Themes in UK corporate tax disputes for 2025 (and beyond)

Like climate change, while the corporate tax disputes landscape in the UK changes relatively slowly, distinct trends can be observed when standing back and taking stock. Awareness of those trends helps corporates to identify the risks they present and consider how best to protect against them. 

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 are 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

Given pressure to raise taxes, it’s understandable that HMRC is carefully scrutinising 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 more 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, that seems to be 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 (but 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 remain a key area of focus for 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 following business restructurings); 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, many large corporate groups have commented that HMRC’s approach when scrutinising their tax affairs has felt more aggressive. Examples include:

• issuing protective assessments to leave open multiple lines of enquiry, including when it is not obvious that the conditions for doing so are met;
• disputing legal professional privilege and pressuring taxpayers to waive privilege;
• imposing tight deadlines for taxpayer responses (sometimes 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, these sorts of experiences have led to businesses complaining that HMRC’s approach feels increasingly one-sided rather than collaborative. There are also concerns that HMRC are leaving money on the table by stretching out enquiries and pushing cases to litigation rather than resolving them efficiently in accordance with HMRC’s published Litigation and Settlements Strategy. 

9. Criminal powers

Criminal tax investigations involving large corporates are still far rarer in the UK than in some other jurisdictions but HMRC will use its criminal powers (or initiate COP8/COP8 investigations) 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 unusual, even early-stage criminal investigations can have significant financial and reputational consequences, and there is a 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 hesitancy from HMRC in agreeing 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.