In this article we’ll take a look at Disregard, and why this particular Tax Code may apply to you. Generally speaking, if the Dispute Regulations applies to a non-taxation agreement, they will generally re-create for tax purposes the same accounting treatment of the non-taxation agreement that the business would have adopted if it had prepared its accounts according to ‘old UK GAAP’ (which is the generally accepted international standards of accounting practices). If you are considering a deal with a company or other third party, it is important to be familiar with the Dispute Code and Disregard before entering into it. This applies if you are involved in an agreement with such a business, where the Agreement must be in writing (including any financial statement) and must be signed by both parties to the agreement, even if it is a ‘nontaxation’ agreement. It is also important to note that if you enter into an agreement, whether it is a ‘non-taxation’ or otherwise, it may still be subject to Dispute Code, although this will depend on the nature of the agreement and what is being negotiated.
Dispute Code applies when the business’s books are not prepared according to ‘old UK GAAP’ accounting standards, and the company’s accounts are therefore deemed to be liable for paying the correct tax. This code has many variations and is governed by the different jurisdictions that the Code applies to. Most jurisdictions will require that a company must prepare its accounts to comply with ‘old’ UK GAAP before it is able to take advantage of Dispute Code. In other jurisdictions, the company will have to ensure that the accounts are prepared using ‘new’ accounting standards, after it has passed its preliminary examination. The main purpose of Dispute Code is to ensure that the accountant or company has a reasonable understanding of what accounting practices are used in a particular jurisdiction in order to prepare its UK accounts. The Code is also used to ensure that a company is not liable for paying the correct tax on account of transactions that were not properly prepared. However, most Dispute Codes focuses on the fact that companies must properly prepare their books in order to pass their preliminary examination, and that this will then require them to take steps to prepare accounts according to the standard accounting practices of the jurisdiction in which the Code applies to.
The Dispute Code can be a useful guide in some circumstances, and many people choose to follow its principles for tax planning. However, there are cases where the Code can be seen to not apply, even though there is a clear need to prepare accounts correctly for HMRC review. As an example, if a company has an asset purchase, but the sale of that asset will be considered ‘non-provisional’ (or not be considered ‘normal’ under the law), the company should be prepared to prepare accounts using the rules that apply in the jurisdiction in which the asset was acquired and not the new rules which apply.
Another example might be where an overseas firm is purchasing an asset in the UK and wishes to take advantage of Dispute Code if they do not follow the usual UK procedure. They may well need to make certain decisions in relation to that asset as part of their normal book preparation, such as how they are going to dispose of it, but would have to include in their accounts certain information about the acquisition, for instance, the date of receipt of the asset. If they did not do so, the code will not apply.
In this instance, they may need to provide the HMRC with evidence that their decision making was influenced by an accounting error – for example, that the transaction was made under the old UK GAAP rules and that this led to the acquisition being classified as ‘non-provisional’. There may be a number of other situations in which Disregard will be used in relation to an Asset Purchase Agreement, but it is important to ensure that the Dispute Code is understood as applying to each case individually and not to all of the cases that are involved. Although there is no specific law requiring companies to take Disregard into account when preparing accounts for UK tax, there are still several ways in which they can do so. Companies that need to obtain an extension on their normal period to prepare accounts may find that a Dispute Code application would help them. There are two types of Dispute Code application, namely the ‘extension of time’ exemption from charge’. The company can apply for both and can claim relief from tax liability for failure to do so if their case is successful.