Uncertain VAT Treatment
On 20 July 2021, the Government published draft legislation on a new requirement, first announced at Budget 2020, for large businesses to notify HMRC where they have adopted an uncertain tax treatment (UTT) in corporation tax, VAT or income tax returns. There is a £5 million threshold below which a notification is not required, see below, so the provision should not apply to uncertainties involving small sums of money.
The measure is intended to improve HMRC’s ability to identify uncertain tax treatments adopted by large businesses, encouraging more businesses to discuss areas of uncertainty with HMRC, helping reduce tax losses in situations where HMRC and a taxpayer take different views of what the law means, resulting in a different tax outcome, but where there is no avoidance.
The measure will apply to VAT returns due to be filed on or after 1 April 2022. There will be an escalating penalty ranging from £5,000, where the company or partnership has not, in any of the preceding three financial years, been assessed to a notification penalty in respect of the same relevant tax to £50,000, where the company or partnership has been assessed to a second penalty or further failure penalty in the preceding three financial years in respect of the same relevant tax. It is therefore important that large businesses consider how they will approach the requirement now.
This is a fairly complicated area and cannot be covered fully here. If you are concerned that this new requirement to notify may impact on your business and you need advice, please contact us.
Large businesses in-scope
The measure only applies to large businesses, which very broadly comprises companies and partnerships with UK turnover of greater than £200 million per annum or a UK balance sheet total over £2 billion.
HMRC has published guidance on the new regime in a word document that can be accessed via its website and details on the application of the measure can be found there, including the legal definitions of businesses falling within the scope. Other points of note included in that guidance are:
To comply with the UTT rules qualifying companies and qualifying partnerships must notify HMRC if a relevant return delivered to HMRC includes an amount in relation to which one or more of the following three notification criteria is met.
- Provision made in the accounts
The amount relates to a transaction in respect of which a provision has been recognised in the accounts of the qualifying company or partnership, in accordance with generally accepted accounting practice, to reflect the probability that a different tax treatment will be applied to the transaction
- HMRC’s known interpretation of the law
In arriving at the amount, reliance was placed on an interpretation or application of the law that is different to HMRC’s known interpretation or application.
- Substantial possibility amount would be found to be incorrect
It is reasonable to anticipate that, if a tribunal or court were to consider the way in which the amount was arrived at, there is a substantial possibility that the treatment would be found to be incorrect.
Establishing HMRC’s known position
For the purposes of UTT HMRC’s position is taken to be known by a qualifying company or partnership if it is apparent from guidance, statements, or other material of HMRC that is of general application and readily available and in the public domain; in addition to the business’s correspondence with HMRC. The table below lists the types of publications that do/do not indicate HMRC’s known position for the purposes of this criterion:
|Contains HMRC’s Known Position||Not to be considered|
|HMRC Manuals||Advice provided via On-line HMRC forums|
|Statements of Practice||Submissions HMRC makes in litigation|
|Public Notices||Explanatory and technical notes relating to legislation|
|Publications which set out HMRC’s view of tax compliance risk in relation to certain transactions||–|
|Revenue & Customs Briefs||–|
|Correspondence between the taxpayer and HMRC about transactions covering statutory and non-statutory clearances and advice provided by HMRC on specific transactions||–|
This criterion applies where there are two or more likely tax treatments, based upon either legal interpretation or the possible applications of law to facts, which result in different amounts, which when compared create a tax advantage that meets the threshold test.
HMRC states in its guidance that for VAT purposes a qualifying company or partnership obtains a “tax advantage” 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.
HMRC also state that 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.
Disclosure threshold amount
A threshold of £5 million applies and below this amount uncertain tax treatments do not need to be notified to HMRC. The threshold applies to an aggregate amount of tax in a “relevant period”. In respect of VAT returns, the relevant period is defined as a twelve month period ending on the last day of the last prescribed accounting period falling wholly within the financial year for which the return is delivered to HMRC.
Situations where notification may not be required
A qualifying company or partnership is not required to notify HMRC regarding an amount included in a relevant return, if it is reasonable to conclude that HMRC already have available to them all, or substantially all, of the information relating to that amount.
The onus is on the qualifying company or partnership to draw attention to any amounts or details. This is particularly true if there is some doubt as to the interpretation of that information. It is not sufficient for a company or partnership to simply to provide the information if:
- it is hidden away,
- it is obscure, or
- its relevance is unclear.
Although there is no definitive list specifying how a qualifying company or partnership may notify HMRC of an uncertain tax treatment outside of the formal notification process the guidance states that common methods may include:
- Making your Customer Compliance Manager (CCM) aware of an uncertain treatment during a regular interaction
- Providing a relevant HMRC Tax Specialist details during a Business Risk Review (BRR)
- Submitting a statutory clearance request
- Submitting a non-statutory clearance request
HMRC say that if a business has provided HMRC with information in relation to a clearance request then the general exemption will likely apply. However:
- If the specifics of the transaction/tax treatment have changed significantly since clearance was given or
- Clearance was not given by HMRC, but the transaction/tax treatment was still implemented
Then notification of an uncertain tax treatment will likely still be required.
Constable VAT has always strongly recommended the submission of non-statutory clearance requests where a tax treatment is uncertain and this process becomes even more useful taking into account this new regime.