What are HMRC’s proposed changes to uncertain tax treatments?

HMRC is consulting on proposals to extend the scope of the notification of uncertain tax treatments (UTT) regime. In our view, the most significant change from a VAT perspective is the creation of a new trigger which would require notification where a particular VAT treatment is adopted, but an alternative credible legal interpretation exists. Such a trigger is likely to be subjective and therefore difficult to apply with certainty. In our view it would significantly increase the number of potential notifications.

The legal interpretation tax gap

Since the notification regime was introduced in 2022, HMRC has received around 30 notifications of UTTs, involving potential tax of approximately £1bn. This is a modest contribution towards closing a legal interpretation tax gap estimated by HMRC to be around £20bn over the same period (although we expect that many taxpayers will have sought clearance from HMRC rather than making a disclosure under this regime).

In those circumstances, it is understandable that HMRC is seeking to extend the notification regime. The consultation explores a number of potential changes:

• It could be extended to other taxes: originally, customs and excise duties and insurance premium tax were going to be in scope. However, these were dropped from the regime and the consultation does not propose to include them again.
• The threshold could be reduced: currently, only tax uncertainties over £5m have to be notified, but the consultation does not propose reducing this threshold.
• The regime’s sensitivity could be increased: at the moment, notifications are required if a business has included a provision about an UTT in its statutory accounts, or if it has adopted a position which is at odds with HMRC’s guidance. The consultation describes this as a ‘narrow scope’ and proposes to extend it by introducing a third notification trigger.

The proposed third trigger explained

The proposed third trigger would require businesses to notify uncertain VAT treatments to HMRC if more than one credible legal interpretation exists.

This echoes a proposed third trigger that was dropped shortly before the enactment of the notification regime in Finance Act 2022. That original proposal would have required businesses to take action if there was a substantial possibility that the courts would find a tax treatment to be incorrect.

The trigger was omitted after widespread objections that it was too subjective – the Chartered Institute of Taxation (CIOT), for example, described the trigger as “loosely drafted and poorly conceptualised”. In our view, the CIOT was right. Careful analysis of uncertain tax treatments is required to determine whether or not a provision should be included in statutory accounts, frequently requiring a judgment of whether the treatment is more likely than not to be correct. The “substantial possibility” trigger would have required businesses to run the same exercise again, against a different and arbitrary benchmark.

The question of whether there is more than one credible legal interpretation of a tax treatment will provoke similar criticisms. HMRC says that it will link the trigger to its published view on what businesses should do to ensure tax filings are correct and complete, as set out in Guidelines for Compliance (GfC) 13. However, GfC13 refers to taxpayers not having a good reason for errors in returns by reference to something akin to a substantial possibility test. It does not provide a clear, practical test for identifying whether other credible legal interpretations exist.

No statutory definitions have yet been proposed for the new trigger. However, an opinion which is confident of a particular VAT treatment may fall short of asserting that no other alternative analysis is possible. When pressing counsel to express the likelihood of a particular treatment being correct in percentage terms, it is rare for them to provide any number greater than 75–80%. Few professional advisers guarantee their opinions, asserting that no credible alternative interpretation could possibly be advanced by HMRC.

In such cases, does 20–25% doubt mean that there is a credible legal interpretation that produces a different outcome? If so, the scope of the proposed third trigger will be vastly greater than those that have applied so far.

What should businesses do?

HMRC seems determined to introduce a third trigger, and it seems likely that it will significantly expand the scope of the regime. Businesses should therefore be aware that the likelihood of having to disclose VAT treatments to HMRC is going to increase, especially as inflation increases the likelihood of the £5m threshold being breached.

The new notification trigger may be complex and subjective to apply in practice, and could absorb significant management time. To avoid this, large businesses may be able to rely on their relationship with their Customer Compliance Manager. When applying a VAT treatment over which there is some doubt, many businesses will, in accordance with their published tax strategy, bring it to HMRC’s attention anyway. Such conversations may mean that the business is exempt from having to notify HMRC formally.

RSM will be responding to the consultation. If your business may be affected by HMRC’s proposed UTT changes, speak to our VAT specialists to assess your exposure and reduce compliance risk.

Latest related insights