Like climate change, while the corporate tax disputes landscape in the UK changes relatively slowly, distinct trends can be observed if one stands back and takes stock. It is awareness of those trends that enables one to identify the risks they present and consider how best to protect against them.
Navigating potential HMRC scrutiny on a number of different fronts can be challenging and businesses would be well-advised to seek specialist advice at an early stage: with care, good results are still possible.
Ten key themes we are seeing in UK corporate tax disputes are summarised below.
Structures in focus
1. Partnerships
HMRC continues to test the tax treatment of partnerships, particularly in respect of their executive remuneration arrangements, and professional services firms and asset managers have found themselves embroiled in litigation as a result. A number of these cases are still outstanding (for example, the Supreme Court has recently granted permission to appeal in HFFX LLP v HMRC and Bluecrest Capital Management LP v HMRC may head the same way following the recent Court of Appeal decision) and others on hold pending their outcome. Depending on where the case law ends up, there may well be a flurry of more challenging enquiries ahead for partnerships, especially in respect of the mixed member, salaried member and sales of occupational income rules.
2. Debt
Debt structures – especially those involving intra-group debt – continue to be an area of focus. HMRC appears to have been emboldened by recent court successes relating to the loan relationships ‘unallowable purposes’ anti-avoidance provision (section 441), taking an increasingly robust stance in reliance on aspects of the decided cases which support their view.
We are also starting to see more challenges to the deductibility of debt using other aspects of the UK tax code. Those include the thin capitalisation and transfer pricing arguments that often go hand-in-hand with section 441, but also beneficial ownership requirements, the anti-hybrid mismatch rules and even the CFC rules.
Business expenses
3. Deductibility
Going back to basics, HMRC is also looking at the deductibility of a variety of other business expenses. For example, in Centrica Overseas Holding Limited v HMRC, professional fees relating to the sale of a subsidiary’s business were found to be non-deductible. We are also seeing tech and life sciences companies in particular facing challenges about the deductibility of royalties and R&D costs (typically on the basis of the ‘wholly and exclusively’ test).
4. Reliefs
HMRC is continuing to carefully scrutinise claims for tax relief. This is a well-documented trend in respect of R&D reliefs (at least in respect of the pre-April 2024 regime), but capital allowances claims (and, conversely, the imposition of balancing charges) are in the spotlight too. The availability of statutory exemptions such as the dividend exemption and the substantial shareholding exemption may also become contentious.
High risk areas
5. Big and unusual transactions
While businesses might naturally expect HMRC to ask for more information about, particularly large or unusual transactions, and sometimes go on to challenge them, in our experience that is happening more often even where the transaction in question was proactively raised with HMRC before the tax return was filed.
6. Effective tax rate planning
Steps taken which are (perceived as being) designed to reduce a group’s effective tax rate are also likely to raise questions from HMRC. The efficacy of these kinds of arrangements are commonly tested using the plethora of purpose-based targeted anti-avoidance rules that now exist in the UK tax code (and relatively seldomly with the General Anti-Abuse Rule (GAAR)).
7. Transfer pricing of cross-border arrangements
Cross-border structures and arrangements that are perceived as being UK-base erosive continue to be closely scrutinised by HMRC, with transfer pricing a primary tool used in this space. In particular, we are seeing:
- transfer pricing challenges accompanying section 441 challenges to interest deductions on shareholder debt (see for example BlackRock);
- increased scrutiny of payments related to IP (including under cost contribution agreements); and
- HMRC testing the boundaries of the transfer pricing concept of ‘accurately delineating the transaction’ to the point of (arguably) claiming accurate delineation as a basis for economic recharacterisation.
HMRC’s approach
8. Less collaborative audits
In recent years, HMRC’s approach when scrutinising the tax affairs of large corporate groups has generally become more aggressive. There are a multitude of ways we are seeing this play out in practice, including:
- issuing protective assessments to leave open multiple lines of enquiry when it is questionable whether the conditions for doing so are met;
- disputing privilege and implicitly pressuring taxpayers to waive privilege over documents HMRC want to see;
- imposing tight deadlines for taxpayer responses (often followed by long periods of silence);
- a reluctance to engage in technical debates with a view to reaching a settlement; and
- an increased willingness to litigate.
Whilst not true in every case, businesses can perceive HMRC’s approach as increasingly one-sided rather than collaborative.
9. Criminal powers
HMRC appears to be increasingly prepared to use its criminal powers to investigate positions taken by taxpayers that it considers aggressive and/or indicative of fraud. This approach is coupled with legislative reforms that make it easier for corporates to face criminal liability for the acts of individuals, including:
- the corporate criminal offence of failing to prevent the facilitation of tax evasion (the CCO);
- the corporate criminal offence of failing to prevent fraud; and
- the expansion of the identification principle.
While successful prosecutions of corporates for tax offences remain relatively unusual, even early-stage criminal investigations can have significant financial and reputational consequences, and there is also a growing risk of such investigations ‘spilling over’ into other disputes – including disputes led by tax authorities in other jurisdictions and disputes involving other forms of corporate wrongdoing.
10. Penalties
HMRC seems to be taking a tougher approach when imposing civil penalties on corporate taxpayers, particularly if it believes that the business has been involved in tax planning, has provided inaccurate or misleading information or is seeking to ‘defend the indefensible’. We are also seeing a reluctance from HMRC to agree to suspend penalties for careless inaccuracies.
If you would like to discuss any of the points raised in this blog post in further detail, please contact the authors, our tax investigations and disputes team or your usual Freshfields contact.
