UTT17350 - Penalties: in what circumstances is discretion exercised

Where HMRC has declined to provide clearance on the basis that there is no uncertainty

On the 25th August 2023 for the financial year ending 31st October 2023 Gamma Ltd sought clearance from HMRC on whether a treatment it wanted to apply on its capital expenditure on a new warehouse and machinery, was in accordance with HMRC’s view as laid out within the guidance. Gamma Ltd disclosed general information to HMRC but did not indicate how it wanted to apply the treatment. HMRC declined clearance on the basis that no uncertainty existed based on the information disclosed. This did not exempt Gamma Ltd from having to notify about an uncertainty within its CT return and submit a UTT notification.

Gamma Ltd submitted its CT return on 31st October 2024. HMRC undertook a compliance check into the CT return and identified that the treatment applied by Gamma Ltd on its capital expenditure on a new warehouse and machinery was uncertain and contrary to HMRC’s known position. Gamma Ltd failed to submit a UTT notification in relation to this uncertainty and is therefore liable to a penalty.

Gamma Ltd liaised with HMRC and declared that HMRC declined clearance on the basis no uncertainty existed at the time. HMRC exercised discretion and no penalty was charged. HMRC urged Gamma Ltd that when making a full disclosure to HMRC on whether a treatment would be contrary to HMRC’s known position, the onus is on Gamma Ltd to provide HMRC with all information necessary, including indication how they intend to treat the matter, in order for HMRC to make a reasonable determination whether an exemption is applicable.

Where HMRC had not updated guidance to reflect HMRC’s interpretation of the law

Delta Ltd is an employer within a large business group which operates its own PAYE scheme. In the financial year ending 31 December 2024, Delta Ltd applies a tax treatment to employee remuneration which may be contrary to HMRCs known position. Having reviewed HMRC’s guidance, Delta Ltd concluded that its situation was not uncertain because:

• it was not covered in the guidance (and therefore couldn’t be contrary to HMRCs known position), and
• it had not made a provision.

Therefore, it did not need to submit a UTT notification.

HMRC undertakes a compliance check into the PAYE return and identifies that potentially a tax treatment contrary to HMRC’s known position had been applied and should have been notified. Although Delta’s specific situation is not covered within the guidance, the principles in guidance applied to Delta’s set of facts.

Furthermore, a recent case decision applied the existing principles to a set of facts more in line with the situation covered by Delta. This decision reinforced HMRC interpretation, however HMRC had not updated their guidance to reflect this.

Therefore, HMRCs interpretation had not changed, and their guidance published at the time when Delta filed their return was applicable but may had not been clear enough for Delta to apply to its set of facts.

Delta Ltd is liable to a penalty because it failed to notify of an uncertain tax treatment applied to its employee remuneration which was contrary to HMRC’s known position.

Delta Ltd made a representation to HMRC and argued that under their own assessment the guidance did not indicate that the treatment Delta applied would be contrary to HMRC known position. Upon review, HMRC exercised discretion and no penalty was charged. HMRC urged Delta to discuss any uncertainties or treatments with their CCM if they are in doubt whether HMRC guidance explicitly covers it. HMRC updated its guidance to clarify their interpretation in relation to Delta’s set of facts.

Where there is a doubt over whether general exemption is met

Epsilon Ltd is the representative member of a VAT group which makes quarterly VAT returns for quarterly calendar periods. During the financial year ending 31st December 2023, several VAT group members made supplies where the applicable VAT rate is uncertain, as they have taken a position that is different to HMRC’s known position.

Epsilon Ltd submitted their VAT return but failed to submit a UTT notification in relation to the uncertainty. Epsilon Ltd is therefore liable to a UTT penalty.

Epsilon Ltd made a representation to HMRC and argued that it did not need to notify about the uncertainty as it engaged with their CCM and discussed the matter.

Epsilon were having to consider an uncertainty for the first time, they thought all of the relevant information had been provided but had misunderstood one of the requirements. Therefore, the discussion didn’t qualify for an exemption.

HMRC exercised discretion, and no penalty was charged, as Epsilon had discussed the uncertainty with their CCM and thought that the exemption was met. HMRC urged Epsilon Ltd that for future reference it needs to meet all of the disclosure requirements before an exemption is met. HMRC will make it clear whether the exemption from having to notify has been met.