Large businesses: notification of uncertain tax treatment

Finance (No. 2) Bill – in a Public Bill Committee at on 11 January 2022.

Alert me about debates like this

Question proposed, That the clause stand part of the Bill.

Photo of Christopher Chope Christopher Chope Conservative, Christchurch 9:25, 11 January 2022

With this it will be convenient to discuss the following:

Government amendments 7 to 10.

That schedule 15 be the Fifteenth schedule to the Bill.

New clause 7—Uncertain tax treatment—

“The Government must publish within 12 months of this Act coming into effect an assessment comparing the rates of uncertain tax in the UK to those of all other OECD countries

Photo of Lucy Frazer Lucy Frazer The Financial Secretary to the Treasury

Clause 94 introduces schedule 15, which covers a new requirement for large businesses to notify Her Majesty’s Revenue and Customs when they adopt an uncertain tax treatment. The clause seeks to reduce the legal interpretation tax gap, which stands at £5.8 billion—an issue that I am sure hon. Members agree is worth tackling. Through collaborative engagement with stakeholders and several formal consultations, the policy has been refined to minimise administrative burdens, while still achieving the policy objectives.

The requirement will apply only to the largest of UK businesses, companies or partnerships—those with a turnover of over £200 million per year, or a balance sheet total exceeding £2 billion. They will need to notify only those uncertainties that involve a tax difference of more than £5 million. The requirement will apply only to corporation tax, VAT, income tax and pay-as-you- earn returns, and will apply to returns due on or after 1 April 2022.

The Government are committed to ensuring that businesses pay the tax they owe. They have made significant inroads in reducing the tax gap, which fell from 7.5% of total theoretical liabilities in 2005-06 to 5.3% in 2019-20. However, there is further to go in protecting revenues in order to enable the Government to invest in our public services. Schedule 15 is designed to reduce the legal interpretation portion of the tax gap, the majority of which is attributable to large businesses.

Legal interpretation tax losses arise when businesses take a different view from HMRC of how the law should be applied, resulting in a different tax outcome. This issue has proven stubborn and difficult to tackle. Disputes often arise late in the day and are not identified in time for formal compliance enquiries to be undertaken, resulting in irrecoverable losses to the Exchequer. The new notification requirement will tackle the legal interpretation tax gap in a well-targeted and proportionate way, raising £150 million over the next five years, while driving positive behavioural change.[Official Report, 25 January 2022, Vol. 707, c. 8MC.] The new notification regime breaks new ground by enabling earlier identification of potentially high-risk legal interpretation disputes that often are not apparent from tax returns. That will help to level the playing field for those large businesses that are already transparent with HMRC about their uncertain tax treatments.

The changes made by clause 94 will affect approximately 2,300 large businesses, which will need to consider whether they have taken an uncertain tax position in their returns. If they have, they will now be required to notify HMRC. They will not need to notify HMRC if they have already brought the uncertain position to its attention by other means, such as through discussions with their customer compliance manager, by contacting HMRC’s customer engagement and support scheme, through the non-statutory clearance process, or through other legislative disclosure requirements.

The Government have listened carefully and have developed the policy design to arrive at a regime that is objective and simple to understand. There are now only two conditions that trigger the notification requirement, which consultees agreed are objective and clear. The first is if the business has made a provision in their accounts to recognise the uncertainty. The second is if the tax treatment is contrary to HMRC’s known interpretation of the law or how the law applies to a certain set of facts. Business will be able to find HMRC’s known position in statements, in published guidance and in briefs, as well as through their dealings with HMRC. HMRC’s guidance on the regime will set out information on those sources, so that taxpayers are not required to extensively search HMRC’s current and historical positions in order to comply.

In recognition of stakeholders’ concerns, the Government have decided, at this stage, not to include the third trigger—the substantial possibility test, which has been consulted on—in order to ensure that the regime is as clear and well targeted as possible on implementation. Businesses will incur costs in complying with this new requirement, both through familiarising themselves with the new rules, and through the ongoing requirement to comply with them. The Government have estimated that these costs, across the entire large business population, will be up to £3 million per year.

I assure the Committee that the Government consulted on this proposal extensively, and have thought carefully about how to keep these burdens to a minimum to ensure that the regime is proportionate while remaining effective. We have narrowed the list of circumstances in which businesses need to notify HMRC, reduced the number of taxes in scope, and raised the de minimis threshold to limit the burden on businesses.

HMRC will promptly acknowledge any notification by a business, and will assess the risks posed by the uncertainty and respond accordingly. This will not always end in litigation. Issues notified could result in guidance clarifications or legislative change. HMRC will deploy its resources in a cost-effective way to secure the best return for the Exchequer, and value for money for businesses, HMRC and the courts.

The Government’s commitment to supporting businesses and meeting their compliance obligations does not stop there. We will be monitoring the impacts on the large business population, and HMRC is determining the most suitable metrics through which to evaluate the regime. I reassure hon. Members that the Government are listening to businesses and providing additional support where required.

The Government have tabled technical amendments to schedule 15 to ensure the measures work as intended when a business makes a provision in respect of VAT or PAYE to reflect tax uncertainty. The amendments address two issues in order to ensure that we place an obligation on businesses to notify HMRC only when they have the information to do so. The first, covered by amendments 7 and 9, concerns the timings of the notification obligation. The amendments ensure that businesses have no obligation to notify until they have made a provision. The second, covered by amendments 8 and 10, concerns partnership accounts. The Government’s amendments ensure that a partnership need notify HMRC only about provisions in its own accounts—not those in the accounts of its members.

I have emphasised the steps we have taken to ensure this regime is simple to comply with. The amendments ensure that there are no practical barriers to notification for PAYE and VAT, and I urge Members to accept them.

Let me try to pre-empt the points that will be made about the Scottish National party’s new clause 7. It would require the Government to publish an assessment comparing the rates of uncertain tax in the UK to those of all other OECD countries 12 months after the Act comes into effect. I assume that what the hon. Member for Glasgow Central is aiming for is an assessment of how effective the regime is at tackling the legal interpretation portion of the tax gap, in contrast to regimes in other OECD countries.

HMRC is one of only two revenue authorities that publish a comprehensive estimate of the tax gap annually. The few international authorities publish tax gap estimates use a range of estimates methodologies that provide different levels of tax gap information, making timely direct comparisons impossible. The majority of OECD countries do not have comparable regimes. In designing this measure, HMRC has learned lessons from two other notification regimes: those of Australia and the United States. However, these regimes operate differently in practice. For example, the Australian equivalent applies only to income tax and cannot be meaningfully compared. I therefore urge Members to reject the new clause.

This new requirement to notify will encourage earlier and open communication with HMRC about areas of tax uncertainty. It is designed to protect the public finances by reducing the legal interpretation portion of the tax gap. I commend clause 94 and schedule 15 to the Committee.

Photo of James Murray James Murray Shadow Financial Secretary (Treasury) 9:30, 11 January 2022

As we heard from the Minister, the purpose of clause 94 is to introduce schedule 15, which, in turn, introduces a new requirement for large businesses to notify HMRC when they have taken a tax position that is uncertain. The new requirement has effect for returns within scope that are due to be filed on or after 1 April 2022. We understand that large businesses are defined as those with a turnover above £200 million, or a balance sheet total of over £2 billion. Uncertain tax amounts with a tax advantage below the threshold of £5 million will not need to be notified to HMRC. We also understand that uncertain tax treatments are defined as those that meet one of two criteria: either a provision has been made in the accounts for the uncertainty, or the position taken by the business is contrary to HMRC’s known interpretation of the law.

The stated intention of the clause and schedule is to reduce the gap between taxes paid and taxes thought by HMRC to be owed that is attributable to differences in legal interpretation. The measure aims to ensure that HMRC is aware of all cases where a large business has adopted a treatment with which HMRC may disagree, and to accelerate the point at which discussions occur on these uncertain tax treatments. It also claims to identify areas of law that are currently unclear and to allow HMRC to focus on clarifying these areas of uncertainty, ultimately resulting in fewer disputes caused by uncertainty in the tax law.

We know from HMRC figures that in the financial year 2019-20, the tax gap attributable to differences in legal interpretation was £5.8 billion. Of this, £3.2 billion was attributed to large businesses. We do not oppose the broad intention of the measure. It is important that revenues are not lost to legislative ambiguity, and that tax liabilities are clear to large businesses. Measures that seek to reduce the administrative cost of dealing with uncertain tax treatment for both HMRC and businesses are worth pursuing. However, we note concerns raised by the Chartered Institute of Taxation. It was unconvinced that the measure would achieve its aim. It points to the additional compliance burden that all businesses will face, regardless of whether they have been transparent and open with HMRC about their tax dealings.

HMRC’s own figures suggest a cost of £1,300 for each business impacted, and the House of Lords Finance Bill Sub-Committee described that cost as disproportionate. I would be grateful if the Minister could tell us approximately how many large businesses the measure aims to change the behaviour of. I am sure that HMRC or Treasury officials will have estimated the scale of the problem before proposing a remedy, so I would be grateful if the Minister could share any figures she has.

On the operation of the measure, we understand that HMRC does not expect the legal interpretation part of the tax gap to be impacted immediately by the introduction of the measure alone, and it expects to have to take further action. It is therefore not immediately obviously why this extra measure is needed, and why HMRC’s existing powers are not enough. As the Chartered Institute of Taxation said,

“it is not clear to us how this measure will itself additionally impact on the legal interpretation tax gap, given that HMRC already have extensive powers to open an enquiry into, and investigate, a tax return, from which any disputes in respect of legal interpretation can be addressed.”

I would be grateful if the Minister addressed that point directly. Could she explain what practical advantage the new measures lend HMRC? Could she also comment on the penalties levied for non-compliance with the measure? Given that it targets a minority of non-compliant large businesses with a tax advantage above £5 million, the penalties for non-compliance seem rather small: £5,000 for a first offence, £25,000 for a second, and £50,000 for repeated failures to notify HMRC of uncertain tax treatments. Those amounts seem rather low for businesses with a £5 million-plus tax advantage. I would be grateful if the Minister explained how these figures were arrived at, and confirmed whether she believes these measures serve as a robust disincentive for large businesses to use differing legal interpretations to alter their tax liability.

Photo of Richard Thomson Richard Thomson Shadow SNP Deputy Spokesperson (Treasury - Financial Secretary), Shadow SNP Spokesperson (Wales), Shadow SNP Spokesperson (Northern Ireland)

It is a pleasure to serve under your chairmanship, Sir Christopher. I apologise for arriving slightly behind schedule this morning. It was good to see the ministerial team picking up exactly where we left off, getting their rebuttal in first, and telling us what was wrong with our new clauses before we had the chance to utter a syllable. I look forward to that continuing this morning—and this afternoon, if we get that far.

HMRC estimates that a potential £5.8 billion of the UK’s estimated £35 billion tax gap for the tax year 2019-20 is attributable to a difference in legal interpretation between HMRC and the businesses concerned. It is that situation that motivated us to draft new clause 7, which is in the name of my hon. Friend the Member for Glasgow Central. We support all and any reasonable and proportionate measures to try to narrow the gap. I would add, in passing, that it is disappointing that the third trigger has been dropped, which is that HMRC should be made aware by companies if there is a substantial possibility that either a court or tribunal might find that the taxpayer’s position was incorrect in certain material respects.

While there will always be a level of uncertainty around tax, it is useful to try to get a measure of the tax gap on its own terms—one that is as objective as possible. It is also very useful to compare, as far as possible, the estimated size and scale of our tax gap with the gap in other comparably advanced economies, so that we can see what we might learn from others.

I accept that direct comparisons might not be possible, but I do not accept the Minister’s argument that meaningful comparisons are impossible, because we can get an understanding of practices and of analysis; that is at the heart of the matter. This is about trying to get to grips with the scale, and developing an understanding of what will be a continually moving target, as entities seek to minimise their overall liability as legitimately as they can within the confines of the broader tax code. That backdrop of information would allow policy makers to reflect adequately on how the domestic tax code might be amended to ensure greater clarity and better compliance. It is on that basis that we tabled new clause 7.

Photo of Lucy Frazer Lucy Frazer The Financial Secretary to the Treasury

I am grateful for the contributions from Opposition Members. I was very pleased that the hon. Member for Ealing North recognised the importance of closing the tax gap and welcomed the provisions from that perspective. As I set out, the provisions will affect only the largest companies, which have the means of dealing with and communicating their issues to HMRC. He asked me about the practical advantages of the provisions, given that we have existing measures. Quite simply, some, though not all, companies are looking at all times to minimise the tax they pay, and are coming up with new ideas. They have the ideas first, and HMRC does not want to be slow in reacting. The best way to get on the front foot is for the companies to tell us what measures they are thinking about, so that we can engage at the first moment. That is what the provisions seek to do—to ensure that we can engage at the first moment, so that we can make sure that companies comply with their tax obligations.

The hon. Gentleman also asked about penalties. The Government originally proposed a flat £5,000 penalty for failure to notify under this regime. In response to stakeholder feedback, we revised the penalties, which now escalate for repeated failures to a maximum of £50,000. The Government considered carefully the penalties to ensure that they were proportionate and fair for a notification regime. Penalties are charged for failure to notify and are not charged by any determination of the amount of tax at stake—providing for a larger penalty in those circumstances would be disproportionate. If it was eventually found that a tax return contained a deliberate error, then a larger tax-geared penalty could still apply. As with all policies, the Government will of course keep this under review.

I was very pleased and interested to hear from the hon. Member for Gordon about his disappointment about the dropping of the third trigger. As I have said, we keep all measures under review and will keep looking at this area. If we do bring any further measures forward on uncertain tax treatment, I look forward to his support.

As the hon. Gentleman quite rightly identified, I have already addressed his point about comparisons with other OECD countries, but I highlight that we are one of a few countries that have published statistics. Of course, we often engage with other countries in order to look at and learn from what they do, and in order to compare ourselves, but we do not believe that a direct comparison with an assessment would be meaningful or helpful. For those reasons, I urge the Committee to support the clause standing part and schedule 15.

Question put and agreed to.

Clause 94 accordingly ordered to stand part of the Bill.