UK draft bill would require uncertain tax treatment reporting, amend hybrid rules

By Doug Connolly, MNE Tax

The UK on July 20 published draft legislation for Finance Bill 2021-22 to create an uncertain tax treatment notification requirement for large businesses and amend the tax rules for hybrids and other mismatches, among other measures. The tax proposals are open for consultation until September 14 before being laid before Parliament.

The bill would also add provisions to crack down on tax avoidance promoters. Other business tax proposals in the bill include measures on the taxation of asset holding companies in alternative fund structures, real estate investment trusts, and capital allowances.

The rules on uncertain tax treatment would require large businesses to notify HMRC if they adopt an uncertain tax treatment with respect to returns filed on or after April 1, 2022. For this purpose, large businesses are defined as those with turnover of more than GBP 200 million per annum (approximately USD 275 million) and a balance sheet total over GBP 2 billion (approximately USD 2.75 billion).

The draft legislation defines uncertain tax treatments as positions meeting at least one of three conditions. Generally, a tax treatment would be considered uncertain if the taxpayer has made a provision in their accounts to reflect the probability that a different tax treatment would be applied, if the treatment diverges from a position set out by HMRC, or if there is a substantial possibility that the taxpayer’s adopted tax position would be overturned by a tribunal or court.

Uncertain tax treatments below a threshold of GBP 5 million (approximately USD 6.9 million) would be exempted from the requirement. There is also an exemption for certain transfer pricing calculations. A penalty of GBP 5,000 (approximately USD 6,900) would apply to a failure to notify.

The draft legislation on the uncertain tax treatment notification requirement follows a consultation on the proposed requirement held earlier this year.

The change to the hybrid regime would amend part of the rules that aim to counter mismatches related to payments to hybrid entities to ensure a proportionate outcome when certain entities are seen as transparent in their home jurisdiction. To this end, the amendment would treat certain transparent entities located outside of the UK that are treated as transparent in their home countries – e.g., US limited liability companies – the same as partnerships to ensure that the counteraction provision operates as intended.