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Fears are growing that HMRC’s proposed extension of the Uncertain Tax Treatment (UTT) regime could mire individual taxpayers and trusts in more complexity in an increasingly demanding tax system.
The UTT regime was introduced in 2022 and is designed to get very large companies and partnerships to flag when they have taken a tax position that could be legally contentious. To be included in the legislation, an entity would currently need an annual turnover of £200m or more, or a UK balance sheet of £2 billion or more. Businesses must tell HMRC when they’ve taken a tax position in a return that might be open to challenge, where the tax advantage is £5m or more.
The consultation, which has now closed and HMRC is considering responses, proposed bringing individual taxpayers and trusts into the regime, and adding additional taxes, such as Stamp Duty Land Tax, Capital Gains Tax, National Insurance Contributions and Inheritance Tax.
Could individuals and trust be brought within the regime?
The proposals in the consultation suggest this is the direction HMRC is looking to travel. The current regime covers Corporation Tax, VAT and Income Tax, including PAYE. But the hope is that the £5m reporting requirement will remain in place, so any expansion would only affect the very wealthiest people in the UK.
The proposed changes are designed to reduce the ‘tax gap’ between what is being paid and what HMRC estimates should be paid. For 2023/24, the tax gap was estimated to be £46.8bn, with the ‘legal interpretation’ portion of the tax gap estimated at £5.4bn, according to HMRC figures.
HMRC argues that if it is notified early about potentially contentious tax positions, it can solve disputes sooner, rather than having to discover them through an inquiry or litigation. But expanding the scope would create greater complexity for individuals and trusts.
Tax is often uncertain because legislation is complex and guidance can be difficult to get right as a result. The addition of a reporting ‘trigger’, where HMRC’s view on an aspect of tax isn’t known, could be difficult to apply in practice, and may mean taxpayers who are unsure whether they should notify or not, deciding to report anyway to avoid the risk of penalties.
Is this HMRC overreach?
Some professional bodies have raised concerns about including individuals and trusts in their responses to the consultation. For example, the Association of Taxation Technicians (ATT) has warned that the £5m threshold must be retained to avoid a disproportionate impact on individuals and trusts.
It also stated: “We also recommend leaving Inheritance Tax (IHT)out of any expansion of the taxes covered by UTT. IHT can involve long periods of time between tax planning taking place and the tax event (often death) occurring, IHT reporting duties on death often fall on people who were not involved in the planning, and because reporting may be unnecessary in the case of some IHT events (e.g. 'successful' Potentially Exempt Transfers) where there is no tax charge.”
The ATT is also concerned about the practical implementation of the new reporting ‘trigger’. The consultation response added: “As proposed, this addition risks creating an impractical burden on taxpayers. Instead, we recommend relying on the existing triggers at least until an extended UTT regime has had time to become established, and its effectiveness and impact on trusts and individuals can be properly assessed.
“Finally, the ATT reminds HMRC of its responsibilities in areas of uncertainty and potentially different legal interpretation - UTT should not become a means for HMRC to excuse itself from proactively identifying such areas and clarifying them in either legislation or guidance.”
Any changes have not yet been finalised, so we will have to wait and see what happens to the UTT regime. HMRC’s response to the consultation is expected this summer.
We can help you
If you think you may be affected by the proposed changes, or have any other concerns about your tax position and the current tax regime, then please contact us and we will do everything we can to assist you.