Tax: Contentious: A UK-Wide Overview

Introduction

The political landscape in late 2025 heading into 2026 will create uncertainty in tax. 2025 saw a host of new anti-avoidance measures set out in draft legislation for inclusion in the Finance Bill 2026. The reported tax gap for 2023/24 was GBP46.8billion (an increase from GBP39.8billion in 2022/23). The UK government will want to be seen to be delivering on promises to prioritise HMRC’s enforcement and collection activities and have stated their intention to recruit 5,500 extra HMRC staff in order to reduce the tax gap. The prospects for increased tax disputes are patent.

HMRC Powers and Compliance

Draft legislation for inclusion in the Finance Bill 2026 introduces measures to address (i)  advisers facilitating non-compliance; (ii) promoters of tax avoidance schemes; and (iii) non-compliance in the umbrella market.

There is a focus within the proposals on tackling  advisers who are perceived to facilitate tax evasion. In particular, there is a broadening of HMRC’s powers to investigate and sanction tax  advisers who “deliberately” facilitate tax non-compliance and publish their information publicly. These measures include powers to publish the names of legal professionals who design schemes under the protection of legal professional privilege (LPP) but, following consultation, the UK government decided not to pursue plans to introduce a deemed waiver to LPP.

The proposals also include measures to tackle promoters of tax avoidance schemes, including updates to the DOTAS civil penalty regime enabling HMRC to determine penalties without first obtaining approval from the Tax Tribunal, and the introduction of a criminal offence for failing to notify under DOTAS.

Increased enforcement is expected under the new umbrella legislation which makes staffing agencies and (where there is no agency in the supply chain) end clients liable for unpaid PAYE and NICs of umbrella companies within their supply chain.

There are plans to introduce a new US-style whistleblowing scheme which rewards informants for providing information to HMRC on tax non-compliance.

Failure to Prevent Fraud v Failure to Prevent Tax Evasion

Taxpayers should be alert to the overlap between the offence of failure to prevent fraud under the Economic Crime and Corporate Transparency Act 2023, which came into force on 1 September 2025, and the offence of failure to prevent the facilitation of tax evasion under the Criminal Finances Act 2017. While the offence under CFA 2017 applies to organisations of all sizes, the failure to prevent fraud offence under ECCTA 2023 is limited in scope to “large” organisations. HMRC guidance warns that “reasonable procedures” which may qualify as a defence to the failure to prevent the facilitation of the tax evasion offence under CFA 2017 may not, on their own, be sufficient to act as a defence to the failure to prevent fraud under ECCTA 2023.

Mandatory Registration of Tax Advisers

In July 2025, the UK government published draft legislation introducing a new requirement for tax advisers to register with HMRC. This measure, set to come in force on 1 April 2026, aims to ensure that all tax advisers meet minimum standards in their dealings with HMRC. Failure to comply with the registration requirements may result in sanctions imposed by HMRC, including suspension or a permanent prohibition order.

Personal Taxes – New Regime for Long-Term UK Residents

From 6 April 2025 domicile is no longer a connecting factor for assessing chargeability to UK tax. The non-dom/remittance basis regime has been replaced with a new residence-based test which exempts foreign income/gains (FIG) for the first four continuous years of UK residence.

To qualify for the new regime, the individual must have been non-UK resident for ten continuous tax years prior to taking up UK residence. There are specific rules for qualifying foreign income, foreign employment income and foreign gains. Separate claims with full disclosure must be made for each relief. After the four-tax-year period, all individuals are subject to income tax and CGT on a worldwide basis.

Qualifying individuals who previously benefitted from the remittance basis of taxation may be able to make use of the transitional reliefs, namely rebasing and the temporary repatriation facility (TRF) allowing taxpayers access to the 12-15% rate on previously unremitted FIG.

Double tax treaty disputes will increase due to the tax mismatch and entity classification distinctions made in different jurisdictions. There will be more focus on the UK anti-avoidance provisions (and accompanying motive defences) for sheltering non-UK income and gains in corporate/trust structures. The remittance basis will continue to apply for pre-6 April 2025 unremitted FIG.

From 6 April 2025, the IHT regime also fundamentally changed for both individuals and the trusts they settle, with residence replacing domicile as the factor determining the scope of IHT. Broadly, an individual will be within the scope of worldwide IHT if they have been UK resident for at least ten of the previous 20 tax years, thus qualifying as a long-term UK resident.

Once an individual has become a long-term UK resident, the time it takes to fall outside of the worldwide IHT net ranges from three to ten years depending on the length of time they have been UK resident. The IHT-excluded property status of trusts changes in line with the IHT status of the settlor subject to grandfathering and transitional provisions applying to pre-existing trusts.

Domicile challenges will continue due to the impact on transitional provisions, and there will be increased focus on the Statutory Residence Test.

VAT

VAT will continue to be one of the most highly litigated areas of taxation. Its comprehensive nature means that technical and factual disputes are more likely. The VAT accounting system inherently creates greater room for error or misuse.

HMRC will continue to target businesses thought to be connected with VAT fraud through de-registration and denial of input tax. Supply chains involving umbrella companies remain a target for HMRC. Issues around HMRC’s discretion and proportionality are being contested at all levels, and EU law principles continue to be relevant in this area.

R&D and Capital Allowances

Erroneous or fraudulent research and development (R&D) claims are believed by HMRC to be having a substantial impact on the exchequer. Accordingly, such claims are receiving heightened scrutiny from HMRC, who are focusing resources in this area.

Capital allowances are another area of development. Whether certain costs (such as costs related to design and installation) can qualify as capital allowances remains hotly litigated, including in the construction and energy sectors.

Application of EU Law Post-Brexit

2025 has seen UK courts and tribunals continuing to grapple with the current status, interpretation and application of EU law in tax disputes, including cases where the relevant facts arose in pre-Brexit tax years (the procedural mechanism for the referral of questions of EU law to the Court of Justice of the European Union having been removed at the end of the Brexit implementation period).

The resolution of disputes grounded in alleged breaches of EU law is set to continue well into 2026. The interpretation of the European Union (Withdrawal) Act 2018 and the Retained EU Law (Revocation and Reform) Act 2023 on the ongoing relevance and proposed application of CJEU case law and general principles of EU law in the context of both direct and indirect tax disputes remains incredibly complex.