International Tax Review (ITR): What can UK taxpayers do to minimise the risk of disputes arising with HMRC?
Kevin Elliott, KPMG (KE): Companies can minimise the risk of tax disputes arising by:
Having an enterprise-wide tax policy which establishes an appropriate risk appetite;
Requiring all tax planning to be aligned with business activity;
Subjecting all planning to rigorous technical challenge using specialists and external advisers where required; and
Robustly implement and fully disclose all planning to HMRC.
Companies can also reap benefits from establishing an effective working relationship with HMRC. In recent years HMRC have encouraged real time dialogue and collaborative working. Large UK companies will have a designated HMRC customer relationship manager (CRM) responsible for ring-mastering risk assessment activity and authorising any HMRC interventions. Through this relationship it is possible for large UK large companies to have regular exchanges to inform HMRC of any unusual or potentially contentious transactions and in return HMRC can conduct informal risk assessment which may obviate the need for formal enquiries. Operating on such real time, full disclosure, no surprises basis can minimise the risk of tax disputes.
Jake Landman, Pinsent Masons (JL): HMRC values taxpayers being open about tax compliance risks. If a taxpayer is uncertain about an issue, then raising it promptly – ideally in real time – will be viewed positively by HMRC.
If HMRC starts raising queries in relation to a particular issue there is considerable value in maintaining control of the enquiry process by giving prompt and fully considered answers.
This approach should extend to tax planning. If a taxpayer is upfront with HMRC as to what has been implemented and can demonstrate the structure involves genuine economic activity this can in some cases avoid a dispute despite HMRC's hard line in this area.
Companies should also be mindful of others they are transacting with. HMRC is taking an increasingly aggressive line on tax fraud and can target others in a transaction chain vitiated by fraud even if they are not complicit in it.
ITR: How should a company develop its strategy when challenged by HMRC?
Mark Whitehouse, PwC (MW): It is important to have a clear idea of what is at the heart of the dispute. Is it the sort of issue that can only be resolved by litigation or are alternative dispute processes worth investigating?
HMRC is very unlikely to consider anything other than litigation in the case of an issue of principle where there are wider implications for others.
Fact specific issues with little resonance outside of the particular dispute on the other hand, are far more likely to be worth directing towards alternative dispute processes. It is worth bearing in mind that even if an alternative dispute process fails, it can often promote settlement since it tends to clarify the issues.
KE (right): Companies should conduct detailed and objective feasibility analyses when developing a strategy to achieve the best outcome from single or multiple issue tax disputes. This will include identification of whether disputes are all or nothing or whether there are a range of plausible outcomes; analysing the strengths and weaknesses of both parties’ arguments and an estimate of the cost of taking a tax dispute through the litigation process.
The vast majority of UK tax disputes are resolved by negotiation rather than litigation. Typically companies will attempt to settle disputes by negotiation as a preferred option but if resolution appears difficult or unlikely companies can consider alternative methods of engaging with HMRC.
HMRC has developed dispute resolution programmes for companies with multiple issues which enable resolution to be attempted on a project basis. HMRC has also developed settlement opportunities for specific issues including controlled foreign companies (CFCs) and employee benefit trusts.
ITR: What is the most effective way for a company to organise its tax dispute team when involved in a dispute?
KE: Whether a company tends to deal with HMRC enquiries in-house or outsources such work, the key to effectively managing HMRC in a tax dispute will be to ensure the people engaging with HMRC have the relevant knowledge and experience.
A company might be relatively comfortable in dealing with usual HMRC enquiries but might not have the relevant expertise to deal with more intrusive interventions from specialist units of HMRC or to handle a more unusual aspect of a dispute such as taking an appeal to the tribunal. In those circumstances even a relatively experienced and well resourced in-house tax department would be well advised to seek specialist assistance.
MW: The best teams involve a clear demarcation of responsibility. Clearly an in-house team is likely to have the best firsthand knowledge of the particular transaction that is at the centre of the dispute.
They are also likely to have some history with the HMRC team. External teams bring objectivity which can be invaluable in assessing, for example, the factual context. The external team is also likely to have greater practical experience of disputes from beginning to end and possibly experience of dealing with specific issues with specific teams.
It can sometimes be useful for an in-house team to use the external team to progress the case in a way which might otherwise upset a good relationship with a CRM. Complex disputes are therefore likely to require both internal and external teams.
ITR: Are you seeing any trends in the types of tax cases HMRC is taking up, and the types of cases where HMRC is being successful in the courts?
JL: We are seeing an increasing number of sectors which have been infiltrated by VAT fraudsters. Where HMRC is unsuccessful in recovering the often considerable tax loss from the fraudsters they are looking to target others in the supply chain.
Under the relevant legal principles HMRC can look to deny the input VAT claimed by those other parties where they have knowledge or means of knowledge of the fraud.
Large multinationals are an attractive target for HMRC because of their deep pockets. HMRC will typically try to allege that the transactions should have aroused suspicion and that proper investigations would have uncovered the fraud.
KE: There have been a number of initiatives launched to target high risk taxpayers through teams set up within HMRC including an affluent unit to target wealthy individuals. There is a continuing trend of HMRC focusing on high risk areas such as structured avoidance, transfer pricing and cross-border issues.
Judicial sentiment in the UK has for a number of years been against those who engage in tax avoidance. HMRC have therefore won a series of well-documented cases where the courts have favoured HMRC’s interpretation of the law in avoidance disputes.
MW (left): HMRC is taking a far harder line with tax planning. HMRC seems to have much more of an appetite to take issue with the accounting treatment that companies have chosen to adopt and has had some notable successes at the First-tier Tribunal, the decision in Greene King perhaps being the most recent example.
ITR: What can UK taxpayers expect from HMRC’s litigation and settlement strategy in the near future?
KE: A new area of compliance HMRC will inevitably be concerned with will be the senior accounting officer regulations that require large UK companies to have appropriate tax accounting arrangements.
HMRC will continue to focus on traditional high risk areas of avoidance schemes and international tax planning such as transfer pricing and compliance with the new UK CFC regime.
HMRC refreshed its litigation and settlement strategy in 2011 with a strong emphasis on attempting to settle tax disputes by collaborative negotiation where possible. HMRC have been piloting the use of ADR with this likely to be used as a mainstream tool for settling a small percentage of tax disputes.
HMRC aims to be more effective with the cases it litigates. By handling and resolving disputes by negotiation more effectively, HMRC hopes to reduce the litigation pipeline and is looking to improve its procedures for selecting and progressing cases through the litigation process.
MW: The recent endorsement of HMRC's settlement strategy in Sir Andrew Park's report to the National Audit Committee is likely to mean HMRC will continue to consider that issues can potentially be settled where arguments are not clear cut.
However, inevitably there will be some rigor around this and companies will have to work hard to persuade HMRC that on the facts and the law, they ought to be settling a particular issue and have the power, from a governance point of view, to do so.
Further reading
Tax directors’ guide to surviving an Indian tax audit
How to survive a French tax dispute
What Australian taxpayers should know about the ATO's future strategy
