On august 19, 2021 the HM Revenue & Customs (HMRC) published new draft legislation that will require large businesses to notify HMRC where they have adopted an uncertain tax treatment , as defined by notification criteria set out in this draft legislation. This measure aims to highlight and clarify legal interpretation differences earlier, either through notification, or by encouraging more businesses to discuss areas of uncertainty with HMRC before they submit their returns, thereby negating the requirement to notify. Although not exclusive to large businesses, most of the legal interpretation tax gap is attributable to this taxpayer group.
The measure will apply to returns due to be filed on or after April 1, 2022. The legislation will apply the regime to Corporation Tax, Value Added Tax and Income Tax (for partnerships, and including amounts collected via PAYE).
Large business/qualifying company
Article 2, Paragraph 2 of the draft legislation gives the following definition of a qualifying company:
A company is a “qualifying company” in any financial year if, in the previous financial year, the company had either or both of the following—
(a) relevant UK turnover of more than £200 million;
(b) a relevant UK balance sheet total of more than £2 billion.
Paragraphs 3, 4 and 5 of the draft legislation subsequently arrange the following:
If the company was not a member of a group at the end of the previous financial year—
(a) “relevant UK turnover” means the company’s UK turnover, and
(b) “relevant UK balance sheet total” means the company’s UK balance sheet total.
If the company was a member of a group at the end of the previous financial year—
(a) “relevant UK turnover” means the aggregate UK turnover of the company (“C”) and each other company that was—
(i) a member of the same group as C at the end of C’s previous financial year, and
(ii) within the charge to corporation tax on income at any time during C’s previous financial year, and
(b) “relevant UK balance sheet total” means the aggregate UK balance sheet totals of C and each other such company.
If the financial year of a company that was a member of the same group as C does not end on the same day as C’s previous financial year, the figures for that company that are to be included in the aggregate figures are the figures for that company’s financial year ending last before the end of C’s previous financial year
Article 3 of the draft legislation subsequently defines the term group.
Turnover and balance sheet total
Article 7 of the draft legislation contains definitions of turnover and balance sheet total.
Article 8 defines when a requirement to notify exists. Article 9 subsequently gives a more detailed definition of what is to understood to constitute an uncertain tax treatment. Article 10 contains regulations regarding a threshold test.
Tax advantage in relation to income tax or corporation tax
Article 11 defines what is considered to constitute a tax advantage in relation to income tax or corporation tax. Article 11 of the draft legislation reads as follows:
“For the purposes of this Part, a “tax advantage” in relation to income tax or corporation tax includes—
(a) a relief or increased relief from tax;
(b) repayment or increased repayment of tax;
(c) avoidance or reduction of a charge to tax or an assessment to tax;
(d) avoidance of a possible assessment to tax;
(e) deferral of a payment of tax or advancement of a repayment of tax;
(f) avoidance of an obligation to deduct or account for tax.”
Tax advantage in relation to VAT
Article 12 subsequently determines what is considered to constitute a tax advantage in relation to VAT.
The draft legislation contains several exemptions: a general exemption, an exemption for certain group transactions, an exemption for profits attributable to non-UK resident company, and a transfer pricing exemption.
Penalties for non-compliance are set at:
(a) for a first failure in respect of a relevant tax, £5,000;
(b) for a second failure in respect of a relevant tax, £25,000;
(c) for a further failure in respect of a relevant tax, £50,000.
Click here to be forwarded to the draft legislation as published on the HMRC website on August 19, 2021.
Click here to download the Explanatory note to the draft legislation.
Click here to download the draft guidance on the uncertain tax treatment.
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