In our newsletter last year we summarised and commented on the proposed rules for the notification of uncertain tax treatments. That newsletter can be found here https://cwenergy.co.uk/notification-of-uncertain-tax-treatments-draft-legislation-published/
Since then the relevant statutory provisions have been included in Finance (No.2) Bill 2021-2022, and last week revised draft HMRC guidance was published, subject to a short period of consultation. The consultation will run to 1 February 2022.
The big change in the Finance Bill was the omission of the notification requirement where it is reasonable to conclude that, if a tribunal or court were to consider the tax treatment, there is a “substantial possibility” that the treatment would be found to be incorrect. The notes accompanying the legislation indicate that this trigger may yet, however, be adopted.
In this newsletter, we summarise and comment on some of the key parts of the Finance Bill clauses and accompanying notes and the recently published revised draft guidance.
Threshold for notification
As a reminder, for the uncertain tax treatment to be notifiable there must be more than £5m of tax at stake (which includes SCT) in the year ended on the last day of the period covered by the return.
The Finance Bill contains a clarification of how to measure whether the threshold is met in cases where tax losses are created or increased using treatments that are ‘uncertain’. Where such losses are used, the rules will look to the actual reduction in the tax liability, but where the losses are unused a 10% reduction in liability is assumed unless there is no reasonable prospect of the loss being used to reduce tax liability. In the latter case, the value is zero.
In determining whether there is a reasonable prospect of the uncertain loss being used the same process as applies to the determination of potential lost revenue for penalties for inaccuracies is to be used. This process considers both technical and practical reasons why the loss will not be used e.g. we would expect a lack of sufficient anticipated profits from current field interests would be a relevant factor.
While there are examples of how to calculate the amount of tax at stake in the draft guidance, we would expect complications will still remain.
Provision made in the accounts trigger
The first of the two remaining triggers is where the taxpayer has made a provision in their accounts to reflect the probability that a different tax treatment will be applied to the treatment reflected in a tax return.
In earlier draft legislation this trigger required the provision to be in accordance with GAAP. This condition has now been removed so a provision whether rightly made or not may satisfy this trigger.
The draft guidance notes that there must be a link between that provision and at least one entry (which includes nil) on a relevant tax return. The trigger may apply “irrespective of where the provision is presented in the accounts” which presumably references amounts provided as deferred tax as well as provisions included in current tax.
The draft guidance includes an example where a provision was not made in the accounts that included the transaction but a provision was raised subsequently in a later period. The draft guidance makes clear that this would satisfy the trigger when the provision was raised (i.e. in the later period).
HMRC’s known interpretation of the law trigger
The second of the two triggers for notification is where the taxpayer files on a basis where it is known that HMRC’s interpretation of the law is different. There are two ways that an interpretation may be taken as being “known”:
- Where the position is generally known to all taxpayers from documents published by HMRC; and
- Where the position is specifically known to a taxpayer through correspondence with HMRC.
Whether the taxpayer actually did or did not know of HMRC’s interpretation is not relevant as the rules say that “HMRC’s position on a matter is taken to be “known” by a company or partnership”.
Documents published by HMRC
The draft guidance includes some illustrative, but not exhaustive, examples of publications that could indicate HMRC’s known position, and include HMRC Manuals, Statements of Practice, Public Notices, Revenue & Customs Briefs and Explanatory and technical notes relating to legislation (with the latter newly added to the publications that indicate HMRC’s known position).
The draft guidance also sets out publications that should not be considered as containing HMRC’s known view, being advice provided in HMRC forums and submissions HMRC makes in litigation.
In earlier draft guidance it was stated that “advice provided via Online HMRC forums” were not to be considered so this later draft guidance appears to make it clearer that statements made at the Direct Tax Forum (for example) should not be taken to represent HMRC’s interpretation of the law. In addition, although the minutes of each Direct Tax Forum are published there is potentially insufficient analysis for a company to understand the technical detail and intended application.
Furthermore, much of the correspondence between HMRC and the industry is in the form of letters and meetings between HMRC and UKOITC, Brindex and OTAC. These letters and meeting notes are not published and are not in the public domain so presumably should not be considered in determining what is a “known” HMRC position.
Known to the taxpayer through correspondence with HMRC
In addition to published materials, a taxpayer may know HMRC’s interpretation from “dealings with HMRC by or in respect of the company or partnership (whether or not they concern the amount in question or the transaction to which the amount relates)”.
The draft guidance notes that dealings with HMRC may include not just a written view of the correct tax treatment from HMRC but also discussions with an HMRC CCM or Tax Specialist. It seems reasonable where a taxpayer has a written view from HMRC of a legal interpretation that they are put on notice that a certain treatment is that favoured by HMRC, but it seems strange that a telephone discussion with an HMRC Inspector may be considered as giving a taxpayer sufficient notice of the known position of HMRC.
There is no group concept in this part of the rules so that if a similar discussion has happened with Company A and a year later the same technical question arises with regard to another group company, Company B, that latter company seemingly has no knowledge of HMRC’s known position as the first discussion was not in respect of its affairs. Similarly, if an adviser such as CWE is aware of a particular HMRC treatment from correspondence on one client other CWE clients would not be treated as having that knowledge.
It would appear that this test can only be triggered if the discussions with HMRC are in respect of the tax affairs of the company itself. Therefore, if for example a company’s tax manager is engaged in general discussions with HMRC policy teams about how a law should be interpreted as part of an oil industry discussion, then that will not be sufficient for the company or partnership to be taken as knowing HMRC’s known position from “dealings with HMRC by or in respect of the company or partnership”. Also, if the tax manager is employed by a service company within the group it would seem that no other companies within the group can be deemed to be aware of any discussions the manager holds with HMRC.
Other HMRC comments
The draft guidance does make some further comments:
- There is recognition that there is a large volume of published material and the new rules are “not intended to act as a series of tripwires leading to penalties”. The draft guidance suggests that HMRC expects a “level of familiarity” with its published material but where guidance is hard to find there is more likely to be a reasonable excuse for not making a notification. The guidance suggests a higher hurdle where a treatment is “novel, contentious, high-value or high-risk such that a careful examination of HMRC’s view would be warranted”;
- HMRC has confirmed that where the known position of HMRC cannot be determined or is unclear then this trigger cannot apply. This is potentially applicable to many situations in the oil industry as guidance often does not address particular circumstances;
- The trigger can still apply where there is legal uncertainty of whether HMRC’s known position is indeed correct. The example given in the draft guidance is where the Upper Tribunal has found against HMRC’s technical position but HMRC has not yet adopted the Upper Tribunal’s technical analysis as their “known” position. In that scenario, the draft guidance provides that the trigger condition may be met even though the Upper Tribunal has not supported HMRC’s known position;
- HMRC acknowledges that their publications may be “out of date or contain conflicting advice”. The draft guidance states where HMRC’s position is contradictory the most recently published statement is to be taken as the known position. This is different from earlier draft guidance that stated that where statements were contradictory the trigger would not be satisfied as there was no known position.
Exemption from notification
Even where a trigger test has been satisfied, a business is not required to notify HMRC if it is reasonable to conclude that HMRC already have available to them all, or substantially all, of the information relating to the amount, including the amount itself, that would have been included in a notification.
Perhaps unsurprisingly the draft guidance seeks to make clear that to rely on this exemption each individual taxpayer will need to make the uncertain treatment obvious to HMRC. It will not be sufficient if this information “is hidden away or it is obscure”.
There is also no group concept for this aspect so even if other group companies have made HMRC aware of similar treatments in their own affairs this will not exempt the particular company.
Furthermore, the draft guidance indicates that in the course of any discussions with HMRC over uncertain treatments it would be recommended that taxpayers make clear that the discussion is to avoid the requirement to notify and the discussion is documented. We would expect most taxpayers will wish to expressly confirm that they will not make a formal notification of the uncertain tax treatment under these rules.
In a change from earlier guidance, HMRC has clarified that if a company treats a transaction in accordance with how it was outlined in a clearance request and the business undertakes and treats the transaction in the way included in the clearance, there will be no further need to notify the transaction. In the earlier guidance, this exemption only applied where HMRC agreed with the treatment included in the clearance.
HMRC have encouraged businesses to seek exemption early and in real-time rather than reporting formally under these rules.
Form of the notification
The Finance Bill provides that the form of the notification shall be specified in a notice to be published by HMRC. This notice has not yet been published.
Comments
The omission of the “substantial possibility” trigger is welcome as that element of the rules would have led to a lot of uncertainty as to its application.
The Finance Bill has now passed the Committee Stage and although both the draft guidance and related statutory provisions are not final, the potential for these rules to apply to transactions currently being undertaken means that companies should be considering their impact now.
The draft guidance does provide some assistance to companies seeking to understand how to meet their obligations. We expect companies will need to look at relevant transactions carefully and prepare notifications or commence earlier discussions with HMRC where necessary. Consideration of these rules will also need to become part and parcel of any tax planning being undertaken for groups within the regime.
We at CW Energy will be working with clients who will be within the regime to ensure that the implications are understood and to assist them in complying with the new rules.
CW Energy LLP
January 2022