Notification of uncertain tax treatment by large businesses

[Image by Bruno from Pixabay]

Uncertain tax positions are a major risk for the public exchequer: the taxpayer has a punt at a favourable tax analysis, hoping either that it doesn't get challenged by HMRC at all, or that any challenge fails. And the risk to the public exchequer is much greater if HMRC don't even know that the taxpayer has taken a punt in this way. That being the case, we very much welcome the government’s proposed obligation on large businesses to notify HMRC of uncertain tax positions. A consultation on the policy closes today and we have filed a consultation reponse welcoming the measure, and also suggesting a few technical tweaks.

One area of concern is to do with the triggers for a notification obligation. We believe the triggers should include any circumstance where a tax treatment requires substantive actions to be taken by the taxpayer in order to mitigate tax risk (except where they are actions which it is the purpose of the relevant legislation to incentivise).

The reason for this is that much tax avoidance takes the form of formal documentary exercises which the taxpayer needs to back up with substantive changes to their business arrangements. In these circumstances the taxpayer’s tax advisers will explain what needs to be done on the level of substance, but these recomendations are often ignored, because doing things with no business purpose is costly and tiresome, and because people without specific tax expertise often imagine (even in the face of express advice to the contrary) that the formalities are enough to obtain the tax advantage.

Such gaps between what has been recommended by way of tax risk mitigation and what is actually done in practice can exist in the tax arrangements of even the biggest and best-advised multinational companies. And these risk mitigation gaps have the consequence that the taxpayer could be sitting on a tax risk that they wrongly believe has been fully mitigated, and which HMRC may not (without a notification trigger along the lines we recommend) find out about.

But, technical tweaks aside, this is a good policy, and one which we look forward to seeing implemented.