in returns that are due on or after 1 April 2022, making the legislation operate retrospectively.

3.139 As mentioned earlier in this document, many respondents said that those businesses with a CCM are advantaged over those that do not, and there is a need for more CCMs so that discussions with businesses can occur more quickly.

3.140 Most respondents said that if the triggers are not clarified and more targeted, it would result in significant over-notifying. Also, where uncertainties are discussed with HMRC in advance of the transaction, the required level of detail may not be known (through no fault of the taxpayer), such that a notification would ultimately be required notwithstanding this discussion having taken place.

3.141 It was held by a few respondents that where there is concern over whether sufficient information was provided in CCM discussions, businesses may change their approach and provide the information through the notification instead. This would be to the detriment of the CCM model.

Government response

3.142 The government has listened to concerns from respondents about the potential administrative burdens associated with the regime. Feedback on the extent of any additional administrative burden has been varied and the government will continue to assess the impacts of the measure. To support businesses in complying with the measure and to minimise the potential additional costs incurred by businesses, the government has made a number of significant policy design changes, such as increasing the threshold from £1m to £5m, reducing the taxes in scope, reducing the number of triggers and making the definition of an uncertain tax treatment more objective.

3.143 Respondents have said that most large businesses are already open and transparent with HMRC and so discussions on uncertain matters are already occurring. It follows that in many cases there should not be a significant increase in compliance costs for these businesses. However, the government understands that many affected businesses may want to put new processes in place to check that they are compliant with the new regime, and this will vary depending upon a large business’s existing tax governance frameworks. The government does not agree that the administrative burden will be so material as to make the UK an unattractive place to do business. The US and Australian tax authorities successfully implemented similar reporting regimes some years ago.

3.144 Where businesses discuss uncertainties with their CCM, but are unsure as to whether the level of detail provided meets the notification requirements, CCMs will advise if notification is still required.

3.145 Regarding those businesses without a CCM, as stated in the consultation, HMRC will ensure that they will have an opportunity to discuss uncertainties with HMRC.

3.146 The government does not consider the proposal to be retrospective as it does not change the tax consequences of the transaction. It imposes a duty to notify that is prospective for treatments that are already uncertain under the tax code.

3.147 The government is amending the proposed triggers so that there will be fewer to consider and they are clearer on what uncertainties need to be notified.

4. Next steps

Next steps following the consultation

4.1 Since the consultation closed on 1 June 2021, HMRC has considered the evidence submitted in response to the consultation and used this evidence to inform the further design of the policy.

4.2 HMRC has suggested changes to the proposed regime to mitigate the concerns raised in the responses. Five of the triggers have been removed from the proposal and a new trigger has been added that amalgamates aspects of several of the previous triggers.

4.3 The government will consult on the draft legislation published on the same day as this summary of responses. The Explanatory Notes will be published alongside the draft legislation.

4.4 The government intends to include legislation in Finance Bill 2021 to 2022, to apply to returns due to be filed on or after 1 April 2022.

4.5 A Tax Information and Impact Note (TIIN) published at the same time as this response indicates that changes in the policy design require a reassessment of the Exchequer Impact which needs to be certified by the Office of Budget Responsibility (OBR) before the figures can be published. Similarly, the impacts to business are being considered in light of respondents’ feedback to quantify the costs to businesses in complying with the measure.

4.6 HMRC will develop guidance for large businesses to support them in meeting their obligations under the new regime. This will be published in draft for consultation in the coming weeks.

Annexe A: List of stakeholders consulted

Association of British Insurers (ABI)

Aegon UK

Alternative Investment Management Association (AIMA)

All Party Parliamentary Group on Anti-Corruption and Responsible Tax

Baker McKenzie

British Private Equity & Venture Capital Association (BVCA)

BDO

British Universities Finance Directors Group (BUFDG)

British Telecom

Confederation of British Industry (CBI)

Chartered Institute of Taxation (CIOT)

The City of London Law Society (CLLS)

Crowe

Deloitte

Ernst & Young

Ford

GE Aviation

The Institute of Chartered Accountants in England and Wales Tax Faculty

Institute of Chartered Accountants of Scotland (ICAS)

KPMG

Law Society

Legal & General

Linklaters

London Society of Chartered Accountants’ Taxation Committee

Macfarlanes LLP

Mazars

PwC

RSM

Simmons & Simmons

The 100 Group

The Investment Association

The Tax Law Review Committee (TLRC)

UK Finance

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