UTT14300 - Threshold test: the expected amount
For the purposes of the threshold test, the “expected amount” will be determined by reference to the specific notification criterion set out in UTT13000. The customer will compare the uncertain amount which they have accounted for, with the “expected amount” when calculating whether the threshold test is met, however the “expected amount” will be approached differently depending upon which notification criterion applies. This could be criterion 1 under sub-paragraph 10(2) or criterion 2 under sub-paragraph 10(3), or both.
Tax Provisions Notification criterion
Where an amount is uncertain by virtue of the different tax treatment for which a provision has been recognised in the accounts as explained further in UTT13100, the “expected amount” is the amount provided for in the accounts which relates to the uncertain entry in the tax return. Where a provision covers multiple liabilities, of which the relevant uncertain tax treatment is only one of those, the expected amount is the amount of the provision that relates to the uncertain tax treatment.
Where the tax provisions and known position criteria are both met however, the criterion that results in the largest tax advantage should be notified to HMRC.
Example 1
Omega Ltd makes a provision in its accounts for the financial year ending 31 December 2025 in recognition of the uncertainty over the tax treatment of a new product which it has launched into the market, on which the applicable VAT rate is uncertain. The company applies a reduced rate of VAT to this product, but it is uncertain whether it should in fact be standard rated. A provision for £33 million is included in Omega Ltd.’s accounts, which must be notified to HMRC under the provisions criterion because the tax advantage exceeds £5 million. It is likely that the known position criterion would not apply in this case unless HMRC had stated its position as regards the applicable VAT rate for the new product.
Example 2
Delta Ltd incurs expenditure on several repairs to its land and buildings in the financial year ending 31 March 2023. There are multiple uncertainties regarding the tax treatment, including the liability of supplies provided by a fellow group company, whether the expenditure is of a capital or revenue nature for Corporation Tax (CT) purposes, and on whether any of the expenditure qualifies for capital allowances. A provision recognising all these uncertainties is included in Delta Ltd.’s accounts for the period ending 30 June 2024. Delta Ltd must consider whether each uncertainty individually is notifiable by reference to the threshold of £5 million and the exemptions.
Provisions relating to more than one period
There are situations in which a provision will relate to more than one relevant period. This may be because:
- A provision builds up over several years. For example, £3 million may be provided for in each of three consecutive relevant periods. In this case the provisions trigger would not apply, as the amount provided for in each relevant period (£3 million) is below the threshold.
- A provision may relate to entries in tax returns in two or more relevant periods. In this case, notification depends upon whether the entry in the relevant return, in respect of which a provision has been made, exceeds the threshold.
Known Position Notification criterion
Where an amount is uncertain by virtue of adopting a tax treatment not in accordance with the way in which it is known that HMRC would interpret or apply the law as explained further in UTT13200, the “expected amount” is the amount which will have been derived from adopting a tax treatment in accordance with HMRC’s known interpretation and application of the law.
Where a qualifying company or partnership considers there to be more than one “known position” the expected amount is the amount that produces the lowest tax advantage. As such, if one known position results in a £7 million tax advantage and it is apparent a further known position exists which results in a £3 million tax advantage, there would be no requirement to notify an uncertain tax treatment as threshold test would not be met.
There could be more than one known position, but which known position is applicable depends on the facts and circumstances being considered. The tax advantage is calculated using the known position that produces the lowest tax advantage.
However, in a case where there is more than one known position because HMRC has not made its position on the matter clear, there would be no known position and therefore no notification requirement under the known position criterion.
CT Example
A UK resident company, Alpha Ltd, receives royalty income from several patents it holds, and it issues special shares to Beta Ltd, which is tax resident in the British Virgin Islands, that entitles it to receive an amount equal to all the royalties received in respect of intellectual property.
The accounts of Alpha Ltd show the issue of the shares. The royalty receipt from intellectual property would not be recognised by Alpha Ltd because it has an obligation to pay it out (as the company considers itself not to be the beneficial owner of the income), but HMRC guidance indicates that Alpha Ltd should be taxed on it. Alpha Ltd decides to not include it in its company tax return which is contrary to HMRC’s known interpretation. The expected amount for corporation tax purposes will be the value of the royalty receipts over the relevant 12-month period.
VAT - Example 1
Where a qualifying company or partnership supplies compressed fruit bars consisting mainly of fruit and nuts, the question is whether they should be standard rated as confectionary under Item Number 2 (Excepted Items) Group 1, Schedule 8 of the VAT Act 1994 or zero rated as cakes under the same provision. The HMRC known position is that they should be standard rated in accordance with Paragraph 4.6.3 of VAT Notice 701/14.
If the business takes the view that the supplies are liable to VAT at the zero rate, a tax advantage will exist. Where total outputs of the fruit bars amount to £60 million in the relevant period, the uncertain amount will be £0, and the expected amount will be £10 million, determined by applying the standard rate VAT fraction to the total consideration received.
VAT - Example 2
Where a bank provides merchant acquirer services to retailers accepting card payments, the HMRC position is that these are exempt financial services.
If the bank considers the supply to be taxable and this treatment increases the input tax deductible by £7 million in the period compared to an exempt treatment, this will be notifiable as it exceeds the threshold test with an expected amount, and tax advantage, of £7 million.
More than one notification criterion met
Where a qualifying company or partnership meets both the provisions and the known position criteria, and this gives rise to more than one expected amount, the business must consider the tax advantage for both, and notify under the criterion which results in the largest tax advantage, where that tax advantage exceeds the threshold test. This is the case even where under their calculations the first criterion they consider exceeds the threshold test.
Where a qualifying company or partnership considers there to be more than one ‘known position’ (which could include a range of positions) the expected amount is the amount that produces the lowest tax advantage. Where there is more than one known position and the provisions criterion is also met, the qualifying company or partnership must determine the known position that creates the lowest tax advantage and compare that amount with the expected amount for the provision criterion. Whichever of those amounts produces the largest tax advantage is the criterion under which a notification is to be made, where that largest tax advantage exceeds the threshold test.
Exemption for certain group transactions
There is an exemption from the requirement to notify in relation to uncertain amounts of Corporation Tax (paragraph 5(2)), where the overall tax advantage (considering the group position) is below the threshold. Further explanation of the criteria for the exemption can be found in UTT16300.
FA22/SCH17/PARA15