Policy paper

Notification of uncertain tax treatment for large businesses

Published 27 October 2021

This tax information and impact note sets out a new requirement for large businesses to notify HMRC when they take a tax position in their returns for VAT, Corporation Tax, or Income Tax (including PAYE) that is uncertain.

Who is likely to be affected

The measure will affect large businesses with either:

• a turnover of more than £200 million per annum
• a balance sheet total over £2 billion

It will particularly affect those large businesses that adopt uncertain tax positions and do not have an open and transparent relationship with HMRC, such that these issues can be discussed and resolved early.

General description of the measure

This measure will require large businesses to notify HMRC where they have adopted an uncertain tax treatment that HMRC is not already aware of through its ongoing customer compliance relationship. Amounts of Corporation Tax, Value Added Tax or Income Tax (via Self Assessment or PAYE) will be classified as uncertain if the tax treatment to which they relate meets one of two legislative criteria:

1. That a provision has been made in the accounts for the uncertainty
2. That the tax treatment applied is not in accordance with HMRC’s known position

Businesses will be required to notify HMRC only if the tax advantage exceeds a £5 million threshold.

The measure will level the playing field for large businesses by improving HMRC’s ability to identify uncertain tax treatments adopted by those that do not have an open and transparent approach, and to accelerate the point at which discussions on uncertain treatment can occur. Overall, this is expected to result in an increase in tax revenue because the requirement for businesses to notify HMRC will enable HMRC to become aware of potentially incorrect tax approaches sooner than would otherwise have been the case, enabling better deployment of resources, earlier conversations and, where appropriate, earlier challenge of the approach a business has taken.

The government is committed to further consideration of a third trigger (where there is a substantial possibility that a tribunal or court would find the taxpayer’s position to be incorrect in material respects) for possible inclusion later.

Policy objective

The objective is to reduce the legal interpretation portion of the tax gap, which is estimated at £5.8 billion (in 2019 to 2020). £3.2 billion of the legal interpretation tax gap is attributable to large businesses. This measure breaks new ground by enabling early identification of potential high risk legal interpretation disputes that are often not apparent from tax returns. It levels the playing field for those large businesses who already voluntarily tell HMRC about these uncertain tax treatments and encourages more businesses to discuss areas of uncertainty with HMRC before they submit returns.

Legal interpretation tax losses arise where the taxpayer takes a different view from HMRC of how the law should be applied, resulting in a different tax outcome. Different tax treatments can result in too little tax being paid if the treatment is based upon an incorrect interpretation of the law. HMRC cannot currently identify all legal interpretation issues from returns, and this policy will facilitate earlier identification of them. At present, legal interpretation disputes can take years to identify and resolve, often through litigation which is costly for both taxpayers and HMRC. In some cases, uncertain tax treatments are identified only when it is too late for them to be resolved. Longstanding legal interpretation disputes cause uncertainty for HMRC and taxpayers and can undermine trust in the tax system.

This measure aims to highlight and resolve legal interpretation differences earlier, ideally by encouraging more businesses to follow best practice and discuss areas of uncertainty with HMRC before they submit their returns or, if necessary, through notification.

Background to the measure

At Budget 2020, the government announced a new regime requiring large businesses to notify HMRC of uncertain tax treatments.

A consultation document was published on 19 March 2020 setting out the proposed framework for the regime and seeking views on a range of implementation issues. The consultation closed on 27 August 2020. In November 2020, the government announced a one-year delay to the implementation of the regime to April 2022 to allow for a second consultation which took place between 23 March 2021 and 1 June 2021. A summary of responses to the second consultation has been published and is available here.

On 20 July 2021, HMRC published draft legislation which has been subject to further consultation, along with draft guidance. Consultees engaged with HMRC until 14 September 2021 to provide feedback on the draft legislation and guidance.

The consultation responses have informed this impact assessment and legislation.

Detailed proposal

Operative date

The measure will apply to the Corporation Tax, Value Added Tax and Income Tax returns (via Self Assessment and including amounts collected via PAYE) of large businesses that are due to be filed on or after 1 April 2022.

Current law

This is new legislation to establish a requirement for large businesses to notify HMRC where they have adopted an uncertain tax treatment. No existing legislation is being revised.

Proposed revisions

Legislation will be included in Finance Bill 2021-22 to define:

• a large business (turnover above £200 million per annum and/or a balance sheet total over £2 billion), and
• an uncertain tax treatment

It will also introduce a threshold of £5 million; uncertain tax amounts with a tax advantage below this threshold do not need to be notified to HMRC.

The legislation will provide criteria that large businesses will need to consider in order to determine whether a tax position is uncertain, and therefore whether notification is required. It will specify the due date for the notification, which is aligned with due dates for relevant returns.

There will be exemptions from the requirement to notify if disclosure is already required under another provision or if HMRC are already aware of the uncertain tax treatment adopted by the large business.

The legislation will apply the regime to Corporation Tax, Value Added Tax and Income Tax (via Self-Assessment and including amounts collected via PAYE). A penalty will be included for failure to notify, along with appeal and reasonable excuse provisions. The penalty will escalate for repeated failures to notify across multiple notification periods.

Summary of impacts

Exchequer impact (£m)

Notification of Uncertain Tax Treatment Exchequer Impacts

(Figures may not sum due to rounding)

	2021 to 2022	2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027
Notification of UTT (original proposal with delayed implementation to April 2022)*	+5	+25	+50	+45	+40	+40
Notification of uncertain tax treatment: changes to scope**	-5	-10	-15	-15	-20	-15
Total Exchequer Impact	+5	+15	+35	+30	+25	+20

*These figures are set out in Table 5.2 of Autumn Budget 2021 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2020, under the heading “Notification of Uncertain Tax Treatment” and Spending Review 2020, under the heading “Notification of uncertain tax treatment: delay of year to April 2022”.

**These figures are set out in Table 5.1 of Autumn Budget 2021 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Budget 2021, under the heading “Notification of uncertain tax treatment: changes to scope”.

The sum of these two figures gives the total Exchequer Impact of the measure.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

The terms used in this section are defined in line with the Office for Budget Responsibility’s indirect effects process. This will apply where, for example, a measure affects inflation or growth. You can request further details regarding this measure at the email address listed below.

Impact on individuals, households and families

There is expected to be no impact on individuals as this measure only affects large businesses. There is expected to be no impact on family formation, stability or breakdown.

Equalities impacts

It is not anticipated that there will be impacts for those groups sharing protected characteristics.

Impact on business including civil society organisations

An estimated population of around 2,300 large businesses (as of September 2021) will need to consider whether they have taken an uncertain tax position in their returns that they have not already made HMRC aware of - in which case they will need to make a notification. Large businesses who do not already discuss legal interpretation issues with HMRC in real-time will be more likely to need to make the notification.

After the draft legislation was published on 20 July 2021, in order to estimate the impact on large businesses, HMRC sought further specific details of the one-off and continuing costs which are likely to be incurred.

Affected large businesses will incur one-off costs to familiarise themselves with the new obligation and prepare for it. Evidence received in consultation suggests different businesses will take a large variety of approaches, from training tax teams in-house, using external training providers, setting up new processes and repurposing existing ones. It is expected that one-off costs will vary depending upon a business’s chosen approach, and it is estimated that across the population the average one-off cost will be negligible. One-off costs are deemed to be negligible where the estimated impact is less than £5m across the population

Continuing costs to large business are expected to exceed £100,000 across the total population. Continuing costs arise from large businesses considering whether relevant returns contain an uncertain tax treatment that HMRC is not already aware of, and from notifying HMRC where that exceeds the £5m threshold, . HMRC have engaged with consultees on continuing costs and from the evidence received estimate continuing costs of up to around £3m per annum, across all large businesses. It is acknowledged that there will be a broad range of continuing costs depending on the type and size of large businesses and the nature of the relationship they have with HMRC. For some large businesses, it is expected that costs will decline over time as this becomes part of business as usual.

HMRC does not expect these costs to be evenly spread across the population, as large businesses who already have an open and transparent relationship with HMRC will already discuss legal interpretation issues with HMRC, or will have systems and processes in place through which the identification of uncertain amounts is part of their existing compliance approach. It is however recognised that even large businesses who are already open and transparent with HMRC will seek to ensure they have complied with the legislative requirements on an annual basis and will therefore incur some additional costs in doing so.

Estimated one-off impact on administrative burden (£m)

One-off impact	(£m)
Costs	Negligible
Savings	-

Estimated continuing impact on administrative burden (£m)

Continuing average annual impact	(£m)
Costs	Up to around £3m
Savings	-
Net impact on annual administrative burden	+Up to around £3m

Customer experience is expected to remain broadly the same because those with a Customer Compliance Manager or who are open and transparent with HMRC on uncertain tax issues will benefit from the general exemption where they meet the legislative criteria.

For customers without a Customer Compliance Manager, HMRC will utilise their existing Customer Engagement Team to provide a structured opportunity to discuss tax uncertainties, so that they can also benefit from this exemption.

Customers will rely on HMRC’s published guidance to determine HMRC’s known position for the purposes of complying with this measure, so it is important guidance is up to date. Guidance is updated regularly and HMRC are committed to keeping their technical guidance up to date. In recognition of the increased importance of guidance when the measure is implemented, HMRC are exploring further opportunities to improve their technical guidance. A working group of HMRC and external stakeholders has been established and has begun identifying the highest priority areas needing improvements in the months leading up to implementation.

There is expected to be no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

The operational impact on HMRC, including further compliance staff and new IT development, is currently estimated to be £15 million across the scorecard.

Other impacts

Other impacts have been considered and none has been identified.

Monitoring and evaluation

HMRC conducted a consultation with large businesses. Feedback from consultees about the impacts has been taken into account in changing the policy design. HMRC has specifically asked consultees for details of the potential impacts and has used these in informing their assessment. The measure will continue to be monitored through communication with large businesses and their representatives.

HMRC published an evaluation plan of the uncertain tax treatment policy in December 2022.

Further advice

If you have any questions about this change, please email uncertaintaxtreatmentconsultation@hmrc.gov.uk.