Notification of uncertain tax treatments – what's the position with PAYE?
What do large businesses need to know as they consider the notification requirement for uncertain income tax treatments in payroll?
What do large businesses need to know as they consider the notification requirement
Under the uncertain tax treatment (UTT) regime, certain large businesses must notify HMRC of uncertain income tax positions taken in PAYE returns which are due to be filed on or after 1 April 2022. Based on HMRC's recently finalised guidance, the likelihood of notifiable PAYE positions arising appears to be low for most organisations. However, all businesses within the scope of the new rules should review any potentially contentious PAYE positions they might take in relation to employees and workers subject to the off-payroll working rules, understand their reporting obligations, and ensure that any necessary notifications are made.
When do PAYE UTTs arise?
A fuller general discussion of the new UTT rules, including their interaction with the Senior Accounting Officer and Business Risk Review regimes, is set out in our previous article 'Notification of uncertain tax treatments - updated HMRC guidance', and an update on HMRC's final UTT guidance is available here.
However, in summary, companies in groups with an annual UK turnover of more than £200 million, or a UK balance sheet total of more than £2 billion, must notify HMRC if they adopt an uncertain income tax treatment in any PAYE return with a due date that falls on or after 1 April 2022. Note that the new rules apply only where the company adopts an uncertain technical position – they do not apply to simple compliance errors.
For these purposes, 'PAYE return' means any return made under PAYE regulations. It therefore includes Real Time Information returns such as Full Payment Submissions, and forms P11D. However, it does not include Construction Industry Scheme returns.
A PAYE UTT will arise if:
- The income tax treatment applied is, wholly or partly, based on an interpretation or application of the law that is known to differ from that accepted by HMRC; and/or
- A provision has been recognised in the accounts to reflect the probability that a different income tax treatment will apply.
However, uncertain income tax treatments will not be notifiable if - were those treatments to be accepted - the aggregate income tax advantages which would arise for the company would not exceed a de minimis threshold of £5 million in the relevant period.
Even if the aggregate income tax advantages exceed the £5 million threshold, no notification is required if it is reasonable for the company to conclude that HMRC already have all, or substantially all, of the information that would otherwise be included in a UTT notification.
How does the £5 million de minimis apply?
The de minimis threshold applies to the aggregate income tax advantages that arise for the company from UTTs included in all PAYE returns for a company's financial year (for UK incorporated companies this will be the period covered by their accounts). As reporting is on a 'return by return' basis, the threshold applies separately to each PAYE reference number operated by a group.
'Tax advantage' is broadly defined and includes the avoidance of an obligation to deduct or account for income tax. This means that avoiding an obligation to operate PAYE counts as a 'tax advantage' even where tax is paid on the relevant employment income through self-assessment.
Importantly, though National Insurance Contributions (NIC) are not a 'relevant tax', so uncertain NIC treatments are not themselves notifiable. Any NIC associated with an uncertain income tax position is treated as though it were income tax when quantifying the company’s tax advantage.
Whether aggregate income tax advantages exceed the £5 million threshold is, broadly, determined by reference to the company’s financial year. If a financial year is shorter or longer than 12 months, the £5 million threshold is adjusted accordingly. For example, the threshold for a nine month financial year would be £3.75 million; for an 18 month financial year it would be £7.5 million.
However, the £5 million threshold is not adjusted for financial years which straddle 1 April 2022, even though the notification regime applies only to PAYE returns which are due on or after that date. This means that for a 12-month financial year which ends on, say, 30 June 2022, the full £5 million de minimis threshold applies to UTTs included in the PAYE returns due to be filed in the three months between 1 April and 30 June. This treatment is confirmed in the final version of HMRC's guidance.
When are PAYE UTT notifications due?
If an income tax treatment is known to be uncertain at the time the relevant PAYE return is submitted (i.e. it is then understood that the adopted treatment differs from HMRC's position, or that a provision will be recognised in the accounts), a UTT notification should be submitted to HMRC on or before the due date for the last PAYE return for the relevant financial year.
For example, if a company's employees are paid on the 25th of each month in respect of calendar month pay periods, and a reportable PAYE UTT arises in the financial year ending 30 March 2023, the relevant PAYE UTT notification should be submitted on or before 25 March 2023.
However, if an amount included in a PAYE return is not known to be uncertain at the time the relevant return is submitted, but a provision is subsequently recognised in respect of the uncertainty, notification is due as though the uncertain amount arose in the financial year following that in which a provision is recognised in the accounts.
Extending the example above, if the relevant amount was not known to be uncertain until the year ending 30 March 2024, and a provision was recognised in the accounts for that year, the related UUT notification would be due on or before 25 March 2025.
Interestingly, an example in HMRC’s final UTT guidance, which changed during consultation, appears to suggest that for companies that file P11Ds in relation to their employees, the P11D filing deadline of 6 July could potentially be the UTT notification deadline regardless of when their financial year ends. We are confirming this with HMRC.
What should businesses do?
Given the de minimis threshold, for most companies the likelihood of a PAYE UTT arising in relation to normal employee remuneration appears to be low.
However, companies within the scope of the UTT regime should review their position to confirm whether a notification obligation arises.
Companies with large contractor populations which fall within the off-payroll working rules should take particular care to ensure that any related uncertain positions are identified. As recent press coverage of HMRC’s off-payroll working enforcement activity indicates, PAYE and NIC exposures that can arise in relation to off-payroll working can be substantial and may be more likely to exceed the de minimis threshold.