Transparency data

Notification of uncertain tax treatment: policy evaluation plan

Published 14 December 2022

Summary

Notification of uncertain tax treatment (UTT) by large businesses was implemented to help reduce the legal interpretation portion of the tax gap, by requiring large businesses to bring uncertain matters to HMRC’s attention. This will mean that uncertainties can be clarified and resolved earlier than they would through normal compliance activity.

The regime requires large businesses to tell HMRC where they have treated a transaction in their Corporation Tax (CT), Income Tax (including payroll) and Value Added Tax (VAT) returns in a way that is contrary to HMRC’s known interpretation on that matter, and/or they have created a provision in their accounts to recognise that an alternative treatment might be correct. An uncertainty is only notifiable where the tax difference in treatments exceed £5 million.

In the year ended 30 June 2021, the legal interpretation portion of the tax gap is estimated at £3.7 billion and represents 12% of the total tax gap of £32 billion. Of the £3.7 billion legal interpretation portion of the tax gap, around 50% is attributable to large businesses.

In response to several consultations, and to address the concerns raised, the policy design of the new requirement changed, particularly around the definition of what constitutes a reportable uncertain tax treatment. Although many of the concerns were mitigated, respondents to the consultations remained sceptical that UTT will deliver the policy objective and were concerned about the expected administrative costs to comply with the requirement.

The government announced that it would evaluate UTT to assess whether it is achieving its stated aims and is proportionate.

The evaluation will draw on existing information sources as far as possible (including HMRC’s administrative information). To provide qualitative information, subject to approval and feasibility, research will be externally commissioned to an independent research provider. To ensure the evaluation is robust, HM Treasury (HMT) and HMRC are drawing on the expertise of internal and cross-government stakeholders and will consult with external academics and evaluation experts.

Notifying an uncertain tax treatment is an annual consideration. To conduct a full evidence-based evaluation, the evaluation must occur over several annual reporting cycles.

1. Notification of uncertain tax treatment (UTT) by large businesses

1.1. Overview

UTT requires large companies and partnerships (being businesses with a turnover of more than £200 million per annum, and/or a balance sheet total over £2 billion) to notify HMRC where they have adopted an uncertain tax treatment that HMRC is not already aware of through its ongoing customer compliance relationship. Amounts of Corporation Tax, Value Added Tax or Income Tax (via Self Assessment or PAYE) will be classified as uncertain if the tax treatment to which they relate meets one or both of two legislative criteria:

1. that a provision has been made in the accounts for the uncertainty
2. that the tax treatment applied is not in accordance with HMRC’s known position

Businesses will be required to notify HMRC only if the tax advantage exceeds a £5 million threshold.

UTT aims to level the playing field for large businesses by improving HMRC’s ability to identify uncertain tax treatments adopted by those that do not have an open and transparent approach, and to accelerate the point at which discussions on uncertain treatment can occur. Overall, this is expected to result in an increase in tax revenue because the requirement for businesses to notify HMRC will enable HMRC to become aware of potentially incorrect tax approaches sooner than would otherwise have been the case, enabling better deployment of resources, earlier conversations and, where appropriate, earlier challenge of the approach a business has taken.

In 2021, a third criterion was proposed and consulted on (where there is a substantial possibility that a tribunal or court would find the taxpayer’s position to be incorrect in material respects) but was dropped prior to introduction of the 2022 Finance Bill. The government may seek to introduce a third criterion later.

The results of the evaluation will be used, among other things, to consider how the uncertainties that were targeted by the third criterion can be identified.

More information on the policy objectives for UTT are contained in the Tax Information and Impact Note (TIIN).

1.2. Policy objective

The policy objective is to contribute towards reducing the legal interpretation portion of the tax gap, which is estimated at £3.7 billion (in 2020 to 2021) and represents 12% of the total tax gap of £32 billion. Of the £3.7 billion legal interpretation portion of the tax gap, around 50% is attributable to large businesses, for the tax year 2020 to 2021 (no change from 2019 to 2020).

The legal interpretation portion of the tax gap has reduced since the 2019 to 2020 estimations, from £5.8 billion (17% of total tax gap of £34 billion) to £3.7 billion (12% of the total tax gap of £32 billion). This reduction is largely attributable to the reduction in the total VAT gap from £12.5 billion in 2019 to 2020 to £9 billion in 2020 to 2021. Since estimates of the VAT gap are particularly volatile, it is important to consider the trend, rather than the year-to-year changes.

Although the policy objective of UTT is to contribute to reducing the legal interpretation portion of the tax gap, it is not expected that UTT will eradicate legal interpretation disputes and the legal interpretation tax gap methodology should not be used in isolation to provide evidence of the legislation’s success.

Within the overall policy objective, UTT has additional policy aims:

• enable earlier identification of potential legal interpretation disputes - earlier identification will enable the matter to be settled earlier, and clarified earlier in guidance or case law, which will increase certainty to all taxpayers
• level the playing field with businesses that are already open and transparent with HMRC about uncertainties
• assess the correct tax liability where the different interpretation has resulted in too little tax being paid

UTT breaks new ground by enabling earlier identification of potential high risk legal interpretation disputes that are often not apparent from tax returns. It levels the playing field for those large businesses who already voluntarily tell HMRC about these uncertain tax treatments and encourages more businesses to discuss areas of uncertainty with HMRC before they submit returns.

Legal interpretation tax losses arise where the taxpayer takes a different view from HMRC of how the law should be interpreted or applied, resulting in a different tax outcome. Different tax treatments can result in too little tax being paid if the treatment is based upon an incorrect interpretation of the law. HMRC cannot currently identify all legal interpretation issues from returns, and this policy will facilitate earlier identification of them. At present, legal interpretation disputes can take years to identify and resolve, often through litigation which is costly for both taxpayers and HMRC. In some cases, uncertain tax treatments are identified only when it is too late for them to be resolved. Longstanding legal interpretation disputes cause uncertainty for HMRC and taxpayers and can undermine trust in the tax system.

UTT aims to highlight and resolve legal interpretation differences earlier, ideally by encouraging more businesses to follow best practice and discuss areas of uncertainty with HMRC before they submit their returns or, if necessary, through notification.

1.3. Timeline

At Budget 2020, the government announced a new regime requiring large businesses to notify HMRC of uncertain tax treatments.

A consultation document was published on 19 March 2020 setting out the proposed framework for the regime and sought views on a range of implementation issues. The consultation closed on 27 August 2020. In November 2020, the government announced a one-year delay to the implementation of the regime to April 2022 to allow for a second consultation which took place between 23 March 2021 and 1 June 2021.

On 20 July 2021, HMRC published draft legislation which was subject to further consultation, along with draft guidance. Consultees engaged with HMRC until 14 September 2021 to provide feedback on the draft legislation and guidance.

Feedback during consultations helped with the policy development, including dropping a proposed third criterion prior to the introduction of the Finance Bill.

The Finance Act 2022 received Royal Assent on 24 February 2022 and allowed UTT to apply to returns filed on or after 1 April 2022.

1.4. Policy impacts to evaluate

The primary policy objective of UTT is to contribute towards reducing the legal interpretation portion of the tax gap, and the evaluation will seek to measure this.

The evaluation builds on the government’s commitment to:

• provide transparency and accountability of public funds
• ensure decision-making is evidence-driven
• release research and analysis in a way that promotes public trust, objectivity and credibility
• provide robust evidence in areas of interest to the public

The evaluation will also address the House of Lords Economic Affairs Committee concern about the proportionality of UTT, which recommended “an evidence-based evaluation of the measure in its current form be carried out to identify whether it does indeed deliver the benefits HMRC tells us it is expecting”. This evaluation will implement this recommendation and seek to measure the effectiveness of UTT in achieving the policy objective.

Additional beneficial impacts were identified as the policy was developed. The evaluation will seek to also measure these. These impacts include:

• increased receipts and reduced losses caused by legal interpretation issues
• increased certainty for customers around their tax affairs
• increased efficiency and resource saving for customers seeking certainty from HMRC
• increased efficiency and resource savings for HMRC in tackling legal interpretation issues

As the policy developed, some possible negative impacts were identified. The evaluation will also seek to measure these. These impacts include:

• increased administrative burden that complying with UTT places on the businesses within scope
• increased demand on HMRC resources to provide the existing level of customer service, due to increased customer contact to discuss uncertainties and process notifications
• that the small number of businesses within scope of UTT that do not have a Customer Compliance Manager (CCM) have access to an equivalent level of service as those with a CCM

Where the data and other information allows, the evaluation will distinguish between the taxes within scope of UTT.

2. Evaluation plan

2.1. Overview of evaluation approach

The evaluation of UTT will be taken forward by HMRC, with input where necessary from HMT. This builds upon the government’s commitment to increase transparency and accountability. It will support in our decision-making and help us to build on our evidence base.

We will be considering and using a range of best practice guidance across government and the department on key approaches and models. This includes the Magenta Book, which is HM Treasury’s guidance on what to consider when designing an evaluation, as well as the Green Book which is the central government guidance that details economic principles that should be applied to policy appraisal and evaluation. In line with this guidance, we will be using a combination of quantitative and qualitative approaches to conduct the evaluation.

We will be evaluating across 3 areas:

• administrative burdens
• customer service
• the effectiveness of the measure (alongside overlapping or similar interventions) in reducing the legal interpretation portion of the tax gap

The findings from this evaluation will ensure we learn key lessons to inform future policy making both in relation to UTT and wider policy measures.

2.2. Measurement of the counterfactual

The counterfactual refers to what would have happened in the absence of the legislation. We will be estimating and not measuring the counterfactual as it is difficult to separate the influence of the UTT measure itself and other influencing factors, such as other changes to online guidance or wider policies more generally.

We will use a combination approach which will, subject to approval and feasibility, use bespoke externally commissioned research to enable us to answer questions about the impact of UTT on customers that cannot be obtained from internal data. This research will give HMRC a better understanding of customer perceptions and views of the impact of the policy on businesses.

This approach is also likely to use internal HMRC data on investigations into customers’ tax affairs as well as data from internal management information systems to estimate the impact on HMRC resource on legal interpretation issues.

2.3. Sources of information

The evaluation will use a range of information, including:

• customer research
• administrative data
• models

Large Business Customer Survey

HMRC commissions an annual survey of large businesses overseen by the Large Business Directorate within HMRC. These businesses are all in scope of the UTT legislation. The aims of the research are to understand whether HMRC’s processes are delivering the intended customer experience from a large business perspective and to maintain an in-depth knowledge of how the department’s relationship with large businesses changes over time. Specific questions primarily related to customer perceptions of UTT have been added to the survey for 2022 to 23.

Further external research

Where possible (and subject to funding approval and feasibility), bespoke externally commissioned research of businesses in scope of the legislation which will enable us to answer questions about the impact of UTT that cannot be obtained from internal data.

UTT notification data

This data will allow us to track the number of notifications and their value.

HMRC case management system data

HMRC records data on investigations into customers’ tax affairs on internal data systems. This data will be used to assess the impact of the measure on cases related to legal interpretation for businesses in scope of the UTT legislation.

Internal customer contact data

This data includes the nature of the contact that a business has made with HMRC and the time spent by the department handling these enquiries.

Other internal data

This includes any other forms of data that will be relevant to the evaluation but which may not be held in a formal environment. Examples include data related to pre-notification discussions with customers regarding uncertainties prior to a formal UTT notification. Evaluation leads are working with colleagues across the department to ensure all relevant data sources have been included.

Models

Data will be used to develop models to help assess the impact of the measure. These will be developed using a range of best practice guidance across government as detailed in HMT’s guidance on evaluation best practice, the Magenta Book.

It should be noted that this is not an exhaustive list of information sources; further research may be needed to improve the reliability of the evaluation. Exploration of further data sources is ongoing to ensure that the evaluation of the impact of the policy is as complete as possible.

2.4. Reporting

HMRC will be reporting evaluation findings for UTT according to best practice guidelines (as outlined in the Magenta Book, Green Book and analytical codes of practice). Where possible, findings will be broken down by various factors, including tax regime, business size and sector.

The evaluation of UTT builds on HMT’s Public Value Framework, which summarises the key criteria to assess and maximise value delivered from public spending. It also builds on HMRC’s Single Departmental Plan, which, in part, outlines how we assess our performance against the Public Value Framework to maximise the public value delivered.

HMRC will also be ensuring that the evaluation is in line with the UK Statistics Authority’s 5 year strategy, which supports the need for having “high quality data and analysis to inform the UK, improve lives and build the future”. By publishing the findings from this evaluation, HMRC will be able to support the strategy’s key aim of ensuring there is relevant and coherent information to aid businesses, individuals and thus society.

The Code of Practice for Statistics and the Government Social Research Code sets the standard that those who are producing official statistics and research should adhere to. The evaluation and report will align with these standards to ensure public value and high-quality analysis.

Analytical and policy experts across the government and outside of the Civil Service will be consulted throughout the design and delivery of this evaluation to ensure that it is conducted with integrity, honesty, objectivity and impartiality.

Please note, UTT must have existed for several cycles in order to conduct a thorough evaluation. Each cycle is one financial year, meaning that the findings from this evaluation cannot be published until at least 3 years have passed. HMRC want to ensure the evaluation report provides a full picture of the impact this policy measure has had on businesses and HMRC.