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Draft Finance Bill 2022: Uncertainty over uncertain tax positions

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The government has brushed aside concerns that this regime will introduce considerable administrative burdens for large businesses, the majority of whom already cooperate with HMRC, for projected returns which are likely to be tiny (up to £45m a year according to the last consultation document) compared with the £4.9bn of the tax gap supposedly attributable to legal interpretation. 

The current proposals – HMRC’s third attempt – are a definite improvement on the first attempt which would have required businesses to crystal ball gaze to try to work out whether HMRC may challenge their interpretation of the law. The second attempt had seven triggers, including ‘is in some way novel such that it cannot reasonably be regarded as certain’. We are now left with two of these triggers (contrary to HMRC’s known position and provision has been made in the accounts) and a brand new one (substantial possibility that a court or tribunal would find the treatment incorrect). 

It is still going to be difficult to work out what HMRC’s ‘known position’ is. The draft legislation defines this broadly as where ‘it is apparent from guidance, statements or other material of HMRC that is of general application and in the public domain’ or ‘dealings with HMRC’ by the business, even if in respect of another matter. The first part of the definition will need to be limited (perhaps in guidance) maybe just to HMRC manuals, statements of practice and Revenue & Customs briefs so that there is a limit to what the taxpayer has to trawl through. There will also need to be some way of dealing with out of date guidance. For instance, would you need to notify if a taxpayer has won a tribunal case on the point but HMRC has not yet updated its guidance? The second part of the definition is also problematic because it is so wide. Does it cover some meritless argument raised by an HMRC officer on a previous transaction which turned out not to be relevant on that occasion? 

The new trigger requires a business to work out whether there is a ‘substantial’ possibility that a court or tribunal would find the treatment incorrect. Substantial is not defined. Is it a more than 50% chance or some lesser percentage? For example, for SSE purposes, non-trading activities are regarded as ‘substantial’ if they are more than 20% of total activities. Surely it can’t be as low as this? 

Where there is new legislation and HMRC has yet to issue guidance the known position trigger won’t apply, but the business will still need to work out what view a court or tribunal may take. Even with established law this is difficult: there are a number of instances where the result has flipflopped between a win for the taxpayer and one for HMRC, all the way up to the Supreme Court; and note the legislation says ‘a’ court or tribunal – not necessarily the highest one. 
The regime adds to the raft of other compliance challenges for large businesses.