Taxes – Not So Safe After All? HMRC seeks to close the gap | Katten Muchin Rosenman LLP
The size of the “legal interpretation fiscal deficit” in the United Kingdom is of growing concern to the government, to the point that it has just published its second consultation on the subject. A “ legal interpretive tax gap ” arises when a tax authority (in the UK, Her Majesty’s Revenue and Customs (HMRC)) and a taxpayer have a different view of the meaning of tax law as it stands. applies in a specific case. In the UK, the gap between how much HMRC would expect to collect based on its interpretation of the tax law and the amount of tax actually collected in these uncertain situations is estimated at £ 4.9 billion sterling, and that number will only increase. unless active measures are introduced to reduce it.
To this end, the government is proposing to introduce a system that requires large companies to notify HMRC of uncertain tax treatments, as described in its second consultation paper. The proposed notification regime is intended to encourage large companies to engage with HMRC from the outset in areas of legal uncertainty in interpretation. The United States and Australia already have systems like this in place, so the government can seek inspiration in these jurisdictions.
Definition of uncertain tax treatment
Uncertain tax treatment is one where there are more than one way to interpret or apply tax law in connection with a transaction. The proposal will require a company to tell HMRC where:
they have used an interpretation or application of tax law for a transaction that is contrary to the known position of HMRC; or
they deal with a new or novel type of product, transaction or business structure where there are various ways of dealing with it under existing law and where the position of HMRC is not known.
This measure will only apply to large companies, which means that only companies with an annual turnover of more than £ 200m or a balance sheet total of more than £ 2bn will be affected by the proposal. .
One of the main concerns is that there must be an objective way to assess whether a tax treatment is uncertain. Defining uncertain tax treatment as treatment that HMRC can or is likely to challenge, as suggested in the previous consultation, was considered too subjective. Therefore, the government has proposed seven triggers to assess tax treatments in a more objective and predictable way. These triggers are listed below.
1. Results of a different interpretation of the known position of the HMRC
This trigger is intended to require notification when a business adopts a tax treatment that is based on a different interpretation of the law from HMRC’s known position. This would capture interpretations that are inconsistent with HMRC guidelines or other documents in the public domain, for example, HMRC tax handbooks or the HMRC view as established in previous transactions between the company. and HMRC.
2. Was entered into other than in accordance with known and established industry practices.
Some industries have an established industry-wide approach to processing certain transactions. This is often published in HMRC manuals or guides. Notification would be required when a company takes an approach that is not consistent with the industry-wide approach.
3. Is treated differently from how an equivalent transaction was treated in a previous statement, and the difference is not the result of a change in legislation, case law or a change in approach to agree with the known position of HMRC
This trigger would cover situations where a business changes a previously used tax treatment, where that change is not due to a change in the known position of HMRC – it is likely to overlap with the first trigger.
4. Is somehow new, so it cannot reasonably be considered certain
Notification would be required when there is a new or new product, transaction or business structure where there are different ways of dealing with it and where the position of HMRC is not known.
5. In respect of which a provision has been recognized in the accounts of the company or partnership, in accordance with generally accepted accounting practices (GAAP), in order to reflect the likelihood that a different tax treatment will be applied to the transaction.
This trigger includes situations in which IFRIC23 (or another accounting standard) requires the company to make a provision to recognize uncertainty in tax treatment. For example, a company encountered a transaction in a niche industry. It applied a tax treatment that it believed to be correct, but following discussions with the company’s auditors, it determined that a tax provision should be recorded to reflect the likelihood that a different tax treatment would be applied.
a tax deduction greater than the amount incurred by the company; or
income received for which an equivalent amount is not reflected for tax purposes, unless HMRC is known to accept this treatment
This trigger requires a business to notify HMRC when the economic outcome is not the same as the tax outcome and that difference is not an intended consequence of the relevant tax legislation. Sometimes there are situations where a deduction is intended to exceed the economic cost, for example in research and development expenses.
7. Has been the subject of professional advice, which is not protected by legal professional secrecy:
which is contradictory, in terms of tax treatment, with other professional advice they have received; or
that they did not follow to determine the correct tax treatment of a given transaction
HMRC states in the consultation that this trigger will apply to accounting or tax advice; however, it would appear that where tax advice relates to solicitor-client advice in a legal context, legal privilege should be available. For example, a large company asks their agent to undertake a hybrid analysis. The agent produces a report that identifies a particular group entity that can be considered a hybrid, but this will depend on whether HMRC considers the entity to be transparent or opaque. The HMRC potion is unclear, but the agent advises his client to file based on the fact that the entity is captured by the hybrid legislation in Part 6A of the 2010 Taxation Act ( international and other provisions). he. Therefore, notification would be required.
Notification of uncertain tax treatment
Uncertain tax treatment should only be notified if it results in a difference of £ 5million between the company’s calculations of their tax liability and HMRC’s intended calculation of their tax liability. This should help identify the issues in which companies have adopted different interpretations of HMRC and narrow the tax gap in legal interpretation. The government is proposing a two-step process to calculate whether this £ 5million threshold is exceeded and whether notification is required:
Is the total tax impact of the tax treatment equal to or greater than £ 5million? The total tax impact includes both deductions taken from taxable income and the non-inclusion of receipts for tax purposes when such treatments would be considered “uncertain” under the proposed triggers.
If the tax difference between the company’s treatment and the treatment expected by HMRC is more than £ 5million, notification is required. When a tax calculation results in a bracket, rather than a specific number, the calculation resulting from the largest difference should be used as the basis for determining whether a notification is due.
Notifications will be an annual process and a separate notification will be required for each of the taxes involved.
The government offered a group notification option for Value Added Tax (VAT), which would exclude tax-neutral inter-entity transactions. A group notification option could also apply to direct taxes.
The government intends to publish, for guidance, a list of information that should be included in the notification. He proposed that the notification contain the following information:
a concise description of the transaction;
nature of uncertainty;
periods affected by uncertainty;
an indication of the amount of tax associated with the uncertainty; and
date of the transaction / event giving rise to uncertainty.
Respondents to the first consultation expressed concern that the proposed scope of the notification regime was too broad and should be limited to corporation tax, which would be comparable to the models in the United States and the United States. Australia. HMRC has now proposed that the relevant taxes under the scheme be corporation tax, VAT, and income tax (including labor taxes).
Anything that may be disclosed under another legislative requirement will not need to be notified. If HMRC is already aware of the uncertainty and how the company plans to treat it for tax purposes, the company will not be required to bring it to HMRC’s attention again through the process. notification, unless the company processes the transaction contrary to HRMC’s recommendation.
Penalties for failure to report
The government has proposed to impose a penalty on the large business to which the failure to notify relates. No penalty will be imposed on individuals, except where the default involves a partnership and the uncertainty is related to the partnership’s return. The penalty will be £ 5,000. There will be an appeal and there will be a reasonable excuse provision.
The second consultation on the notification of uncertain tax treatment by large companies ends on June 1, 2021.
Ciara McBrien, Financial Markets and Funds Intern, contributed to this opinion.