HMRC has published new guidance on the obligation to notify them of uncertain tax treatment.

The obligation applies to returns required to be made on or after 1 April 2022 by large companies (turnover exceeding £200 million or balance sheet total exceeding £2 billion). Businesses are required to notify HMRC where they have adopted a tax treatment which meets one of the two criteria in the legislation and results in a tax advantage of £5 million or more.

The notification requirement is triggered where:

1. A business makes a provision in its accounts to reflect the probability that a different tax treatment will be applied to the transaction; or

2.  A business has taken a position in making its tax filings that is different to HMRC's known interpretation or application of the law. 

It is the second requirement that is likely to have the most significant impact.

This new regime has the potential to transform the approach to tax reporting for those business affected. Instead of the relatively clear boundaries provided by the Disclosure of Tax Avoidance Schemes (DOTAS) rules and the General Anti Abuse Rule (GAAR) - where businesses will know they are potentially playing with fire - businesses will need to scrutinise ordinary commercial transactions and second guess how HMRC might view them.   

This condition will require taxpayers to keep track of HMRC's views, in particular, HMRC guidance (including HMRC's manuals and customer guidance), statements of practice, public notices, explanatory and technical notes relating to legislation, guidelines for compliance and Revenue & Customs Briefs. Taxpayers will also need to consider correspondence between the taxpayer and HMRC about transactions  - covering statutory and non-statutory clearances and other interactions with HMRC on specific transactions. The requirement also stretches to HMRC’s position as expressed oral discussions with HMRC personnel.

HMRC say that the aim is to encourage businesses to engage early and thereby to obtain exemption from the regime. The new guidance states that "Support will be provided for businesses who engage early by providing assurance when they meet their obligations that they have obtained exemption". How this will square with HMRC's traditional hesitance to agree tax treatment prior to a transaction remains to be seen.

A first failure to notify carries a fixed penalty of £5,000, rising to  £25,000 for a second failure and to £50,000 for each further failure to notify. 

The guidance indicates that HMRC will exercise its discretion to not impose penalties on taxpayers who take a reasonable approach to establishing HMRC's view of transactions. However, the guidance does not provide a great deal of assistance as to what is meant by a reasonable approach.

The application of tax law is often an uncertain process, requiring positions to be taken and judgements to be made in an inherently uncertain legislative context. Businesses will need to obtain suitable advice on HMRC's likely view whenever they enter into a suitably large transaction.