The Chartered Institute of Taxation (CIOT) is calling for a rethink of plans for large businesses to notify HMRC if they adopt an uncertain tax treatment. The CIOT says the proposal is unclear, unfair and will lead to onerous demands on affected businesses.
The Government wants large businesses to notify HMRC where they have adopted an uncertain tax treatment (which it is suggested is one where the business believes that HMRC may not agree with their interpretation of the legislation, case law, or guidance). The proposal is that businesses must notify any uncertain tax treatments to HMRC separately from their tax return.1 HMRC claim this requirement will help to reduce tax which is not collected as a result of businesses adopting tax treatments that HMRC does not agree with. But the CIOT said that it is not clear how a requirement to notify will assist HMRC with closing this legal interpretation tax gap, even if a satisfactory objective definition of uncertain tax treatment is found.
John Cullinane, CIOT Tax Policy Director, said:
“As it stands, we are opposed to the introduction of this compliance obligation and encourage the Government to rethink. Given the many challenges businesses are facing because of COVID-19, now is not the time to add to compliance burdens unless the measure is better justified.
“This proposed compliance obligation is inherently unclear and unfair. Businesses would not be able to comply with it with any confidence or certainty that they have got it right: it is unreasonable to expect these taxpayers to form a judgement on what HMRC may or may not do.
“It is not encouraging for the cooperative relationships that HMRC is keen to foster with businesses if, even when a business embraces collaborative and cooperative compliance, the Government still imposes new rules which significantly increase the businesses’ compliance burden.”
The CIOT set outs its concerns in a recent submission to a HMRC consultation.2
The CIOT says time should be taken to evaluate which issues contribute to the legal interpretation tax gap that are not already disclosed to HMRC through the existing systems.
‘A flawed proposal’
The fundamental building block of the proposal – that is to say what is an ‘uncertain tax treatment’ that must be notified – is inherently uncertain and unclear, said the CIOT. This is both with regard to the wholly subjective test devised around the likelihood of an HMRC challenge, and the principal exclusion proposed, which is intended to ensure that HMRC are not told about ‘what they already know’.
The lack of coherency around how this proposal interacts with the existing tax system amplifies the flaws in the proposal.
As it is currently framed the requirement to notify uncertain tax treatments would place large businesses under an obligation with which they would be unable to comply with any confidence or certainty, resulting in an unreasonable, increased compliance burden on compliant taxpayers and a greatly increased administrative burden for HMRC for little benefit to the Exchequer.
‘Unfair penalties ‘
The CIOT also said that the proposal is not a fair balance between the powers of tax collectors and the rights of taxpayers. It is unfair to have a compliance obligation based on a test which is as subjective and uncertain as that currently proposed linked to penalties, when penalties should be reserved for deliberate or careless behaviour and not applied where a compliance failure arises as a result of uncertainty or a judgement call around reporting obligations.
The CIOT suggests removing the risk of an inequitable penalty in circumstances where Courts ultimately determine that there is no additional tax due. The way the proposal is presented the result is that even if a business has a reasonable tax position, and has taken care to consider whether or not the tax position is correct and certain, HMRC can disagree, open an enquiry and levy a penalty for not notifying the tax treatment. Even if the taxpayer goes to Court and eventually wins, such that the tax position is ultimately held as correct, there is the jeopardy of a penalty. During CIOT’s discussions with HMRC, CIOT encouraged HMRC to amend the proposal so that a penalty would not be due if the outcome of the enquiry/dispute was that there was no further tax due.
John Cullinane said:
“A compliance obligation along these lines needs a clear and objective definition of uncertain tax treatment, with further clarity around the proposed exclusion for ‘what HMRC already knows’. We suggest limiting the proposal to corporation tax at least initially. We understand that HMRC is sympathetic to the idea of reducing the taxes to which the obligation would apply but may wish to also include VAT and PAYE. There also needs to be additional exemptions to the requirement to notify to better focus the compliance obligation and a strong reasonable excuse defence.”
Notes for editors
1. The Government has suggested that the requirement should be for notifications in respect of corporation tax, income tax (including PAYE), VAT, excise and customs duties, insurance premium tax, stamp duty land tax, stamp duty reserve tax, bank levy and petroleum revenue tax.
2. The Chartered Institute of Taxation (CIOT) response to the HMRC consultation document on Notification of uncertain tax treatment by large businesses is here.
3. An uncertain tax treatment is one where the business believes that HMRC may not agree with their interpretation of the legislation, case law, or guidance. The measure aims to ensure that HMRC is aware of all cases where a large business has adopted a treatment with which HMRC may disagree and accelerate the point at which discussions occur on uncertain tax treatment. The requirement will only apply to large businesses (A turnover above £200 million or a balance sheet total over £2 billion. The requirement will be for notifications in respect of Corporation Tax, Income Tax (including PAYE), VAT, Excise and Customs Duties, Insurance Premium Tax, Stamp Duty Land Tax, Stamp Duty Reserve Tax, Bank Levy and Petroleum Revenue Tax. It will not be necessary for businesses to disclose any uncertainty which is the subject of formal discussion with HMRC.
The objective of this policy is to provide HMRC with timely and accurate information regarding tax treatments adopted by large businesses which HMRC may disagree with. It will also identify areas of law that are currently unclear and allow HMRC to focus on clarifying these areas of uncertainty, ultimately resulting in fewer disputes caused by uncertainty in the tax law.
4. The Government will publish its response, along with draft clauses, in late summer 2020. Legislation will be introduced in the 2020 to 2021 Finance Bill and will apply to returns filed after April 2021.