Promoting tax compliance and tackling avoidance remains a key priority for HMRC, as set out in its most recent departmental plan. In pursuit of this goal, the government has committed an additional £155 million of investment to be made available to HMRC for investigations in 2019 and 2020. HMRC’s longer-term target is to raise an additional £5 billion a year by 2020 through challenging tax evasion and avoidance, and by preventing non-compliance. It intends to achieve this through the implementation of a host of criminal, civil and regulatory measures.
In practical terms, this means that the tax landscape in 2019 will continue to be characterised by heightened regulatory obligations for corporates, an increased risk of HMRC investigation and HMRC adopting a more sophisticated and forensic approach to the resolution of disputes, whether by agreement or litigation.
For those taxpayers who are involved in ongoing disputes with HMRC, some of the key issues to be aware of are as follows:
1. Delays in decision making
The strict governance processes and the number of different stakeholders within HMRC who are required to progress and later approve the resolution of sensitive, strategically important or high value disputes, (including the terms of any settlement or any decision to litigate), means that taxpayers are frequently met with substantial delays in progressing enquiries towards resolution. HMRC’s stated target for turning around disputes with large businesses is 18 months, but very often disputes drag on for much longer. Given this, at the outset of a dispute it is important to maintain pressure on HMRC to set out their technical view of the dispute at the earliest opportunity. In the later stages of a dispute, it is critical to involve HMRC officers with the requisite level of authority. This is with a view to improving the prospects that any settlement can be approved on the agreed terms without delay, or to force HMRC to issue an assessment against which an appeal can be initiated.
2. Scope for settlement
The Litigation and Settlement Strategy (LSS), which sets out the overarching framework under which HMRC resolves tax disputes through civil procedures, emphasises that HMRC can only resolve disputes in a way that is consistent with the law and on a basis that determines the correct amount of tax. It has been clear since the LSS was first published over a decade ago that HMRC’s historic practise of agreeing a package deal to settle multiple disputes, or agreeing a settlement on terms more akin to that typically seen in commercial disputes, would not continue. This message has been strongly reiterated more recently. Accordingly, taxpayers wishing to settle a dispute would be well-advised to prepare a detailed technical analysis to underpin the offer; HMRC accepts that there may be a range of outcomes in some (typically fact sensitive) cases and is permitted to settle on one of the alternative bases provided that this would be one of the “likely outcomes” in litigation.
3. Merits of HMRC internal review
Where it is not possible to resolve an HMRC enquiry through agreement, HMRC will issue an assessment or decision at the close of the investigation. At this stage, the taxpayer has the option to request an internal review of the decision from an independent officer within HMRC. Recent statistics published in HMRC’s Annual Report show that in the last tax year, the independent reviewing officer upheld the original assessment in 49% of cases. Our experience indicates that in complex or high value cases, the figure is much higher than that, with HMRC rarely overturning an assessment following an independent review. This leaves litigation as the only option in those cases.
4. Increased litigation
In 2017/18, there was a 12% increase in the number of appeals against HMRC decisions which were filed at the Tax Tribunal. Given that HMRC’s primary objective is to maximise revenues, in the current political climate it is perhaps not surprising that there has been an increase in the number of cases which are proceeding to litigation.
Prevention is better than cure In today’s tax environment, where disputes with HMRC can be prolonged and the outcome uncertain, taxpayers would be well advised to take all reasonable steps to minimise the risk of a dispute arising at all. HMRC’s annual report emphasises that HMRC prefers to resolve issues through agreement wherever possible; transparent and collaborative engagement on both sides will be fundamental to achieving this.