UTT13200 - Notification criteria: HMRC's known position

An amount is notifiable under the second criterion if the tax treatment applied in arriving at the amount relies (wholly or in part) on an interpretation or application of the law that is not in accordance with the way in which it is known that HMRC will interpret or apply the law (“known position”).

As with the first criterion, for notification of the uncertain amount to be required, the entity must be in scope, the tax must be a relevant tax, the tax return must be relevant to Uncertain Tax Treatment (UTT), the threshold condition must be met, and the exemptions do not apply (UTT13100).

HMRC’s “known position” is considered at the time the return is filed. If there is no “known position” at the time the return was filed, but uncertainty arose after it was filed, perhaps due to HMRC guidance being changed, there is no requirement to notify. This is the case even if the due date to notify has not passed.

The table below lists the types of publications that do or do not indicate HMRC’s known position for the purposes of this criterion:

Contains HMRC’s Known Position - (publicly available and accessible) Not to be considered - (possibly not publicly available, or taxpayer or fact specific)
HMRC guidance, including HMRC’s published technical manuals and customer guidance published on GOV.UK Advice provided and conslusions reached during HMRC forums and stakeholder meetings
Statements of Practice Submissions HMRC makes in litigation
Public Notices -
HMRC publications, such as Revenue & Customs Briefs, Employer Bulletins, and Agent Updates -
Explanatory and technical notes relating to legislation -
Guidelines for Compliance - (New practical guidance and greater transparency on the approaches HMRC regards as higher or lower risk) -

Sub-paragraph 10(4)(b) of the Uncertain Tax Treatment legislation extends the concept of HMRC’s known position beyond the content of published materials. HMRC’s position may be known from any dealings with HMRC in respect of the business. These may include:

  • Discussions with a HMRC Customer Compliance Manager.
  • Discussions with a HMRC Tax Specialist.
  • A written view of the correct tax treatment from HMRC.
  • A response to a non-statutory clearance request.
  • The outcome of the HMRC Check Employment Status for Tax (CEST) tool, where the result is not indeterminate, and the information provided is accurate.

Any views expressed directly to a particular taxpayer or regarding a particular situation, will not apply to other taxpayers or to other situations. Similarly, any views expressed to an agent in respect of a client will not apply to other clients of that agent.

For the purposes of a tax return, it remains the case that the business is responsible for ensuring it has self-assessed in accordance with the law.

Examples

All the examples in this guidance are purely illustrative to demonstrate how the UTT legislation should be applied in practice. The examples are not intended to suggest that uncertainties may be limited to particular industry sectors or particular types of tax issue, nor do they set out HMRC’s current known position. Examples are not exhaustive of the situations where notification is or is not required under this criterion.

Example 1

A qualifying company or partnership develops a new energy saving material designed primarily to be installed in residential housing. Due to its application, and as the energy saving material is of a kind that would normally be considered as qualifying goods, the company are applying VAT on retail supplies of the material at the reduced rate. This is contrary to HMRC’s view of applying the standard rate to any energy saving material that is not also installed as part of the supply.

Unless the threshold test at paragraph 11 is not met or one of the exemptions at paragraphs 18 or 19 apply, notification is required if the business treats the energy saving material as reduced rated, whatever the reasons for that decision.

Example 2

A UK company, which is a member of a multinational group, supplies various administration services to UK and overseas affiliates. The company rewards its employees by a mixture of cash and share options in the listed parent company. The UK company’s profit and loss account includes a debit in respect of the share-based compensation (SBC). There would be a corresponding increase in equity for equity settled SBC. The company has commissioned a transfer pricing report which concludes that the transactions between the company and its affiliates require to be priced on an arm’s length basis in accordance with Part 4 TIOPA 2010. The report also includes a full comparability analysis and concludes that the most appropriate transfer pricing methodology to determine the arm’s length price for the services provided by the company is cost plus a margin of 5%. In determining the cost base on which to determine the price charged the company excludes the FRS102/IFRS2 amount and does not substitute an alternative measure regarding the SBC.

HMRC’s published guidance includes page INTM421060 of the International Manual which states “Ensuring that the full costs of employing any UK staff are properly reflected in the cost base is potentially more important than the rate of uplift to be applied. This will include the costs of share options where these are made available to the UK staff” and “The usual starting point in determining the cost base would be the accounts prepared under IFRS or UK GAAP. In the example above the charge in the accounts (under FRS20) would be the fair value of the stock options/awards and that would be the most appropriate figure, reflecting the arm’s length charge for providing the share options.“

Unless the threshold test at paragraph 11 is not met or one of the exemptions at paragraphs 18 or 19 apply, notification is required if the company excludes any amount in respect of SBC in the cost base used to calculate the arm’s length price for the services it supplies, whatever the reason for that decision.

Example 3

For the purposes of determining whether the Substantial Shareholdings Exemption (SSE) is available on the disposal of shares in a company, it must be determined if the shares being disposed of are shares of a trading company. For these purposes a company is considered to be a trading company if its activities do not include to a substantial extent activity other than trading activities. The legislation does not define “substantial extent” for this purpose.

The phrase “substantial extent” is used in various parts of the TCGA 1992 to provide some flexibility in interpreting a provision without opening the door to widespread abuse. HMRC published guidance in the Capital Gains Manual (CG53116) sets out the HMRC view that, for this purpose, ‘substantial extent’ means greater than 20% of total activities and that the matter should be judged ‘in the round’, using a range of appropriate indicators.

Notification would be due if:

  • an alternative approach is adopted; and
  • the notification exemptions do not apply; and
  • the notification threshold will be exceeded.

For example, Alpha Limited may consider that HMRC’s interpretation of ‘substantial extent’ is incorrect and that it should mean greater than 50%. If, having considered the matter in the round they conclude that the company invested in was a trading company for the purposes of the SSE despite only 60% of its activities being trading activities notification would be needed.

Employment status

Employment status uncertainties are within scope of UTT. There are two limbs within the ‘known position’ trigger. Paragraph 10 says:

3. This sub-paragraph applies if the tax treatment applied in arriving at the amount relies (wholly or in part) on an interpretation or application of the law that is not in accordance with the way in which it is known that HMRC would interpret or apply the law*.

4. For the purposes of sub-paragraph (3), HMRC’s position on a matter is taken to be “known” by a company or partnership if it is apparent from—

(a) guidance, statements or other material of HMRC that is of general application and in the public domain, or

(b) dealings with HMRC by or in respect of the company or partnership (whether or not they concern the amount in question or the transaction to which the amount relates).”

*As employment status principles are derived from various case law, and often not set out in statute, we interpret the use of “the law” in this paragraph to include both statute law and case law.

Businesses should refer to HMRC manuals for our known position (sub-paragraph 10(4)(a)). The guidance provides the principles that need to be applied to a set of facts.

A business also has the option of using HMRC Check Employment Status for Tax (CEST) tool. The results of CEST do not fall within sub-paragraph 10(4)(a), because they are not “of general application in the public domain”. However, if a business uses CEST, the results fall under sub-paragraph 10(4)(b) – dealings with HMRC in respect of a specific business.

There is no compulsion to use CEST. However, if a business uses CEST, the results provide HMRC’s known position in relation to a set of facts for a specific engagement (in response to a series of answers that the business has provided). If the business treats the status in accordance with the results of CEST, then no notification is required. Similarly, as the results of CEST produce HMRCs known position on the engagement, a notification is required if the business treats the relationship contrary to these results.

The results of CEST will not provide evidence of HMRCs known position where the information is checked and found to be inaccurate, or where the results are achieved through contrived arrangements, designed to get a particular outcome from the tool.

On occasion, the CEST tool will produce an ‘Unable to Determine’ determination. This is due to the individual facts of the case being so finely balanced that CEST is unable to produce a result that HMRC could stand behind. In this situation the ‘known position’ criterion would not be met from using CEST and notification is not required. However, in this situation, the business is still expected to have reviewed HMRC guidance to determine whether the principles in the guidance provide HMRCs known position. To come to a determination the business must use reasonable care when considering the principles set out in wider HMRC guidance on employment status to determine HMRCs known position to their individual set of facts.

Example

Orange Ltd is uncertain whether the relationship with its workers is that of employees or self-employed contractors for tax purposes. The £5m threshold is met. Orange Ltd enters the relevant details into HMRCs Check Employment Status for Tax (CEST) tool, in accordance with HMRCs CEST guidance, and the tool produces the result that the workers are caught for IR35/employees for tax purposes

If Orange Ltd follows the CEST outcome, and treats the workers as employees for tax purposes, they will be treating the relationship in accordance with HMRC’s known position and will not have to notify the treatment under this criterion.

However, if Orange Ltd treats the relationship contrary to the results from CEST, then it is contrary to HMRCs known position and they must notify, unless the conditions of the general exemption are met. Notification is required in this situation, even if they use another, independent, employment status tool that produces the result to support their treatment.

If Orange Ltd chooses not to use CEST, or the result of CEST is “undetermined”, then HMRCs position is not known, and no notification (or pre-notification exemption) is required. However, in this situation, Orange Ltd is still expected to have reviewed HMRC guidance to determine whether the principles in the guidance provide HMRCs known position.

Clearance requests

Where a company or partnership applies for a statutory or non-statutory clearance, HMRC may take one of the following actions (assuming all relevant information has been provided):

  • Agree with the tax treatment being proposed by the company or partnership.
  • Not provide clearance (where HMRC does not think there are genuine points of uncertainty, where the arrangements are for the purposes of avoiding tax, where HMRC is checking the tax position for the period in question, or where the relevant return to which the clearance relates is final).
  • Disagree with the tax treatment being proposed by the company or partnership.

The first and third of these bullets express a known position by HMRC to the company which is the subject of the clearance. If HMRC refuses to provide a clearance because there is no uncertainty, then there is no obligation to notify. Furthermore, the business would have provided HMRC with the same information as would have been provided in a formal notification, and therefore would be exempt from notifying.

HMRC recognises that there is a large volume of published material and the UTT regime is not intended to act as a series of tripwires leading to penalties, where a business took a reasonable approach to establishing HMRC’s position. HMRC would consider the guidance available to the business at the time they were required to notify, and not subsequent amendments or clarifications to the guidance. HMRC has discretion over UTT penalties, and the penalty regime contains provision for reasonable excuse. HMRC expects a level of familiarity with its published material, and that a business would want to ascertain whether HMRC is likely to take a different view from the position included in a return.

Factors to consider would include:

  • Whether HMRC guidance on the issue is easy to find, for example by being in a guidance manual which is clearly relevant to the matter in question.
  • Whether a search using relevant search terms finds HMRC’s published view on the issue concerned.
  • Whether the tax issue concerned is novel, contentious, high-value or high-risk, such that a careful examination of HMRC’s view would be warranted.

The same considerations apply to HMRC’s known position that is known from correspondence with the business. If HMRC’s known position was given (say) 10 years ago, can the business assume that is still HMRC’s known position? HMRC expects the business to have a level of familiarity with published material and tax law, and for the business to consider whether any changes to these may change HMRC’s known position.

Changing and Updating of HMRC Publications

HMRC material is regularly reviewed and updated, and therefore over time HMRC’s known position may change. Any significant changes are initially highlighted by published briefs or technical notes from HMRC. Guidance manuals are then updated. Each manual includes an updates section highlighting pages that have been altered.

All old versions of HMRC manuals that have been updated are accessible in the national archives.

Outdated or Contradictory HMRC Publications

Occasionally HMRC publications may be out of date or contain conflicting positions. This could be for several reasons, for example:

  • Publications are superseded by new publications, but out of date publications may not have been marked as withdrawn or superseded.
  • Publications not yet properly updated to reflect changes in other publications.

There is no requirement to notify HMRC of an uncertain tax treatment under the known position criterion if HMRC’s position is not known. In instances where HMRC’s position is unclear there will be no known position. HMRC’s position is clear where it either provides a clear answer to the question or a clear set of guiding principles that can be applied to a set of facts. Where HMRC’s position is contradictory, the known position is to be taken as the most recently published statement of the known position.

Sometimes earlier guidance will not be withdrawn because subsequent guidance does not fully replace it. Subsequent guidance may not be ‘on all fours’ and address different matters, with overlap with the previous version.

Where HMRC is unsuccessful in litigation but has not changed its guidance, businesses are still expected to notify HMRC where they take a position that is contrary to HMRCs known position as published in guidance.

Example 1

Revenue & Customs Brief 9 (2021) was published on 11 June 2021 following a decision in the Court of Appeal. It concerns the VAT liability of day-care services supplied by private bodies in England and Wales. The brief states, ‘Providers who have not accounted for VAT on supply of these services must do so with immediate effect.’ There is no contradictory HMRC guidance dated later than 11 June. Assuming the other conditions are met, notification under UTT will be required if a private body providing day-care services does not account for that VAT after the UTT legislation comes into force.

Example 2

Revenue & Customs Brief 14 (2021) was published on 28 October 2021. The brief states, ‘From 28 October 2021, registered dentists or dental care professionals, or those importing on their behalf, can exempt from VAT the importation of dental prostheses’. If guidance in the VAT manuals contradicted this treatment, but the date that guidance was updated is prior to 28 October 2021, then notification would not be required if the tax treatment followed was in accordance with the Revenue & Customs Brief.

A belief by the qualifying company or partnership that the guidance is outdated or wrong will not in itself mean that notification is not required. If the business does not file in line with HMRC’s known position then, assuming the other conditions are met, notification is required, whatever the reason. Recognising that HMRC’s known position differs from the customer’s view of the law may oblige notification, but it does not oblige the customer to alter their self-assessment. It remains the customer’s responsibility to calculate their tax liability and file their return in line with the law.

Example 3

The Upper Tribunal has dismissed HMRC’s appeal against a decision of the First-tier Tribunal on whether a supply was zero rated under schedule 8 VAT Act 1994.

A business making the same supplies would self-assess for VAT based on the Upper Tribunal decision being the current understanding of the law, but if that tax treatment is not in line with HMRC’s known position (due to a position expressed in a Revenue & Customs Brief, for example) then, if the other conditions are met, notification would still be required under the uncertain tax treatment legislation.

Similarly, in light of the outcome at Upper Tribunal, businesses may choose to protect their positions by making claims for historic overpaid or under recovered VAT that is not in line with HMRC’s known position and adopt the treatment in question when submitting future returns, in this scenario if the other conditions are met, notification would still be required under the uncertain tax treatment legislation. However, if the error correction notification included all of the information that would otherwise be included in a formal UTT notification, a separate UTT notification would not be required.

Notification under the uncertain tax treatment legislation would be required as HMRC’s “known position” has not changed. It would not be required if HMRC’s published position on the liability of the supply was changed to reflect the outcome at Upper Tribunal.

Factual uncertainties

There will be cases where guidance gives a general HMRC view of a tax issue, but where the real uncertainty depends on the application of that guidance to a set of facts. Where HMRC guidance indicates the types of facts that are relevant these should be considered based on the principles set out in that guidance. Where there is no HMRC guidance on the nature of the facts HMRC considers relevant or there are no principles set out, there is not a clearly expressed ‘known position’ for the purposes of UTT.