UTT14100 - Threshold test: overview

Paragraphs 11-17 of Part 2 of Schedule 17 to Finance Act 2022 set out the procedure for applying the threshold test to an uncertain tax treatment. The following pages provide more detail in relation to how the threshold test is to be applied and whether a notification to HMRC is therefore required, as described in UTT15000.

There is a requirement for a qualifying company or partnership to notify HMRC of an uncertain tax treatment within the notification deadlines, where the tax treatment meets the notification criteria and the threshold test as set out below.

There will only be a requirement to consider whether the threshold test is met where an uncertain amount is identified by reference to one of the two criteria set out in Paragraph 10 of the legislation and as explained at UTT13000. Where at least one of these criteria is met, there is only a requirement to notify if there is a “tax advantage” of £5m or more. The amount of the tax advantage is determined by a comparison of the uncertain amount with the expected amount. It is therefore important to define these terms clearly, as it determines whether an amount is to be notified to HMRC.

The definition of the expected amount is set out in UTT14300 but is the amount of tax that a qualifying company or partnership would have accounted for if the alternative tax treatment was applied (that is, HMRC’s known position or the position that led to the recognition of a provision).

The threshold test is met where it is reasonable to conclude that the tax advantage a qualifying company or partnership will obtain as a result of bringing the uncertain tax treatment, and any related uncertain amounts, into account will exceed £5 million in the relevant period for the relevant tax. For a partnership, the tax advantage includes the advantage accruing to the partners as a result of an uncertainty in the partnership return.

The £5 million threshold applies separately to each uncertain amount for a relevant period. The relevant period corresponds with the company or partnership’s financial year which will normally be 12-months, although there can be situations where the relevant period is longer or shorter than 12 months with the threshold adjusted proportionately. See UTT14400 for examples of how to calculate the threshold where the relevant period is longer or shorter than 12 months.

Where the tax advantage exceeds £5m in a relevant period, as explained in UTT14200, the threshold test is met, and a notification must be made by following the notification process outlined in UTT15000, subject to any exemptions from notification explained in UTT16000.

FA22/SCH17/PARA11