TAX: CONTENTIOUS: An Introduction to UK-wide

Introduction 

With more pressure than ever on His Majesty’s Revenue and Customs (“HMRC”) to address the estimated UK tax gap, one inevitable consequence is a further push to widen HMRC’s already extensive powers, alongside an increased level of scrutiny of all taxpayers.

Resolving any disputes which may arise with HMRC may seem like a daunting prospect for taxpayers under the UK’s highly complex tax system. The Yellow and Orange Tax Handbooks which contain the UK’s tax legislation currently total 23,066 ready-to-tear pages and weigh over 12 kg. This is before one considers the countless pages of published guidance provided in numerous HMRC manuals and constantly evolving case law from the Courts and Tribunals.

The complexity of the process and breadth of HMRC’s existing powers can often leave taxpayers feeling confused as to their rights and the steps which may be available to help them challenge HMRC’s position. The need for expert advice in this area has never been higher and is arguably essential for achieving the efficient and effective resolution of any tax dispute.

This overview explores some of the developing issues and current areas of interest for HMRC.

Tax Avoidance 

The distinctions between legitimate tax planning, lawful but unacceptable tax avoidance, and unlawful tax evasion are becoming increasingly blurred in the media and the public mindset, providing further encouragement to HMRC to be seen to crack down on perceived unacceptable behaviours. Indeed, tackling avoidance, evasion and non-compliance by the taxpayer has been cited by HMRC as a key strategic objective. The result of such action, according to HMRC, has been an additional GBP34 billion tax recovery. Included within this figure is GBP10.6 billion of revenue loss prevention which HMRC considers results from its focus on combatting income tax and VAT fraud. This corresponds with the uptick in recent cases practitioners have been instructed on in light of an increase and expansion of HMRC assessments for perceived VAT fraud.

HMRC’s powers in this area are set to widen further in light of proposed additional measures for discouraging promotion of tax avoidance schemes, namely:

(1) the introduction of a criminal offence for those who fail to comply with a legal notice from HMRC to stop promoting a tax avoidance scheme; and

(2) a new power that would enable HMRC to expedite the disqualification of directors of companies involved in promoting tax avoidance.

With an additional GBP79 million having been invested for allocating HMRC staff to address cases of serious tax fraud and tax compliance risks, we expect this to continue to be a topic at the forefront of HMRC’s mind.

Code of Practice 9 (“COP9”) 

COP9 is a process whereby a person whom HMRC suspects is guilty of tax fraud is given the opportunity to make a disclosure setting out the background/reasons for any non-compliance and make good any potentially unpaid tax. In exchange, subject to some exceptions, HMRC may formally agree not to open a criminal investigation. With HMRC recently going to great lengths to re-write this code and expand it application, it is likely that an increased number of taxpayers will find themselves a subject of this process. Details on these changes can be found here.

Scrutiny of Large, Multinational Enterprises (“MNEs”) 

There has been an increase in global cooperation in the field of tax which most recently led to the introduction of “top-up” taxes into the UK system. These taxes are aimed at ensuring a minimum rate of 15% tax on MNEs regardless of where in the world they are established. Additionally, since April 2023, MNEs have been required to retain transfer pricing documentation in a prescribed and standardised format. These new taxes and compliance rules are yet to be tested and are therefore likely to be a point of focus for HMRC.

Expanding Reporting Requirements 

The Economic Crime (Transparency and Enforcement) Act 2022 introduced significant tools for HMRC to identify the beneficial owners of assets, thereby preventing complex ownership structures from obscuring a source of wealth. In particular, with the introduction of the Register of Overseas Entities and the expansion of Unexplained Wealth Orders (as detailed here), it has never been easier for HMRC to trace the “real” owners of assets and thereby challenge structures that previously provided sufficient protection for the taxpayer.

Loan Relationships – Unallowable Purpose 

In 2023, HMRC made substantial changes to its guidance on the unallowable purpose test for loan relationships set out in its Corporate Finance Manual. These amendments included guidance on specific contentious issues subject to recent litigation and include the provision of example factual scenarios in an attempt by HMRC to clarify its position on its proposed application of the relevant legislation and case law. Given many of the contentious issues remain subject to onward appeal, it is clear that this topic remains a live issue for HMRC as well as many taxpayer groups with historic unresolved disputes.

Reforming Transfer Pricing 

A recent HMRC consultation proposed substantial reforms to the rules on transfer pricing. When combined with the introduction, under the Finance (No.2) Act 2023, of additional record keeping requirements for large companies and the presumption of carelessness for failing to provide such records, there is an increased risk of tax-geared penalties for taxpayers who fail to keep up to date with all the recent changes in this area.

What should taxpayers be doing to protect themselves? 

Taxpayers must ask themselves:

• Do they really understand their UK tax and filing obligations? HMRC expects taxpayers to understand their own affairs; they cannot simply leave this to their professional advisers.

• Does their previous planning still work? Proactively updating business and family wealth structures in line with current legislation and case law before HMRC investigates can save significant time and professional fees, in addition to any tax savings.

• Is using an accountant enough? Increasingly, taxpayers are looking for legal professionals to work in conjunction with their accountants and tax advisors, in order to give a second layer of comfort with the advantage of legal privilege over the advice provided.

• Are they prepared for a HMRC enquiry or investigation? Have they retained contemporaneous records to demonstrate the factual position several years later? Where there might be perceived gaps in documentation can the taxpayer (or members of the taxpayer’s own tax team) clarify or confirm the position?

With the expansion of HMRC’s powers, the likelihood of a whole range of taxpayers - from individuals to multi-national groups - finding themselves subject to challenge from HMRC appears higher than ever. In order to minimise the risk of contentious issues which might be resolved relatively quickly from developing into protracted disputes, the prudent taxpayer will be seeking advice directly from legal professionals with specific expertise in tax disputes who:

1. Have experience communicating directly with HMRC inspectors and CCMs at the enquiry stage, HMRC Solicitor’s Office as well as the UK Courts & Tribunals; and

2. Are able to work hand-in-hand with the taxpayer’s accountants and/or tax advisors from the onset of any enquiry or investigation.

The advantage of doing so will assist in rooting out baseless or procedurally flawed challenges from HMRC at an early stage, improve the prospects of negotiating a satisfactory outcome before HMRC’s position becomes entrenched, whilst also having the capability to conduct litigation on behalf of the taxpayer effectively and efficiently on any contentious issues should it become necessary.