The increasing reach of HMRC
The UK tax system is complex and long with a strong focus on anti-avoidance legislation. However, even seemingly innocent or commercial transactions may now find themselves subject to unexpected tax challenge by Her Majesty’s Revenue & Customs (HMRC).
International co-operation and collective action are continuing at pace as the OECD and the EU take forward tax packages which aim to bring increasing transparency and reporting. Just as the world is becoming more connected, so too are its tax systems. With a multitude of information and disclosure regimes available to HMRC, such as DOTAS, third-party notices, DAC6 and financial institution notices, never has it been easier to find yourself in the focus of HMRC’s radar.
The broadening of HMRC’s powers runs in parallel with the scope of UK tax becoming more extraterritorial and affecting non UK residents more than ever before in history, with the introductions of capital gains tax and 30 day reporting on transactions by individuals on disposals of land and property-rich vehicles. So non-residents with UK interests must also turn their mind to their potential UK tax exposure.
The drive to collect more tax
In 2020, HMRC estimate the tax gap to be approximately £31 billion, which they believe represents about 4.7% of all tax liabilities. The unprecedented economic cost of COVID-19 will add multiples of that figure in extra amounts of tax which HMRC are going to be tasked with collecting over the coming years.
Given the financial hardship that whole swathes of the population will be facing, the fine distinctions between legitimate tax planning, lawful but unacceptable tax avoidance, and unlawful tax evasion - distinctions so beloved by tax professionals - will become increasingly blurred in the public mind; and media (and social media) pressure will give further encouragement to HMRC to crack down on what is perceived to be unacceptable tax behaviour.
Viewed in this context, it should come as no surprise that HMRC are becoming increasingly assertive and tenacious in situations where previously they would have adopted a less forceful approach.
HMRC enquiries and investigations are clearly on the rise as HMRC create more specialist teams to deal with a range of matters. In recent times we have seen them focus on, amongst other things:
• Residence and domicile status – there are noticeably more challenges in this area than previously;
• Footballers’ image rights and agents’ fees - enquiries cover players, agents and clubs;
• Complex offshore trust and corporate structures – how funds flow in and out of the UK;
• Offshore funds – the taxation and reporting of income and gains and the categorisation of such;
• Diverted profits tax – a relatively new tax that allows HMRC an advantageous way to challenge transfer pricing positions;
• Private equity & carried interest – the extent to which income or capital gains treatment applies;
• Hedge fund structures – especially where ownership of the fund equity may be within a tax haven; and
• Aggressive avoidance schemes - where HMRC have demonstrated their increasing willingness to use the general anti-abuse rule (the “GAAR”) in disputes with taxpayers, with the high penalty which the GAAR carries.
What taxpayers should be doing to protect themselves
Taxpayers must give thought to the issues above and ask themselves:
• Do they really understand their UK tax and filing obligations? HMRC now expect the wealthy to understand their own affairs; they can no longer leave the understanding part to the advisers.
• Does their previous planning still work? As tax rules and perceptions change, there can be no guarantee that what was previously advised will remain valid.
• Is using an accountant enough? Increasingly clients are looking for a legal adviser to work with their accountants, to give a second layer of comfort with the added advantage of legal privilege.
The approach to adopt in a dispute with HMRC
In some cases, it may be in a taxpayer’s interest to see an enquiry or investigation through to litigation. In many cases, however, the merits or context will not favour doing this, and seeking an agreed settlement at the enquiry or investigation stage will be preferable.
Experience shows that it is unquestionably in their interest for a taxpayer under enquiry or investigation to be advised and represented by a tax professional trusted by HMRC as “playing it straight”, albeit acting firmly on the client’s behalf.
It is totally counterproductive for a taxpayer to approach the matter with a view to “keeping the cards close to the chest” and making a very low initial offer to settle. In today’s reality that approach is destined to make HMRC more tenacious, less willing to consider what could otherwise be a reasonable route to settlement, and more likely to argue for penalties reflecting what they consider to be the taxpayer's unacceptable behaviour. Engendering HMRC’s trust that the taxpayer’s advisers are playing it straight is today, and will be for the foreseeable future, the best route to an acceptable and timely resolution; and taxpayers need to understand this from the outset.