UTT14500 - Threshold test: related amounts

When assessing whether the threshold test is met, amounts which are related to the uncertain amount must be aggregated for the purposes of this test.

Two or more uncertain amounts are related if -

• The amounts are included in a return or returns of the same description for the same relevant period,
• The amounts relate to the same relevant tax, and
• The tax treatment applied in arriving at one amount is substantially the same as the tax treatment applied in arriving at the other amount(s).

When considering whether tax treatments are substantially the same as others, and therefore to be aggregated as related amounts, the qualifying company or partnership will consider whether the uncertain tax treatments are as a result of applying the same reasoning to determine the tax treatments.

For the purposes of aggregation for the threshold test, the core of the test is whether there are more than one occurrence of the same facts and treatment. For example, aggregation is required apply where unrelated individuals are employed by the same organisation under the same terms and conditions. It is the same relationship and the same uncertainty, but applying to multiple individuals. Therefore, the facts are “substantially the same”. To determine the full extent of the uncertainty, and therefore whether notification is required, they should be amalgamated.

We expect a qualifying company or partnership to consider that if the uncertain tax treatment is found to be incorrect, then any other tax treatments that will resultantly also be incorrect, will be aggregated for the threshold test.

Example - VAT

Where the uncertain tax treatment of compressed fruit bars (as referred to in UTT14300 on HMRC’s known position expected amount) relates to multiple different flavours of bars and all are accounted for at the zero rate of VAT, the different flavours will be treated as substantially the same in relation to the threshold test for Uncertain Tax Treatment (UTT).

Where strawberry flavoured bars amount to total outputs of £24m and banana flavoured bars amount to total outputs of £18 million, taken separately neither will meet the threshold test. As the uncertain tax treatment is substantially the same by virtue of applying substantially the same tax decisions, these should be aggregated with total outputs amounting to £42 million, giving a tax advantage of £7 million.

The threshold test has now been met and a notification should be made, as substantially the same uncertain tax treatment has been applied to the VAT liability of supplies for which the HMRC position is known. If the same business also made retail sales of food that may meet the criteria of hot food under the catering exception, but for which there is an uncertainty when applying the multifactorial tests laid out in the HMRC VAT Food manual, then these supplies will not be aggregated with the compressed fruit bars for the purposes of the threshold test as substantially the same tax treatment. Although all supplies will be considered in relation to the application of Group 1 of Schedule 8 of the VAT Act 1994, the decisions made to determine the tax treatments are not substantially the same.

National Insurance contributions

Where the relevant return is a return under PAYE regulations, National Insurance contributions (NICs) are to be included for the purposes of determining the aggregate value of the relevant tax advantages mentioned in UTT14200.

Therefore, although NICs are not a relevant tax in scope of UTT, NICs are to be aggregated with the uncertain income tax treatment in determining the expected amount where the NICs treatment is substantially the same as the income tax treatment it relates to. This includes all classes of NICs, as relevant to the specific income tax issue under consideration.

Example - PAYE and Corporation Tax (CT) related amounts

Several company directors have set up a new Trust. In lieu of annual bonuses, which the directors were contractually entitled to, the company they work for has agreed to transfer rights to a percentage of the company’s profits to the Trust.

If the company meets certain targets, then a pre-agreed percentage of the company’s profits will be transferred to the new Trust. These profits are not included as part of the business’s taxable profits and as such, no tax is paid on these amounts.

Once transferred, the directors have control of the funds and can dictate how the funds are distributed. Typically, these funds have been drawn down as loans with no repayments made to the Trust.

There are two relevant taxes here to consider for possible notification, Corporation Tax in relation to the undeclared profits of the company and Income Tax, in relation to the bonus earnings transferred to the new Trust. If notification criteria are met for both relevant taxes, two separate notifications would be required.

When considering the relevant amount for Income Tax, as the National Insurance contribution treatment for earnings is substantially the same as Income Tax, all NICs that would be payable if the amounts transferred were classed as earnings would have to be included in addition to Income Tax when calculating the relevant amount.

FA22/SCH17/PARA17