The Government is proposing that large businesses should be required to notify uncertain tax treatments to HMRC. ICAS has responded to the second HMRC consultation on the proposals – the fundamental flaw in the original proposals has not been addressed. They remain poorly targeted, so will potentially impose a burden on all large businesses.
Why was a second consultation needed?
HMRC first consulted on the potential notification requirement in 2020. The stated intention was to tackle the legal interpretation element of the Tax Gap, ie tax losses which HMRC believes arise where the taxpayer’s and HMRC’s interpretation of the law, and how it applies in a particular case, result in a different tax outcome.
ICAS responded and highlighted that the proposals were poorly targeted, involved a highly subjective definition of ‘uncertain tax treatments’ and would impose unnecessary burdens on all large companies and partnerships, including the majority who want to work cooperatively with HMRC.
Other stakeholders shared many of the ICAS concerns and implementation was deferred to allow time for a second consultation on revised proposals. The government now intends the notification requirement to apply to transactions in returns due to be filed after April 2022, with legislation to be included in Finance Bill 2021-22.
ICAS response to the second consultation
The revised 2021 proposals attempt to take account of some of the concerns raised, but the ICAS response notes that the fundamental flaw in the original proposals – poor targeting – has not been addressed.
The taxes within scope have been reduced – the requirement will now only apply to Corporation Tax, Income Tax (including PAYE) and VAT. This has facilitated an improvement in the timing of notifications. Instead of notification being required once a year for all taxes, the timing will be aligned with the date when the last relevant return for the financial year in question is due.
The definition of ‘uncertain tax treatment’ has been improved but there remain areas of subjectivity and considerable uncertainty. Unless there are further amendments, trying to decide whether there is a need to notify or not, is likely to remain challenging and the main proposed exemption seems unlikely to assist in many cases.
The Government and HMRC appear to be trying to address a problem with a minority of uncooperative large businesses – as illustrated by the predicted yield, which is very small compared to the legal interpretation part of the tax gap or to the size of the large businesses in scope. Even in its revised form, the notification requirement will affect the entire large business population and impose unnecessary burdens on the cooperative majority.
Proper targeting is essential
If the Government decides to go ahead, the requirement should be amended so that it only applies to the minority of uncooperative large businesses – not to all large businesses. One possibility might be to extend existing legislation which already imposes sanctions on uncooperative large businesses, to include the notification requirement as an additional sanction.
The compliant majority want to work constructively in real time with HMRC but are experiencing increasing difficulties in doing so, due to HMRC resource constraints. We expect that the proposed requirement will generate unnecessary (and in some cases duplicate) disclosures which will waste time and resources for compliant businesses and HMRC, and increase pressure on both.
The consultation recognises that HMRC will require additional resources to consider the notifications and caseworkers to enquire into them. It would be far more constructive, and more likely to achieve the stated objectives, if additional resources were directed to the existing HMRC Customer Compliance Manager (CCM) and Business Risk Review regime instead. The majority of large businesses would then be able to engage with HMRC in real time, reliably and consistently, with a greater likelihood of resolving uncertainties quickly – and HMRC could also increase its engagement and compliance activities with currently uncooperative large businesses.
The ICAS response also covers a range of issues with the proposals in more detail, including the proposed main exemption, the definition of uncertain tax treatment and the reporting threshold.