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TAX: An Introduction to UK-wide

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Joseph Hage Aaronson LLP Logo
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Contentious Tax – Overview 

The ever increasing reach of HMRC in a highly complex tax system

The UK tax system is complex, with a strong focus on anti-avoidance legislation. However, even seemingly innocent or commercial transactions may now find themselves subject to unexpected tax challenges by Her Majesty’s Revenue & Customs (HMRC).

International cooperation and collective action continue at pace as the OECD and other organisations such as the EU continue to take forward tax packages which aim to bring increasing transparency and reporting. Global tax systems continue to move towards harmonisation, which in the main has led to more powers being given to HMRC. With the multitude of information and disclosure regimes applicable in the UK today (or soon to be applicable), such as DOTAS, third-party notices, OECD mandatory disclosure rules, DAC6, financial institution notices and the new regime requiring large businesses to disclose uncertain tax treatment, it has never been easier for individuals and businesses to find themselves on HMRC’s radar.

HMRC has invested in trying to keep pace with changes in commerce and technology as the digital economy has taken off, and has been keen to be at the forefront of formulating tax rules for the digital age. This has inevitably led to the creation of new tax rules and powers. Examples include the interim digital services tax introduced in April 2020, which is intended to be replaced by a globally agreed solution in due course; and the introduction in 2021 of HMRC’s Manual on the taxation of crypto assets, which draws together and expands on previous guidance which was somewhat piecemeal. Given that globally there is currently little in the way of agreement on the taxation of crypto assets, this is a recent instance of HMRC trying to respond to changing times and ensure that the UK continues to be a leading global player in taxation.

The broadening of HMRC’s powers runs in parallel with the scope of UK tax becoming more extraterritorial and has meant that more non-UK residents are now subject to reporting requirements in the UK, such as for capital gains tax, 30-day reporting on transactions by individuals on disposals of land (which increased significantly due to the relaxation of stamp duty land tax from 8 July 2020 to 30 September 2021), and on disposals of property-rich vehicles. Non-residents with UK investments and business interests must continue to consider their UK tax exposures not only to tax but also to reporting.

Collecting more tax 

Whilst the full extent of the economic cost of COVID-19 is not yet clear, HMRC recently estimated the tax gap for 2019-2020 to be approximately £35 billion, which they believed represented about 5.3% of all tax liabilities. Since then the economic cost of COVID-19 has added enormous pressure on public finances and it is expected that government will look to the tax system to help fill the gap. Recent increases to national insurance and tax on dividends could be the beginning of a toughened revenue-raising process whereby HMRC are tasked with collecting more tax, including by reducing the tax gap, to help balance public finances.

Given this backdrop, the fine distinctions between legitimate tax planning, lawful but unacceptable tax avoidance, and unlawful tax evasion – distinctions so beloved by tax professionals – will remain increasingly blurred in the public mind, and pressures will give further encouragement to HMRC to continue to crack down on what is perceived to be unacceptable tax behaviour.

It has been apparent for some time that HMRC have become more assertive and tenacious in situations where previously they would have adopted a less forceful approach. Times have changed.

HMRC enquiries and investigations continue to 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 – these continue to rise particularly in domicile cases where HMRC are taking a more robust view;
• Sports players’ image rights and agents’ fees – the number of enquiries at least doubled by January 2021 and is set to increase further;
• Complex offshore trust and corporate structures – how funds flow in and out of the UK, with HMRC especially interested in funds flowing out of the UK;
• Diverted profits tax – this has given HMRC an advantageous way to challenge transfer pricing positions, bringing what can be lengthy transfer pricing disputes to a resolution more quickly;
• Private equity and carried interest – the extent to which income or capital gains treatment applies;
• Hedge fund structures – where ownership structures include a tax haven;
• Crypto assets – the creation of a dedicated CryptoAsset taskforce within HMRC; 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 expect taxpayers to understand their own affairs; they cannot simply 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.