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In brief

The inaugural ‘Tax Day’ on 23 March saw a range of announcements on the future of UK tax compliance. One of most significant measures is the re-launch of the proposal to require Large Businesses to notify HMRC of uncertain tax treatments that they have adopted.

This second consultation addresses the criticisms expressed when the proposal was first put forward during 2020. The original trigger of HMRC “may not agree with/is likely to challenge” the treatment adopted by a taxpayer has been replaced with eight separate triggers designed to apply the reporting requirement on a more objective basis.

The revised proposal looks a step in the right direction, but there remain a number of practical concerns to be ironed out. We would recommend that Large Business taxpayers continue to engage with the proposal to ensure it is implemented on proportionate and practicable terms.

The intention is for the requirement to apply to returns that are due to be filed from 1 April 2022 onwards. Therefore, for annual taxes such as corporation tax, this is a live issue that affects the current financial period for the vast majority of taxpayers.

Key takeaways

  • The HMRC “may not agree with/is likely to challenge” reporting trigger has been replaced with eight separate tests designed to apply the regime on a more objective basis.
  • The proposal is much improved but there are still question marks over how certain triggers will apply in practice.
  • Taxpayers should continue to engage with the consultation to ensure the regime is proportionate and practicable.
  • The de minimis threshold has been increased from GBP 1 million to GBP 5 million but a more general materiality threshold is unlikely to find favour.
  • A new two-step test for measuring uncertainty is proposed.  It appears designed to incentivise taxpayers to calculate what HMRC’s position would be, otherwise the transaction could be reportable based on its gross tax benefit.
  • Taxpayers will be required to amalgamate uncertainties where they apply in respect of the “same or similar products, or the same or similar transactions”.
  • Uncertainties regarding transfer pricing positions will be in scope, but HMRC are considering potential exclusions for low risk businesses and the pricing of intra-group transactions in certain contexts.
  • The regime will now be limited to Corporation tax, Income tax (including PAYE), and VAT.
  • Reporting deadlines now reflect the process for filing returns. For annual taxes (corporation tax and income tax), uncertain tax treatments will be reported alongside the relevant return. For non-annual taxes (VAT and PAYE), uncertain tax treatments will be reportable when the last return for the financial year is due.
  • The penalty for failure to report will be levied on the company to which the uncertainty relates, and not a nominated individual as originally proposed. The penalty remains fixed at GBP 5,000.
  • HMRC’s response to the original consultation accepts that matters adequately disclosed under the regime should receive protection from future discovery assessments in certain circumstances.

In more detail

Revised reporting triggers

The initial consultation proposed a reporting requirement where a tax treatment was adopted that HMRC “may not agree” with or are “likely to challenge” (paras 2.6 and 3.7 of the March 2020 consultation). This raised both practical and philosophical questions on how taxpayers could reasonably discern HMRC’s position on a given matter.

HMRC have heeded these concerns and re-drawn the reporting trigger to apply eight separate tests which aim to apply the reporting requirement on a more objective basis:

    1. Results from an interpretation that is different from HMRC’s known position.
    2. Was arrived at other than in accordance with known and established industry practice.
    3. Is treated in a different way from the way in which an equivalent transaction was treated in a previous return and the difference is not the result of a change in legislation, case law or a change in approach to accord with HMRC’s known position.
    4. Is in some way novel such that it cannot reasonably be regarded as certain.
    5. In respect of which a provision has been recognised in the accounts of the company or partnership, in accordance with Generally Accepted Accounting Practice (GAAP), to reflect the probability that a different tax treatment will be applied to the transaction.
    6. Results in either:
      • a deduction for tax purposes greater than the amount incurred by the business, or
      • income received for which an equivalent amount is not reflected for tax purposes,

unless HMRC is known to accept this treatment.

  1. Has been the subject of professional advice, that is not protected by legal professional privilege:
    • which is contradictory, in terms of tax treatment, to other professional advice they have received, or
    • which they have not followed for the purpose of determining the correct tax treatment of a given transaction.

The revised triggers signal a decision to no longer pursue a notification test based on the principles applied by IFRIC 23. Although, trigger e) will capture matters where an accounting provision has been recognised, which will include items to which IFRIC 23 has been applied.

Trigger a) – questions remain over what is required of taxpayers in making themselves aware of HMRC’s “known position”

Trigger a) is the closest to the original reporting requirement, with reportable treatments now limited to those which are contrary to “HMRC’s known position”. HMRC’s known position being determined by reference to materials that are in the public domain or as established in dealings between the business and HMRC.

We welcome HMRC’s attempt to provide a more objective means of discerning HMRC’s view on a given matter. However, we still have practical concerns on how trigger a) will be applied in practice. In our view, reportable matters should be limited to those where the taxpayer is aware that their interpretation is different from HMRC’s known position.

A matter should be reportable only if analysis of the issue has identified HMRC material that contradicts the taxpayer’s proposed position. Taxpayers should not be required to ‘prove a negative’ once they have completed their technical analysis by trawling through HMRC’s voluminous guidance to ensure there is no potentially contradictory statements that could trigger a reporting requirement.

This approach should make the application of penalties more practicable. It should be self-evident from documents disclosed during an enquiry process whether a taxpayer was concerned about a particular view that had been expressed by HMRC, and therefore penalties can be levied on a question of fact. A requirement that asks whether a hypothetical taxpayer should have been aware of a particular HMRC view will likely prove more difficult to administer in practice.

Trigger e) – accounting decisions trigger reporting requirements

The UK regime will adopt the approach taken by the US and Australian regimes in requiring disclosure where a provision has been booked for accounting purposes.

This adds a new dynamic to tax provisioning considerations. Amounts booked for accounting purposes in respect of tax are by their nature an estimate, rather than a precise figure. Large Business taxpayers typically have a limited period of time to prepare and report their financial statements post year-end and have to do so in respect of tax returns that will be filed months later. Therefore, decisions on whether to book a provision can be as much art as they are science.

With a reporting requirement linked to the decision to record a provision, we suspect minds may become focused on whether a provision is strictly necessary.

Trigger g) – a penalty for bad advice?

Trigger g) appears to be designed to capture matters where there are differences of opinion and therefore it is reasonable to regard the position as uncertain.

The two circumstances captured are where taxpayers receive advice from an advisor that is not subject to legal professional privilege and that advice either contradicts previous advice that the taxpayer has received, or is not observed by the taxpayer in the filing position they adopt.

Whilst on the surface this seems reasonable, there is an unfortunate consequence – it imposes a reporting requirement where a taxpayer receives bad advice. The test assumes that if a taxpayer adopts a filing position contrary to the advice received, the position is uncertain, and not simply the advice they received was technically inaccurate. Likewise, if a second opinion is commissioned which reaches a different conclusion, the test assumes that the difference is due to uncertainty, and not because the original opinion was wrong.

Of course, taxpayers can avoid unfortunate situations like this by ensuring the advice they receive is subject to legal professional privilege.

Increase in materiality threshold to GBP 5 million

Taxpayers will be pleased to see that the threshold for reporting has been increased to uncertainty of GBP 5 million+ (an increase from the GBP 1 million threshold previously suggested).

This is a sensible move. In our view, the litmus test for reportable matters should be those that warrant organising a meeting with HMRC to specifically discuss the issue, outside of the standard compliance cycle. A GBP 5 million threshold is a lot closer to meeting that test.

The possibility of an individual materiality threshold for taxpayers has not yet been ruled out, but the consultation expresses doubt on the idea on the basis that materiality is not a common concept within UK tax legislation, and may result in inequitable outcomes.

This may be true, but in reality this is what happens in practice; the focus for very large taxpayers will inevitably fall on the most material transactions.

Two-step test to deal with non-binary matters

Recognising that the measurement of uncertainty may not be straightforward in practice, particularly where potential outcomes do no observe a binary pattern, a two-step test is proposed to determine whether a matter is reportable.

Step 1 captures the tax effect of a transaction, e.g. a GBP 30 million deduction @ 19% = GBP 5.7 million.

Step 2 is then a filter designed to capture only those items where the difference between HMRC’s expected position and the position adopted for filing purposes is GBP 5 million or more.

For example, if the taxpayer thinks HMRC will only accept half of the GBP 30m deduction, it would not be reportable under Step 2, as GBP 15 million @ 19% is GBP 2.85 million, which is less than GBP 5 million reporting threshold.

On the surface this does not add much, but the consultation notes that where there is difficulty in calculating HMRC’s anticipated position, a matter can be reportable based on Step 1 alone.

The feedback to the original consultation highlighted the potential practical difficulties of calculating what HMRC’s position would be.

What the two-step test does is effectively incentivise taxpayers to work out what HMRC’s position would be, otherwise the transaction is reportable under Step 1 based on the gross tax benefit it provides, not the level of uncertainty associated with it.

Amalgamation of “same or similar products, or the same or similar transactions”

One of the key components of determining whether the GBP 5 million reporting threshold has been breached is the extent to which transactions have to be combined for the purposes of determining their tax impact.

The initial consultation suggested the principles of IFRIC 23 could be applied for this purpose. HMRC have moved away from this and now proposes that the “same or similar products, or the same or similar transactions” be amalgamated when calculating whether the threshold has been passed.

On the surface this seems reasonable, provided that discrete uncertainties are applied across the same or similar products/transactions. If all uncertainties are amalgamated across the same or similar products/transactions, then immaterial items may become reportable simply because they sit within a particular line of business.

Reporting exceptions – limited TP exclusion possible

The original consultation listed a number of areas where the requirement to report was disapplied. These can be broadly summarised as situations where taxpayers already had cause to bring HMRC’s attention to a matter.

The latest consultation adds matters discussed under the Code of Practice on Taxation for Banks to that list.

Of wider interest is a potential list of exclusions for the transfer pricing of intra-group transactions. HMRC recognise that pricing issues could lead to a deluge of notifications simply because a range of acceptable values can typically be observed on a transaction.

Low risk businesses could be exempt

In the response to the original consultation there was support for using HMRC’s Business Risk Review (BRR+) process to filter out low risk taxpayers. HMRC are amenable to the idea but are concerned that BRR+ only applies to HMRC’s Large Business Directorate (which has a higher entry point than that suggested for Large Businesses in this context) and is a non-statutory process with no right of appeal.

Whilst HMRC does not rule out applying the BRR+ as a filter, they are soliciting ideas on a more objective means of filtering out low risk taxpayers.

Range of taxes in scope reduced to Corporation tax, Income tax (including PAYE), and VAT

The original consultation proposed that all taxes subject to the SAO regime should be subject to the reporting requirement. This has now been refocused to just Corporation tax, Income tax (including PAYE), and VAT.

Reporting deadlines now reflect filing process

The deadline for reporting an uncertain tax treatment depends on whether the relevant tax is an annual or non-annual tax.

Annual taxes (i.e. corporation tax and income tax) are reportable when the relevant return is due.

Non-annual taxes (i.e., PAYE and VAT) are due when the final return for the financial year is due.

This is a sensible move from HMRC and should ensure reporting is synchronised with the compliance process.

Penalties for failure to report

A controversial aspect of the original proposal was that a penalty of GBP 5,000 would be levied on the person liable to notify where there was a failure to report. This has now been revised, with the GBP 5,000 penalty levied on the Large Business to which the uncertain tax treatment relates. As a result of this change, there is no longer a requirement to notify which individual is liable to notify HMRC of uncertain tax treatments that have been adopted.

Potential protection from discovery assessments

A number of respondents to the original consultation suggested that in return for disclosing matters under the regime, taxpayers should receive greater certainty on the treatment applied by ensuring matters are not discoverable outside of the standard inquiry window.

HMRC’s response to the original consultation accepts that in the context of s.29(5) TMA 1970, provided that adequate disclosure has been made under the regime, there should be limited circumstances where HMRC “could not reasonably have been expected, on the basis of the information made available to them at that time, to be aware of the loss of tax”.

However, in their view, a potential loss of tax due to careless or deliberate behavior by the taxpayer or their agent under s.29(4) TMA 1970 can still apply where adequate disclosure of the uncertain tax treatment has been made.


Kate is a Partner in Baker McKenzie's Corporate Tax Department in London and co-leads our Global Technology, Media & Telecoms Industry Group. Kate is a chartered accountant and chartered tax adviser with over 20 years' experience advising clients on their tax matters. Prior to joining the Firm, she spent seven years as a partner at a Big Four accounting firm.


Patrick O'Gara is a partner in Baker McKenzie's Corporate Tax department in London.


Nick Evans is a senior tax adviser in Baker McKenzie London office.