1. What is the most significant change to your region/jurisdiction’s tax legislation or regulations in the past 12 months?
While pillar two will be the most notable and significant change to the UK tax landscape, the impact of the reforms and consequences on implementation from a tax controversy perspective remains to be seen in the years ahead.
If you were to ask me this question in three years’ time, I expect my responses in the context of pillar two and tax controversy would look very different, so I’ll concentrate on the UK tax controversy landscape over the next 18 months.
As economic uncertainty continues to loom across the world stage, the importance for jurisdictions to promote growth and innovation through efficient and effective tax policy is as fundamental as ever.
While the UK continues to be a leader in its support for businesses to invest in innovation through generous R&D tax relief schemes, in the context of tax controversy, the UK government has expressed concern over the growth in abuse and boundary-pushing involving R&D tax reliefs in recent years.
To address the recent levels of R&D tax relief non-compliance, His Majesty’s Revenue & Customs (HMRC) has introduced a suite of non-statutory changes to strengthen its approach and help combat abuse, as well as a number of operational changes to increase compliance amongst claimants.
2. What has been the most significant impact of that change?
HMRC’s latest reforms and their investment in additional resources are resulting in a marked increase in enquiries into R&D claims.
With a growing backlog of cases, particularly in the wake of the COVID-19 pandemic, disputes are often taking longer to resolve, and businesses are generally finding it more onerous to make R&D claims and get them agreed.
3. How do you anticipate that change impacting your work and the market moving forwards?
As a result of these changes, engaging with HMRC will become part and parcel of the R&D claim process. It is increasingly important that when submitting R&D claims, businesses have comprehensive documentation and an audit trail to demonstrate that the methodology is compliant with legislation and aligned with HMRC guidance.
Businesses should be prepared to actively engage with HMRC and proactively manage the process through a combination of robust governance and, wherever necessary, engaging the support of specialist understanding to assist with the preparation of R&D claims and respond appropriately to any HMRC challenges to the methodology applied.
4. How has this changed the way you offer tax advice?
Advising on tax dispute matters often requires a multidisciplinary team to provide end-to-end support. Deloitte UK’s Tax Controversy team includes solicitors and accredited mediators who manage and help resolve tax disputes, as well as tax specialists with deep technical knowledge of the R&D tax rules.
5. What potential other legislative/regulatory changes are on the horizon that you think will have a big impact on your region/jurisdiction?
The OECD and the European Commission have acknowledged that the rise of the sharing and gig economy has fundamentally changed operations in a number of industries in recent years. Digital platforms are at the centre of powering this transformation, specifically in the transportation, tourism and hospitality, professional services, and finance sectors.
This has created challenges for the existing tax, regulatory, and administrative frameworks, and governments are questioning whether the local policy in its current form is able to protect revenues and minimise economic distortions, particularly as economies change and evolve.
We can expect that the UK government will continue to attentively follow these developments, particularly around the impact on business models and the role of HMRC in collecting and administering UK VAT.
6. What are the potential outcomes that might occur if those changes are implemented?
As mentioned, the UK government’s response is ongoing, but the strategy while designing and implementing a VAT policy and administrative response is likely to centre around a few key objectives, such as compliance obligations for sharing/gig economy providers and increased data reporting.
In line with the OECD observations, we expect a UK policy response that is consistent with the general rules and principles of the existing VAT system. There may also be a trade-off between revenue protection and minimising competitive distortion and the need to safeguard the efficiency of tax administration to avoid undue compliance burdens.
7. Do you think that change will have a positive effect on both your practice and the wider regional/jurisdictional market?
Legislative and/or regulatory changes should provide much-needed clarity to businesses that are currently facing challenges in applying tax legislation and are struggling to keep up with evolving business models.
The UK VAT landscape is already active from a case law perspective, and upcoming decisions in the courts will need to be closely monitored as companies and individuals operating in the sharing/gig economy navigate legal, regulatory, and tax complexities.
8. Are there any regulatory/legislative changes you believe should be implemented in your region/jurisdiction?
Although the UK government has focused resources on implementing new policies, frameworks, and alternative methods to resolve tax disputes, tax enquiries can still take a significant length of time to reach a resolution.
HMRC already has a robust and phased governance process for resolving the majority of transfer pricing enquiries within 18 months (or 36 months where more complex and high risk). Similarly, with UK diverted profits tax (DPT), a 15-month review period provides both parties with clear timeframes to achieve a resolution.
Introducing legislative and/or policy changes under similar principles across other complex tax areas could further encourage HMRC and taxpayers to work collaboratively and minimise uncertainty.
9. How do you believe those changes would help improve the tax landscape in your market?
An HMRC enquiry should be a journey, not a random walk, but if both sides do not start on the same pathway, it is difficult to envisage a resolution that does not involve delays and extensive taxpayer resources.
A mandated statutory framework would be a significant step toward harmonising the tax controversy landscape. We often find that setting expectations and understanding HMRC’s specific concerns and broader objectives upfront fosters a proactive and strategic approach, builds and maintains a positive relationship of trust and respect, and helps taxpayers more effectively respond to HMRC concerns.
10. How are issues surrounding the taxation of the digital economy affecting your work?
As global initiatives looking to systematically unify and address the challenges of taxing the digital economy remain ongoing (for example, pillar one and pillar two – noting that these apply to all in-scope companies and not just those that are part of the digital economy), policies implemented unilaterally at the domestic level can add to the technical complexities to be navigated by taxpayers.
These changes are likely to create a higher likelihood of a substantial increase in the number and size of tax audits and assessments. By proactively developing coordinated approaches to enquiries and disputes, Deloitte UK’s Tax Controversy team works directly with taxpayers to navigate where tax legislation may struggle to keep pace with evolving business models.
11. How would you describe the tax authorities’ approach in your region/jurisdiction?
We have seen HMRC develop a variety of approaches to help improve tax compliance. For example, the use of a more investigative approach, by shifting the onus of proof to the taxpayer. Through HMRC’s ‘One to Many’ approach, a standard ‘nudge’ letter with a common set of questions is sent to a number of taxpayers, typically taxpayers with a similar fact pattern. While these are not notices of any formal investigation or compliance checks, the letters are a cost-effective way for HMRC to positively influence taxpayer behaviour and prompt more proactive engagement with them on potentially complex or contentious issues, where transparency and a mutual willingness to assist can be vital in coming to a conclusion (and resolution).
At the same time, HMRC continues to employ resources directly on areas of strategic importance through more coordinated enquiries in sectors and commercial areas that are felt to be most likely to undermine the UK government’s tax policy objectives. What we can still expect to see from HMRC are larger, more complex, and resource-intensive audits that increasingly rely on the use of formal information powers, which may lead more taxpayers down the road of voluntary disclosure, negotiated settlements, and potentially litigation.
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