• Simon Shaw, Partner |
5 min read

The run-up to Tax Day brought plenty of speculation about what HMRC might announce. Come the day, one of the less heralded – but potentially most significant – developments was the latest rules on uncertain tax positions (UTPs).

It’s fair to say that the changes are causing some confusion among businesses. This was evident when we brought tax leaders together in June for a webinar: Keeping control of your uncertain tax positions.

So what are the new rules? And how can large organisations go about complying with them?  

Triggers and exemptions

Under the proposals, a tax treatment is considered uncertain, and should be disclosed to HRMC, if any of the following triggers applies:

  1. A provision has been recognised in the organisation’s accounts in line with accepted accounting practice, to reflect the possibility that a different tax treatment may be applied to the transaction, to that which formed the basis for the amount included in the associated tax return.
  2. The tax treatment relies (wholly or in part) on an interpretation or application of the law that’s different to how HMRC would interpret or apply the same law.
  3. There’s a substantial possibility that a tribunal or court would deem the treatment incorrect in one or more material respects.

However, there are three exemptions to these rules, under which positions won’t need to be disclosed: 

1. General exemption

Uncertain amounts included in tax returns aren’t notifiable if it’s reasonable to assume that HMRC already has the relevant information relating to those amounts.  

This information includes:

  • Interactions with HMRC – e.g. with the firm’s Customer Compliance Manager (CCM).

For large businesses without a CCM, HRMC’s Customer Engagement Team will provide structured opportunities to discuss uncertainties before filing tax returns. 

  • Information already disclosed to HMRC through formal channels.

This might be under disclosure of tax avoidance schemes rules, international movement of capital reporting, or mandatory disclosure regulations  

Guidance on these information requirements is due from HMRC. Businesses will need to consider how this affects their approach to communications with HMRC.

2. Exemption for group transactions

For corporation tax, there’s no requirement to notify in cases where:

  • The uncertain amount relates to transactions between members of the same corporate group and;
  • The net overall tax advantage to the group would be below £5 million.

3. Exemption for transfer pricing and profit attribution

Earlier HMRC proposals met with widespread feedback that transfer pricing should be excluded from disclosure requirements, as it’s an inherently uncertain area.

The uncertainties surrounding transfer pricing are primarily about how to apply the arms-length principle. The argument goes that this is an economic judgement, not a matter of legal interpretation.

In response, HMRC opted to exclude transfer-pricing and profit-attribution uncertainties under the third trigger. However, treatments for which a provision has been made in the accounts, or which run contrary to HMRC’s known position, remain in scope. As do treatments where the uncertainty relates not to the arms- length principle, but to other aspects of transfer-pricing legislation – for example, whether the participation condition is met.

Financial penalties for not complying with the new provisions will be £5,000 for the first failure to notify, rising to £25,000 for the second and £50,000 for the third. 

Guidance grievances

There’s little doubt that the triggers and exemptions are complex. The second trigger alone makes it difficult to work out whether to disclose an arrangement without getting technical advice. And the third trigger is going, I suggest, to lead to even more debate as to whether there exists a ‘substantial possibility’ of a tribunal or court deciding the arrangements do not work.

At the same time, the guidance HMRC issued along with their proposals is perhaps less clear than it could be.

The overall message seems to be: businesses should disclose positions if unsure that HMRC will approve them. But this will inevitably be a moving target.

HMRC’s stance continually changes as it makes rulings on cases – sometimes retroactively. Then, of course, the Courts may reverse some of these decisions – which businesses will have been dutifully following in the meantime. And experience tells us that the guidance is unlikely to be updated as the UTP landscape evolves.

With all this in mind, we asked how many tax leaders on our webinar felt they could rely on HMRC guidance. Less than a quarter (23%) said they could. Where does that leave them?

The implications

One outcome of the new rules is abundantly clear: they will cast the disclosure net far wider than many first imagined.

Many more large businesses will need to worry about their tax positions, and that comes with an additional compliance burden, as well as the risk of getting it wrong. This is a frustration to some: there’s a sense that they’re being brought into the same fold as tax avoiders.  

And while the financial penalties aren’t too draconian (albeit £50k for a ‘further failure’ is getting a bit more serious), clearly organisations that fall foul of the rules will come under greater scrutiny from HMRC. As might those that frequently disclose UTPs, simply because they’re applying the rules as they should – even if their treatments are consistently approved. The same goes for those that challenge HMRC decisions on their uncertain positions, even if they win in court.

Given the scale and complexity of the new provisions, businesses will want certainty over the treatments they disclose, as quickly as possible.

In my view, the key to swift resolution would be an accelerated alternative dispute resolution (ADR) mechanism. But this doesn’t seem to be on HMRC’s radar; and as a rule, it’s not a route that its Large Business directorate tends to embrace, certainly outside of my world of Indirect tax. 

Words to the wise

All things considered, my advice would be to start preparing for UTP reform now.

Large businesses with complex tax affairs will need external advice sooner rather than later to help them navigate the new regime. Technical experts like those in the KPMG tax team can help you to:

  • Review your current tax arrangements and test your assumptions about what is and isn’t disclosable.
  • Advise on any alternative treatments that HMRC may be more likely to approve.
  • Support your disclosures to help prevent unfavourable decisions and potential disputes. 

You should also begin a dialogue with HMRC as early as possible. The faster you put forward any disclosable positions, the sooner you’ll get clarity on them (accepting that HMRC sometimes take quite a while to decide on things at a Policy level).

For larger organisations, that will mean working closely with your Customer Compliance Manager (CCM). But keep in mind that CCMs allocate their resources based on the perceived level of risk of each business they look after.

Not presenting treatments HMRC consider disclosable will doubtless increase your risk rating; whereas proactively engaging with them will indicate that you’re trying to do things right. In my experience, talking issues through with HMRC generally gets a good outcome.