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Tax risk insurance: Impact of HMRC’s uncertain tax treatment requirement

Our latest tax bulletin explores HMRC’s proposed uncertain tax treatment requirements, the new risks that could emerge and the potential impact on tax insurance pricing and conditions.

New legislation proposed by the UK government will require large businesses to notify HM Revenue & Customs (HMRC) where they have adopted an “uncertain tax treatment” (UTT) in their corporate, value added tax (VAT), or income tax returns — that is, where it is not clear if the tax authority will accept a specific tax position.

Details of the legislation are currently being examined in the House of Commons, with the expectation that the new rules will take effect in April 2022. Designed to reduce tax losses for HMRC, the measure is anticipated to affect mainly companies and partnerships with a UK turnover greater than £200 million per annum or a UK balance sheet total over £2 billion.

The requirement is intended to improve HMRC’s ability to identify uncertain tax treatments adopted by those that do not have an open and transparent approach, and to accelerate the point at which discussions on uncertain treatment can occur. This may be helpful in avoiding legal interpretation disputes, which can take years to identify and resolve. The new regime is expected to trigger an increased interest in the tax liability relating to tax returns of large businesses that are due to be filed on or after 1 April 2022. It will also likely raise wider questions of tax risk insurability and could impact tax insurance pricing and conditions.

Defining uncertain tax treatment

The proposed rules identify two triggers for determining whether a tax treatment is uncertain. The new rules would apply if one of the two triggers is present.

Provisions trigger
The company’s accounts recognise the probability that HMRC may use a different tax treatment than the one used to calculate the tax return.
Guidance trigger
The tax treatment applied in arriving at the amount relies — wholly or partly — on an interpretation or application of the law that is not in accordance with the way HMRC would typically interpret or apply the law.

It should be noted that the UK government is committed to further consideration of a third trigger — where there is a substantial possibility that a tribunal or court would find the taxpayer’s position to be incorrect in material respects — for possible inclusion in the legislation at a later stage.

Broadly speaking, a large business is required to notify HMRC if an uncertain tax treatment would lead to a tax advantage of more than or equal to £5 million.

Are the new risks insurable?

The proposed legislation raises the question of whether risks related to the new requirements would have been insurable beforehand under the two triggers:

Provisions trigger: A tax risk that had already been provisioned in the financial statements would only be insurable in very particular circumstances. For example, a tax provision may have been included in the accounts, due to a particular tax treatment being under investigation or being disputed by HMRC. Only in a few circumstances, such risks may be insurable. Therefore, it is unlikely that the new rules will have a material impact on insurability of the underlying provisions of tax risks.
Guidance trigger: Often, particularly in cases where HMRC guidance is outdated, insurers may view a certain tax treatment as insurable, even though it is contrary to the existing HMRC guidance

The above indicates that at least some of the tax treatments captured by the incoming UTT regime are currently insurable. The fact that a risk falls within the UTT regime will not in itself make a risk uninsurable, particularly since many insurers assess insurability of risks on the assumption that any tax treatment will be reviewed by HMRC.

The tax insurance industry remains highly adaptable in the face of legislative changes and continues to be guided by the technical merits of successfully defending each tax risk in court, rather than the risk of discovery. We expect most insurers to take a pragmatic approach.

New requirement could lead to rate hikes

A targeted disclosure of the insured tax treatment to HMRC may result in slightly higher pricing and retentions to reflect the greater risk that a filing is challenged. To what extent this is true would have to be seen in practice. On the other end of the spectrum, a minority of insurers may simply regard such notifiable risks as uninsurable.

We anticipate strong demand from taxpayers to insure risks that are subject to the UTT rules, even if they have robust advice on the technical merits of the risk. A particular tax treatment could fall within a “grey” area, for example, where there is uncertainty as to whether a disclosure requirement exists. In such a scenario, it is crucial to have early discussions with a tax advisor or broker to discuss a risk mitigation strategy.

If the taxpayer believes there is no UTT disclosure, the relevant insurer may want to exclude any liability should the tax treatment be disclosed at a later date under the terms of the UTT regime through either a specific exclusion or a representation in the tax policy.

In light of increased risk of HMRC scrutiny, many taxpayers will likely want to obtain suitable coverage and will welcome the fact that a tax insurance solution will be a possibility for uncertain tax treatments subject to the proposed disclosure requirement.

For more information on uncertain tax treatment risks, please contact your Marsh advisor.

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Article

Tax risk insurance: Impact of HMRC’s uncertain tax treatment requirement

Defining uncertain tax treatment

Are the new risks insurable?

New requirement could lead to rate hikes

Meet the authors

Leon Steenkamp

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