UTT14200 - Threshold test: tax advantage

The examples in this section illustrate how to approach the calculation of the tax advantage. The examples have been written with this in mind to ensure clarity over the principles in point and are not intended to illustrate other legislative principles (such as the interpretation of whether any of the notification criteria are met).

Income Tax or Corporation Tax (CT)

For these purposes a “tax advantage” in relation to income tax or corporation tax includes -

  1. A relief or increased relief from tax.
  2. A repayment or increased repayment of tax.
  3. Avoidance or reduction of a charge to tax or an assessment to tax.
  4. Avoidance of a possible assessment to tax.
  5. Deferral of a payment of tax or advancement of a repayment of tax.
  6. Avoidance of an obligation to deduct or account for tax.

CT - Example 1 – Land remediation relief

Gamma Ltd carries on a trade of building houses and in the financial year ending 31 October 2022 incurs expenditure of £56 million to remediate land that has been contaminated. Gamma Ltd makes a claim for land remediation relief, which leads to it deducting an additional 50% of the expenditure (£28 million) for CT purposes. However, there is uncertainty over whether some of this expenditure should be excluded from the claim, on the grounds that it does not meet the “polluter pays” principle, which would result in only £26 million of the expenditure being available for a claim (resulting in a tax deduction of £13 million). The tax advantage is the difference between the uncertain amount of land remediation relief (£28 million) and the expected amount (£13 million). The tax advantage would therefore be the difference of £15 million x the CT rate. If the CT rate is 19%, for example, this would result in a tax advantage of £15 million x 19% = £2.85 million. As the tax advantage is below the £5 million threshold, it would not be notifiable.

CT - Example 2 – Corporate Interest Restriction (CIR)

Beta Ltd is the reporting company for a CIR worldwide group. It submits an interest restriction return (IRR) for the period ended 31 December 2022, which shows the total disallowed amount as £3 million. The disallowed amount is allocated to Beta Ltd, and it files its corporation tax return for the accounting period ended 31 December 2022, showing interest expense of £40 million, £3 million of which is disallowed under the CIR rules.

In preparing the IRR, Beta Ltd treated an amount of £50 million as tax-interest income, although this is contrary to HMRC’s published guidance. The effect of this different treatment was to reduce the total disallowed amount by £35 million. The amount of interest expense brought into account by Beta Ltd is therefore an uncertain amount.

The tax advantage is calculated by comparing the £38 million that would be disallowed using HMRC’s interpretation, with the £3 million that has been disallowed in the company tax return. The company pays tax at 19%, so the tax advantage is £35 million x 19%, £6.65 million. Beta Ltd must notify HMRC of the Uncertain Tax Treatment (UTT).

FA22/SCH17/PARA12

FA22/SCH17/PARA14

VAT

For these purposes a qualifying company or partnership obtains a “tax advantage” in relation to VAT if:

  • In a prescribed accounting period, the amount by which the output tax accounted for by the qualifying company or partnership is less, or is accounted for later, than would otherwise be the case.
  • The qualifying company or partnership obtains a VAT credit when it would otherwise not do so or obtains a larger credit or obtains a credit earlier than would otherwise be the case.
  • In a case where the qualifying company or partnership recovers input tax as a recipient of a supply before the supplier accounts for the output tax, the period between the time when the input tax is recovered and the time when the output tax is accounted for is greater than would otherwise be the case.
  • In a prescribed accounting period, the amount of the qualifying company’s or partnership’s non-deductible tax is less than it otherwise would be.
  • The qualifying company or partnership avoids an obligation to account for VAT.

The term “non-deductible tax” in relation to a qualifying company or partnership tax advantage means -

  • Input tax for which they are not entitled to a credit under Section 25 of VATA 1994.
  • Any VAT incurred which is not input tax and which they are not entitled to a refund by virtue of any provision of VATA 1994.

For these purposes, the VAT “incurred” is:

  • VAT on the supply to the company or partnership of any goods or services.
  • VAT paid or payable by them on the importation of any goods.

The tax advantage calculation in relation to output tax is not to be offset by any input tax credit, either within a VAT registration or between VAT registrations, even where there is a direct and immediate link, or the transactions are within the same corporate group. Similarly, any uncertain input tax treatment should be considered in isolation to any related output tax declared when determining the amount of the tax advantage.

A partly exempt business will submit returns that calculate recoverable input tax on a provisional basis pending their longer period adjustment. The provisional deduction is the correct tax to pay (or claim) at the time those returns are submitted, and as such, any calculation of the tax advantage under UTT for a partly exempt business will be calculated in accordance with the returns due and the declared amounts in the relevant UTT period.

VAT - Example 1

A qualifying company may be required to consider whether the notification criteria and threshold test are met where it brings a new article of clothing to the market. The business has undertaken a product liability review and although it is uncertain, it considers that the article meets the design test as being clothing designed for young children and it zero rates the product.

The product is successful and total outputs over the 12-month financial year amount to £36 million. The business has accounted for VAT on the product at the zero rate throughout the relevant period, therefore declared output tax on these supplies is nil. As the amount of output tax that has been accounted for is less than it would have been if the zero rate is found to not apply, then a tax advantage has been obtained.

The business determines that if the article of clothing does not qualify for the zero rate, it will be standard rated. The output tax will be calculated by applying the standard rate VAT fraction to the total consideration of £36 million and as such the tax advantage will be £6 million. This will exceed the threshold.

VAT - Example 2

A fully taxable UK supermarket is taken to court for trademark infringement by a leading sports brand, for using a logo very similar to the brand’s logo on its own labelled sportswear. On 31 December 2020, the court finds in the brand’s favour. The court awards a large financial settlement of £31 million to the sports brand in compensation for damages. The brand has incurred legal service fees of £1 million VAT inclusive in relation to the case for damages.

The sports brand reviews published HMRC guidance for ‘Compensation and liquidated damages that are consideration’ and believes the VAT treatment of the court award for damages is uncertain.

The sports brand realises that the £31 million of the award for damages could therefore be within the scope of VAT. This would require output tax declaration of £5.17 million. However, the sports brand is aware it could then recover £200 thousand of input tax on the legal services and its output tax would be the supermarket’s input tax to recover if the award for damages were to be treated as a taxable supply.

The sports brand netting off its output tax against the input tax on legal fees incurred and the input tax of the supermarket is inappropriate. Therefore, the sports brand qualifies for consideration under the UTT legislation because the amount of uncertain output tax is more than the £5 million threshold for UTT notification. Notification of this uncertain tax treatment to HMRC is required and the sports brand prepares its submission.

VAT - Example 3

Company A is representative member of a fully taxable VAT group and wishes to bring Company B under its group registration to reduce administrative burden arising from supplies between the two entities. Company B is also fully taxable and established in the UK.

Company A considers published HMRC guidance that sets out the conditions for VAT group eligibility. The establishment condition for grouping company B is clearly met. The condition that Company A should have control of Company B as its parent as per section 1159 and Schedule 6 of Companies Act 2006 for VAT grouping is less clear. A’s control of B doesn’t precisely meet the criteria set out in Public Notice 700/2 (Group and divisional registration) and HMRC internal manual VGROUPS02150 (Eligibility for VAT group treatment: control conditions).

Both company A and Company B are fully taxable, and all VAT charged between them would be fully recovered if not grouped and all supplies between the two would be disregarded under VAT grouping (no net tax effect whether grouped or not). However, if the combined output tax charged by either Company A to Company B (or the reverse) were to exceed £5 million in a relevant financial year, given that netting of input tax against output tax is inappropriate for UTT threshold purposes, notification of the uncertain tax treatment to HMRC would be required.

FA22/SCH17/PARA13

FA22/SCH17/PARA14