A new tax compliance burden will take effect from 1 April 2022 affecting large businesses who will be required to identify uncertain tax treatments and then, if necessary notify HMRC either at that time or in their tax returns. Whilst if affects the returns filed on or after 1 April 2022 that does of course mean it is relevant to current transactions. Notification relies on three triggers;
- There is a recognised provision in the accounts reflecting the probability a different tax treatment will be applied;
- A tax treatment has applied which relies on an interpretation or application of law not in accordance with how it is know HMRC would interpret it; or
- It is reasonable to conclude that if a tribunal or court considered the tax treatment applied there is a substantial possibility the treatment could be found to be correct in one or more material aspects.
Whilst it may be a reasonable policy objective to close the tax gap, which is essentially the aim of the legislation, the third trigger is likely to cause a bit of head scratching. What is a reasonable conclusion and how does any business gauge there is a likelihood of a substantial possibility a tribunal or court would disagree with the treatment? This would seem to be deliberately drafted to have a very wide scope and one would hope that further guidance in this area will follow.
There are very many areas of uncertainty in the tax treatment of transactions that would not raise any concerns but adding "substantially " just adds to the uncertainty. Let's not forget that to HMRC substantial can be as little as 20%! Businesses in any doubt as to how this affects them are advised to review policies and strategies with this in mind.
The government is pressing ahead with legislation requiring large businesses to notify uncertain tax treatments.