In March 2020 Her Majesty’s Revenue and Customs (“HMRC”) released a consultation document (the “ConDoc“) regarding a new proposal to bring forward legislation requiring large businesses to notify HMRC where they have adopted an “uncertain tax treatment” (the “Proposal”). We have recently submitted to HMRC our response to the consultation. Below is an abridged version of our response setting out the main issues we have identified in the Proposal. Our full response, including answers to the questions in the ConDoc, can be accessed here.
Issue 1 – “Backdoor delegated legislation”?
The Proposal embodies a novel approach to tax administration which appears to us not to be supported by established legal principles and conventions relating to the respective powers of the Executive and the Legislature in relation to tax.
In the UK, the general rule is that tax can be levied only in accordance with an Act of Parliament passed by the elected Legislature of the country. HMRC, as an arm of the Executive, has the power and duty to collect tax as provided for in and confined by, Acts of Parliament. Specific express powers for HMRC to promulgate secondary legislation on tax exist but are subject to important limitations.
The Proposal contemplates that the notification requirement contained in the new legislation will extend to cases where large businesses “believe that HMRC may not agree with the business’s interpretation of the legislation, case law or [HMRC] guidance”.
Although taxpayers are not precluded from applying tax treatments that are “uncertain”, they will become subject to a notification requirement and a requirement to pay penalties in default of notification. HMRC, on the other hand, are at liberty (so long as they do not act unlawfully) to formulate any treatment they choose. When HMRC formulates guidance and if (as is proposed) an undisclosed failure by a business to follow the guidance gives rise to penalties, taxpayers are likely not to adopt a treatment different from HMRC’s.
The result is that HMRC are able by this indirect means to cause businesses to modify their behaviour, in the same way that legislation would have done, but without the safeguards established by case law. This would represent a noticeable shift of power from the elected body (Parliament) to an unelected body (HMRC) and is as such undesirable in a democratic society.
Issue 2 – The need for precision in, and ease of access to, the legislation
“Good law is necessary, effective, clear, coherent and accessible.”
Sir Richard Heaton, First Parliamentary Counsel and Permanent
Secretary of the Cabinet Office (2012 – 2015)
The Proposal imposes a new duty of disclosure on taxpayers, and failure to perform this duty will give rise to a penalty. Elementary principles of fairness require that a person cannot be penalised for failure to perform a duty unless they have previously been informed, with precision (or have a reasonable opportunity of finding out), of the nature and scope of the duty.
The ConDoc contains no draft legislation and omits discussion of a number of significant matters relating to clarity, coherence and accessibility. In particular, the ConDoc does not describe precisely the circumstances in which the duty of notification will arise (the “trigger”). Four different formulations of the trigger are referred to in the ConDoc, and there are internal inconsistencies.
UK Acts of Parliament and delegated legislation are carefully organised, indexed and presented on the Office for Public Sector Information (“OPSI”) website, and case law is organised and indexed and readily available from a number of sources, including the BAILII website.
The same is not true of HMRC guidance. Until such time as the HMRC guidance is organised and indexed to the same standard as the OPSI website and BAILII, we cannot see that it would be fair, or compliant with Sir Richard Heaton’s criteria above, for a duty which is reinforced by penalties to be based, directly or indirectly, on HMRC guidance.
Issue 3 – The burden on business
The Proposal, if enacted, would add to the UK tax code a new requirement for business to be familiar with HMRC guidance on all topics (and to notify HMRC with respect to the basis on which the business has prepared its tax returns), which would be in addition to those that already exist. Further, experience shows that HMRC’s guidance is not always correct or consistent and HMRC is not always willing to be bound by its own guidance (as is clear from cases such as Davies and James v HMRC). The UK tax code is already unwieldy and overly complex. To have HMRC’s guidance overlaid will create a wholly unreasonable burden on business.
The Impact Statement in the ConDoc refers to impacts on large businesses which are to be fully explored and detailed. We consider that it would have been helpful to all stakeholders likely to be affected by the Proposal, and particularly businesses, to have been given firm and detailed information on the likely impact before the ConDoc was published (and consider that businesses would welcome early additional information on these topics).
Issue 4 – The applicability of IFRIC23 and international comparisons
The ConDoc suggests at para 3.6 that the policy “will draw on [International Finance Reporting Interpretations Committee 23] (referred to below as “IFRIC23”) to help define uncertain tax treatments, as there are similarities”.
The ConDoc explains at para 3.9 that three IFRIC23 principles, dealing with specific issues, will be applied to the trigger in the proposed legislation. However, the ConDoc does not indicate how these principles indicate which of the four possible formulations of the trigger (discussed in Issue 2 above) will form the basis of the legislation.
In any event it is clear that IFRIC23 is concerned with the preparation of companies’ financial statements. The Court of Appeal has given helpful recent guidance on the purpose of financial statements and their relevance to tax, in Union Castle Steamship Company v HMRC  EWCA Civ 547 (our analysis of the case is here):
“… it should be noted that the purpose of accounting standards, which is in general terms to assist actual and potential investors, and others dealing or proposing to deal with companies, in their assessment of the financial position and performance of a company, may not always match the purpose of determining profits and losses for tax purposes.”
In view of these comments it does not seem clear that using IFRIC23 to help define “uncertain tax treatment” is appropriate.
The ConDoc also refers (at para 2.5) to legislation about uncertain tax treatments in the US federal and Australian tax codes, and points out that the need to notify “uncertain tax treatments” within the meaning of those codes will be familiar to large business groups with international reach.
It does not necessarily follow that the need will be familiar to large businesses without interests in the USA or Australia. There is also no necessary reason why, in relation to “uncertain tax treatment”, the interests of the people of the USA, Australia and the UK should coincide. Furthermore, even a superficial examination suggests considerable differences between the “uncertain tax treatment” provisions in the USA and those in Australia. We consider therefore that no help is to be derived from the proffered international comparisons.
Issue 5 – Alternative approach
We suggest that a sounder approach could be modelled on HMRC’s Code of Practice on Taxation for Banks (the “Banking Code”).
This approach would involve a stated expectation that businesses would notify HMRC of “uncertain tax treatments” (as explained in the ConDoc) but no legal obligation to do so and therefore no penalties for breach. However, HMRC would be entitled (as it is under the Banking Code) to adjust the risk assessment of a business which it considers not to have complied with the code.
There is an indication in the ConDoc (at para 2.3) that part of the purpose behind the Proposal is to encourage dialogue about possible tax treatments between a business and HMRC. The adoption of the alternative approach suggested would be fully in harmony with that, and would remove the difficulties and risks in legislating and implementing the Proposal.