Draft legislation is now available for the new regime which will require businesses to provide advance notice to HMRC of uncertainty in relation to their tax affairs.
The main change from the proposals in the second consultation is the so-called triggers for disclosure. Four triggers have been removed and the remainder have been changed to reflect comments made by respondents. The three triggers for disclosure are now when:
- a provision has been made in the accounts of the business to reflect tax uncertainty in accordance with generally accepted accounting practice;
- the tax position taken is contrary to the known position of HMRC, which includes publicly available material and statements made to that specific business; or
- there is a “substantial possibility” that a tribunal or court would disagree with the treatment applied.
The key question will be what “substantial possibility” means in practice. This is not defined in the draft legislation, but the explanatory note released alongside the draft legislation provides some clues as to HMRC’s thinking.
The explanatory note suggests that the “substantial possibility” test will cover situations where an accounting provision is not required because the taxpayer “believes their filing position to be correct" but where the taxpayer still considers there to be a substantial possibility that this position “might not be sustained”.
This seems to mean that at least some positions that are more likely than not to be correct will be disclosable under the regime. A reasonable dividing line might be that “more likely than not” positions will be disclosable while “should” positions are not disclosable. We expect the draft guidance to be released shortly will clarify this position.
The disclosure threshold remains at £5m but the Treasury will have the power to amend that amount by regulations.
Finally, the draft legislation contains an exclusion in relation to fund managers, to prevent managed assets being aggregated for the purposes of the turnover and balance sheet tests. This issue merits closer attention as it would seem that firms that hold assets using a master holding company may find their portfolio companies are grouped for the purposes of the turnover and balance sheet tests – which may not be an intended outcome.
We will be studying the legislation closely over the coming days and would encourage clients to do the same. Responses on the legislation are requested by 13 September 2021.