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New powers for HMRC: fair and proportionate? Contents

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Chapter 5: Notifying uncertain tax treatment

123.In March 2020 the Government launched a consultation on a new requirement for large businesses to notify HMRC of any matter where they believed HMRC may take a different view to them on the tax treatment.178 A large business is one with a turnover of at least £200 million and/or a balance sheet of over £2 billion.

124.The consultation document stated that this new obligation for companies to notify uncertain tax treatment would be legislated for in the Finance Bill 2020–21, with draft legislation published in late summer 2020 and the new measure applying to tax returns filed after April 2021.179

125.As a result of COVID-19, the consultation period was extended, with stakeholders asked to respond by 27 August 2020 instead of the initial date of 27 May 2020. In consequence, the Government did not publish draft provisions on this measure when the draft Finance Bill was published on 21 July 2020.

126.On 12 November 2020 the Financial Secretary to the Treasury announced that the new requirement for large businesses to notify HMRC of any uncertain tax treatment would be delayed until April 2022. The delay would allow “more time to get the policy and legislation right following the recent consultation, including through further engagement with stakeholders”.180

127.We welcome the Government’s delay to the start date for the requirement to notify uncertain tax treatment and its commitment to engage with stakeholders to get the policy right. However, the Government should learn the lesson from this episode: until a measure complies with the policy principles set out above in Chapter 2, it should not be proposed.

Background

128.The consultation document explained that the measure was required to provide HMRC with “timely and accurate information regarding tax treatments adopted by large businesses which HMRC may disagree with”.181 It said that this information was needed by HMRC to allow it to address the tax gap resulting from legal interpretation issues, described as when a taxpayer and HMRC disagree on how tax law applies in a particular situation.182

129.The Government estimated the legal interpretation tax gap for tax year 2017/18 at £4.9 billion. The Financial Secretary to the Treasury told us that more than half of that came from the largest businesses.183 However, a witness made the point that, with HMRC estimating an additional £45 million per year by 2023/24 as a result of this new requirement, the impact of this measure on the tax gap was “relatively modest”.184

130.The consultation was issued as a Stage 2 consultation, meaning that its focus was on the detail of a measure to which the Government was already committed. Some witnesses felt that this was a mistake, with Malcolm Gammie of the IFS Tax Law Review Committee (TLRC) telling us that “there was a complete lack of background or explanation as to why this provision is needed and what it is seeking to address”.185 Frank Haskew of ICAEW added that “when we took this to our committees … almost to a man they have not understood why HMRC needs it”.186

131.Witnesses considered that a Stage 1 consultation, setting out the issue of concern, the Government’s objectives and possible policy responses for comment, would have been best for this measure.187

132.There was concern about the detail of the proposal, some of which we discuss later in this chapter. The TLRC told us that, overall, “it is not possible to conclude that the proposal is a sensible, proportionate or necessary additional compliance obligation.”188 A number of witnesses told us that the best thing the Government could do would be to abandon the current proposals and start again.189

133.HMRC, acknowledging that “considerable concerns about the design of the measure” had been raised during the consultation, told us it was “refining” its approach in light of the criticism before producing draft legislation for consultation.190 A week later, the Financial Secretary to the Treasury told us that we should not assume that the measure was “settled” and that the Government hoped to update the Sub-Committee “shortly” on next steps.191

134.On 12 November 2020 the Financial Secretary announced the delay to April 2022.192

135.We regret that the Government chose to consult on its uncertain tax treatment proposals at Stage 2. A Stage 1 consultation would have much more appropriate.

136.When the Government consults on new proposals, it should clearly state its case and the evidence for it. This is common sense and is what the Government’s Tax Consultation Framework requires. It is clear from our evidence that these requirements were not met by this consultation. We recommend that the Government should issue a new Stage 1 consultation, so it can work with business and representative bodies to develop a more targeted, proportionate measure than that now proposed.

HMRC’s existing compliance measures

137.We were told that HMRC’s existing strategy for dealing with large businesses was “very clear” and it already had a “bevy of measures for securing compliance”.193 These include the allocation of a customer compliance manager (CCM) to the largest businesses who has overall responsibility for their relationship with HMRC.194 HMRC also uses a business risk review to help determine where best to deploy its resources. Paul Riley, Director of Tax Administration at HMRC, told us that business risk review was “the bedrock of our relationship with large businesses”.195 The business risk review process was subject to review in 2018, with a new version introduced in tax year 2019–20.196

138.Malcolm Gammie told us that: “If, for some reason these measures are not working … it is for the Revenue to explain itself. It is not for it to pull a new compliance obligation like a rabbit out of a hat, on a nice to have basis”.197 He added that, given the interaction between taxpayer and HMRC that results from existing processes, “it is not entirely clear why placing an obligation on the taxpayer to notify under this separate provision advances the Revenue’s knowledge to any positive effect”.198

139.HMRC and the Financial Secretary to the Treasury acknowledged that the majority of large businesses have an open, collaborative working relationship with HMRC.199 HMRC described its overall relationship with large businesses as “pretty productive and healthy”.200

140.Some witnesses told us that their understanding, gleaned from discussions with HMRC officials after the consultation had been published, was that the measure was intended to address “continued aggressive, and often undisclosed, tax planning activity undertaken by a minority of large business customers”.201 Witnesses questioned why this proposal had not been targeted at the businesses that HMRC has concerns about.202 One suggestion was that the measure should apply only to businesses with a high risk rating within business risk review; other businesses would continue working with their CCMs as now.203 The CIOT, in response to the consultation, said that the measure risked eroding the collaborative working relationship that had been developed with business.204 CIOT added that “it seems unlikely to us that this proposal will change the behaviour of those that do not wish to engage with HMRC”, and queried whether HMRC could meet its objective by making further improvements to the business risk review process.205

141.While it is positive that HMRC has established a constructive relationship with most large businesses, it seems unnecessary and counter-productive to make a requirement to notify uncertain treatment apply to all, regardless of their risk status. We recommend that this new measure should be targeted only at the minority of large businesses that are of concern to HMRC.

Definition and test of uncertainty

142.The requirement to notify is intended to apply where a large business identifies an “uncertain tax treatment”. HMRC’s proposal is that an uncertain tax treatment be defined as one where the business believes that HMRC may not agree with the business’ interpretation of legislation, case law or guidance.206

143.Witnesses told us that the definition of uncertain tax treatment itself creates significant uncertainty.207 The test is subjective, with witnesses describing having to ‘second guess’ HMRC.208 The CBI said:

“To implement a regime whereby business is required to guess the mind of HMRC, as to what they may or may not believe the mind of Parliament to have been when making the law, is in our view a highly uncertain exercise which will be fraught with disagreement, inefficiency and error.”209

144.Witnesses told us that divining HMRC’s view on a tax issue relied on HMRC having set out that view clearly and publicly. Although HMRC has published extensive guidance on many areas, witnesses told us that, in practice, that guidance may be out of date or not deal with particular issues, or HMRC may have decided not to follow it.210 Witnesses therefore asked how, in the absence of clear, published HMRC guidance, a taxpayer could identify that their view was not the same as that of HMRC.211 HMRC accepted the importance of providing high quality, up-to-date guidance so businesses would know where they stood.212

145.HMRC referred in the consultation document to similar measures in other countries. Witnesses told us that the tests which these countries had adopted were less subjective and generally more straightforward. The proposals bore little relationship to the relevant accounting test (IFRIC23), which meant businesses would have to introduce additional risk management measures to deal with this new requirement.213 HMRC agreed that the UK was taking a different route.214

146.We heard that the range of taxes covered by the requirement was too broad, and in consequence the de minimis had limited benefit.215 It was suggested that HMRC limits the number of taxes in scope, as was the case in the USA where the requirement applied only to income taxes. The CBI said that the test should be based on materiality, whereby uncertainty would be notified only if the amount of tax at stake was significant in terms of that business’ overall position, as is the case in Australia, rather than a specific numerical limit.216

147.HMRC said it was “listening to the feedback” and acknowledged that the proposed test was “probably too subjective and difficult”.217 HMRC accepted the importance of providing high quality, up-to-date guidance so businesses would know where they stood.218 Based on the evidence we heard, it is notable that HMRC did not identify the problems with the proposed test from the outset.

148.We are concerned that HMRC did not recognise the likely difficulty of applying the test for uncertain tax treatments when the policy was being formulated for consultation. Tax obligations should be based on objective criteria that can be easily understood, and a business should not have to second guess HMRC to know if it is subject to a tax obligation. We therefore welcome the Government’s acceptance that it got the test for uncertain tax treatments wrong.

Penalties for non-compliance

149.The consultation proposed two penalties for failure to notify: one for the business and another for the individual officer of the company responsible for tax compliance.

150.Many witnesses were against penalties being imposed on individuals within a company, telling us that tax compliance is a “business-wide decision, not that of an individual”.219 HMRC told us that it was looking into this further.220

151.Although some witnesses regarded the level proposed for penalties as acceptable, a number raised concerns about the principle of penalties applying to this requirement: the CBI described it as “troubling”.221 This was because, if HMRC decides to challenge a tax position that had not been notified, that challenge would itself mean a penalty was due, regardless of the merits of the challenge. As HMRC acknowledges, it is not always right—so a business could face a penalty when its view of the law was correct.222 A particular concern was that in some cases a lack of familiarity with a particular sector can result in an HMRC officer challenging something that is generally acknowledged to be right.223

152.Tax is a business-wide matter and so liability for failure to notify should sit with the business alone, and not individual officers.

153.HMRC’s ability to create a failure to notify simply by challenging the position a taxpayer has taken in its tax return creates a ‘Catch-22’ for businesses. The Government needs to remedy this: a taxpayer should not be at risk of a penalty because of a mistaken or overzealous inspector raising an enquiry without merit.

Potential compliance costs

154.The consultation document contained no information on the cost implications for business of the proposal, saying they would be fully explored and detailed following the consultation. HMRC told us that an estimate of compliance costs had not yet been made.224 HMRC anticipated that, for most businesses, compliance costs would be low, because most businesses already notified any tax uncertainty voluntarily.225

155.Other witnesses took a different view of what this measure would mean for businesses in compliance activity. When we put these concerns to the Financial Secretary to the Treasury, he told us that he would ask HMRC to look at compliance costs in light of the evidence we received.226

156.Both the CIOT and ICAS expected the vast majority of compliant large businesses to make notifications where there was any possibility of uncertainty to avoid the risk of penalties.227

157.The CBI wrote that the requirement would entail a large increase in compliance time and expense for businesses.228 Malcolm Gammie suggested that business compliance costs could easily exceed the expected yield from the measure.229

158.Businesses could face significant costs in seeking to comply with the proposed measure on uncertain tax treatment. We are also concerned that this could lead to an overall negative yield for the Exchequer, to the extent that those additional costs are themselves tax deductible.

159.Any measure which risks costing taxpayers more in compliance than the revenue it generates is not good tax policy. Businesses should also not be asked to incur costs in providing information to HMRC which it accepts is already being provided in most cases. We welcome the Government’s commitment to look into the costs to business of complying with this measure.

Potential resourcing issues for HMRC

160.Witnesses pointed to the risk that measures would increase HMRC’s compliance systems, putting additional strain on resources that may already be stretched.

161.ICAS told us that, with some companies already finding it difficult to get real-time engagement with CCMs, these measures may make the position worse as CCMs dealt with notifications that HMRC did not necessarily want “from compliant businesses erring on the side of caution”.230 ICAS suggested that if the aim of the measure was to help HMRC, “it might backfire” with notifications “clogging up” HMRC’s systems, making it harder for HMRC to identify the problem areas.231

162.The relationship between a business and its customer compliance manager appears to be key to HMRC’s success in managing large business tax risk. We are concerned to hear that this may be under strain. We recommend that the Government identifies what steps can be taken to support existing customer compliance managers and to expand the number of companies benefiting from a customer compliance manager relationship. If this proposal goes ahead, the Government should commit to ensuring that every business affected has a customer compliance manager.

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