Tax Controversy 2019

Last Updated June 06, 2019


Law and Practice


Joseph Hage Aaronson LLP is based in London and has a contentious tax team that brings together specialist tax QCs, experienced tax dispute solicitors and forensic accountants. The team is led by Graham Aaronson QC, the leading tax silk of his generation. Other key members are Simon Whitehead, Paul Farmer, Michael Anderson, Ray McCann and Daniel Margolin QC. The JHA team has vast experience of dealing with tax enquiries and investigations (both in the UK and elsewhere), and tax litigation in all areas of the domestic courts and tribunal system, from the First-tier Tribunal to the Supreme Court. It has also represented clients in numerous references to the European Court of Justice (ECJ) and in high-value tax disputes in foreign jurisdictions. JHA acts for a variety of corporations, trusts and high net worth individuals in a wide range of domestic tax disputes, assisting clients in resolving issues and disputes with HMRC. This includes matters relating to transfer pricing, oil and gas taxation, life assurance taxation, structured finance, state aid, domicile and residence, and avoidance (including film schemes and pension liberation schemes).

The latest figures published by the UK government (on 14 June 2018) show that the ‘tax gap’ in the UK (ie, the difference between the amount of tax that should in theory be paid to HMRC and what is actually paid) in 2016-17 was estimated to be £33 billion, or 5.7% of tax liabilities. This tax gap when analysed shows the below statistics.

By type of tax:

  • income tax, National Insurance contributions and capital gains tax – 40%;
  • value-added tax (VAT) – 35%;
  • corporation tax – 11%;
  • excise duties – 9%; and
  • other taxes – 5%.

By type of taxpayer:

  • small businesses – 41%;
  • large businesses – 21%;
  • criminals – 16%;
  • mid-size businesses – 12%; and
  • individuals – 10%.

By type of behaviour:

  • failure to take reasonable care – 18%;
  • criminal attacks – 16%;
  • evasion – 16%;
  • legal interpretation – 16%;
  • non-payment – 10%;
  • error – 10%;
  • hidden economy – 10%; and
  • avoidance – 5%.

There is a distinction between the determination of a tax liability and the enforcement of that liability. This chapter focuses on the former. Broadly speaking, the enforcement of a determined tax liability in the UK is a matter of general law and with the non-payment of tax purportedly accounting for only 10% of the tax gap.

The general principle of UK tax administration is that the taxpayer, individual or corporate, is obliged to make a return of their liability to HMRC. Returns may be annual (income tax and corporation tax) or triggered by events (eg, stamp duty, land tax or inheritance tax) and will often include a self-assessment of the tax liability. Many claims to relief are included in returns but it is possible to make freestanding claims. HMRC has the power to begin enquiries into the returns and claims it receives. There are statutory time limits within which such enquiries must be commenced if HMRC wishes to challenge a return. If HMRC is out of time to begin an enquiry into a return but ‘discovers’ that there has been an under-assessment of tax, there are statutory procedures by which it can make a ‘discovery assessment’ to tax.

HMRC may receive a wide range of data from sources other than a particular taxpayer and is known to collate data from public sources. This data may be relevant to checking returns that have been made and locating those who have failed to make necessary tax returns. HMRC will initiate tax investigations if it believes or suspects that a citizen has failed to comply with lawful tax obligations. HMRC has published two Codes of Practice (COP8 and COP9) setting out the processes it will follow in such cases.

At the same time, HMRC is a public body and in appropriate circumstances its decisions may be subject to challenge under public law – ie, judicial review – as opposed to through a statutory tax appeal. This may be the appropriate approach to take if HMRC acts unlawfully or with conspicuous unfairness.

All taxes are capable of generating tax controversies. Tax avoidance is an issue of significant public and media interest at present in the UK and there has been much legislation enacted in recent years to tackle it. So whilst a tax controversy can always be caused by a disagreement with HMRC over the technical meaning of tax law, it is a reasonable inference that any attempt by a taxpayer to structure a transaction in a way that HMRC regards as outwith the spirit of the legislation is likely to become the subject of an enquiry.

The UK has been an active participant in international discussions on how to combat tax avoidance in recent years. Domestic legislation generally implements agreed approaches. Sometimes the UK has been ahead of the developing international consensus, such as with diverted profits tax. This approach is thought unlikely to change and UK domestic legislation is likely to continue to contain anti-avoidance provisions. Whether this has contributed to increasing or reducing tax controversies is difficult to say. The UK certainly has a significant number of ‘open’ tax disputes involving avoidance schemes, some implemented many years ago. The UK also introduced a general anti-abuse rule (GAAR) in 2013.

The due date for payment of tax is, generally, provided by statute and varies depending on the tax. The statutory payment date will often be before the final resolution of any tax controversy. However, this will be subject in some instances to the possibility of payment of all or part of the disputed amount being postponed by agreement between the taxpayer and HMRC or by order of the Tax Tribunal. Recently a series of domestic legislative provisions have been enacted (advanced payment notices, partner payment notices and follower notices), which ensure that in avoidance cases an amount of the tax in dispute must be paid at a much earlier time than was previously the case. The statute provides that there is no possibility of postponing payment of these amounts. This is controversial legislation and has been the subject of a number of legal challenges; all unsuccessful to date.

Whether the tax in dispute has to be paid before a judicial challenge can be commenced varies from tax to tax. In direct tax matters – eg, income tax or corporation tax – the commencement of proceedings does not impact the payment date and the due and payable date will often be postponed. However, there is no possibility of such postponement of payment after the first level of appeal. With VAT, any tax must be paid before an appeal against the assessment or determination can be commenced, although this may be mitigated in cases of demonstrated hardship. 

HMRC has published a ‘litigation and settlement strategy’ and a ‘Code of governance for resolving tax disputes’. There is clear governance around tax disputes involving a range of HMRC committees with distinct remits. Each year the Tax Assurance Commissioner publishes an annual report on tax disputes undertaken by HMRC.

HMRC aims to minimise tax disputes by helping taxpayers to pay the correct amount of tax at the right time. Generally, tax enquiries are based on a risk assessment that is informed by what the taxpayer has returned, known risks within the tax system and taxpayer attitudes towards tax. HMRC will have been notified of many tax avoidance schemes through the various statutory disclosure regimes, such as the Disclosure of Tax Avoidance Schemes regime (DOTAS). In addition to risk-based compliance interventions, HMRC also randomly selects a small number of cases for enquiry so as to learn about general levels of compliance risk and to measure compliance levels within the broader population.

The work of HMRC is segmented; eg, there is a separate area dealing with large businesses and each large business has a tax expert, known as a customer compliance manager, assigned to it. Thus, the nature of the risk assessment and the degree of active engagement with particular taxpayers will vary from area to area. 

An enquiry into a tax return usually must be commenced within a year of the return being delivered to HMRC. Once an enquiry has begun, there is no requirement for it to be completed by a certain date. However, the taxpayer has the right to apply to the First-tier Tribunal (Tax Chamber) (referred to in this chapter as the “Tax Tribunal”) for an order directing HMRC to bring the enquiry to a conclusion.

Tax enquiries can last a long time, particularly in cases involving mass-marketed avoidance schemes, where a large number of enquiries may raise the same issue. HMRC will seek information and documents from the taxpayer under enquiry and sometimes from third parties. It will evaluate the evidence received, taking expert advice if necessary, before coming to its decision. 

There are a range of statutory time limits within which assessments of tax must be made, but the ordinary time limit for making an assessment is four years from the end of the year or accounting period. If the enquiry concerns a loss of tax brought about carelessly, the time limit is six years. If the case involves a loss of tax brought about deliberately then the time limit is 20 years. 

The nature and location of a tax enquiry will vary with the type of the enquiry. Typically, a tax enquiry will involve detailed correspondence between HMRC and the taxpayer, with the former seeking information and/or documents. Often there are meetings between HMRC and the taxpayer to discuss the issues. Such meetings take place at a mutually convenient location.

If the taxpayer does not co-operate with HMRC’s requests for information, HMRC has powers to compel it to do so through information notices. The taxpayer has rights of appeal to the Tax Tribunal when such compulsory powers are used. HMRC also has powers to issue information notices to third parties in appropriate cases.

This will depend entirely on the nature of the tax enquiry and the particular issues involved. Typically HMRC will seek to establish the precise factual matrix within which the tax issue arises. The HMRC officer conducting the enquiry will then seek technical assistance, if necessary, on issues such as the construction of legislation involved in the enquiry and the relevant tax policy. In some areas, like transfer pricing, HMRC may think it necessary to commission external expert reports.

It is not (yet) clear that the increasing prevalence of rules concerning cross-border exchanges of information and mutual assistance has led to an increase in the number of tax enquiries in the UK. There is a perception that HMRC now knows more than it might have done in previous years and this may have led to an increase in unprompted disclosures by taxpayers. Additionally, the UK has had a statutory ‘requirement to correct’ obligation in place since 2017. This obligation required a taxpayer with previously undisclosed tax liabilities attributable to offshore income or assets to bring their tax affairs up to date by making a disclosure to HMRC by 30 September 2018 (or at some later date in particular circumstances) or face greatly enhanced penalties if the failure to do so is discovered at a later date. Experience suggests that a number of taxpayers have been taking advantage of the opportunity to avoid the risk of enhanced penalties by bringing their tax affairs up to date. 

HMRC does seem to value taxpayer co-operation with its enquiries and normally will seek to work collaboratively with the taxpayer to resolve issues. However, HMRC will not know the factual matrix within which a tax issue arose and may not fully appreciate those facts when they are disclosed to it. So taxpayers should be ready to explain the situation to HMRC. Taxpayers should be aware of HMRC’s ‘Litigation and Settlement Strategy’ and the policy constraints under which the department operates. HMRC is unlikely to concede a ‘binary’ issue if it thinks that it is correct. If possible, in any particular case it may to be the taxpayer’s advantage to present the issues as involving a balanced appreciation of competing possibilities, so that it does not have to be a case of one party being right and the other wrong. 

The UK operates a 'file now, check later' system of tax for the vast majority of taxpayers. The central part of the system is for taxpayers to file an annual tax return with HMRC, disclosing their taxable income and gains (including deemed income such as controlled foreign company (CFC) charges for companies and some other information for individuals, such as National Insurance and student loan repayments). The only major exception of note is employees who have tax deducted at source and paid to HMRC by their employers under the Pay-As-You-Earn (PAYE) system; they do not have to file a return unless they have additional sources of income.

Alongside the annual tax return, taxpayers in the UK can make a series of claims and elections to a variety of different deadlines depending on the relief or exemption being claimed. Many involve the taxpayer making an amendment to their tax return. This is typically within two years, such as group relief for companies, but others can be claimed many years later under the right circumstances. An example of this is double tax relief.

There are three main mechanisms for HMRC to raise an assessment for income tax, corporation tax and capital gains tax. Whether or not HMRC has used the 'correct' mechanism affects the validity of an assessment, but all operate in a similar way from the taxpayer’s perspective.

The most common method of enquiry comprises of HMRC raising an enquiry into a taxpayer’s tax return or claim to ask questions and check the accuracy of the return. In general, HMRC has to open an enquiry within twelve months of a taxpayer filing its tax return, although in some instances this is extended, such as for returns filed late and returns for large companies. An enquiry typically involves multiple communications between HMRC and the taxpayer by letters, telephone and face-to-face meetings, the sharing of information, and the taxpayer demonstrating that their return is correct or, alternatively, for HMRC to decide that it is not. If HMRC does not agree with a taxpayer’s tax return, it will assess further tax by issuing a 'closure notice' to that effect at the end of the enquiry.

The two less common methods are to use a 'determination' or a 'discovery assessment'. A determination can only be used where a taxpayer has not submitted a tax return. This involves HMRC assessing a taxpayer to an estimated amount of tax if the taxpayer does not provide a return on request. A discovery assessment is typically used by HMRC where a taxpayer has provided a return that HMRC is out of time to enquire into, although the actual application can be wider. If HMRC later 'discovers' that the return was incorrect, it can issue an assessment for the tax it believes was lost. There are statutory rules and a large amount of case law that regulates what HMRC can and cannot discover.

Once HMRC has given notification of an assessment to tax in a direct tax appeal, irrespective of which type of assessment, a taxpayer has three options. The first option is to accept the assessment as it stands, in which case no further action is needed; the second is to appeal the decision in order to have the issue determined by the Tax Tribunal (see 4 Judicial Litigation: First Instance); and the third is to request a 'review' of the decision by HMRC; both within 30 days. If a review is sought, an independent officer working in HMRC’s reviews unit has 45 days to review the enquiry file and any further representations made by the taxpayer, although longer can be agreed. The review officer can uphold, vary, or cancel an assessment. If the taxpayer disagrees with the review officer’s conclusions, they can appeal the assessment within 30 days.

Certain tax regimes have particular mechanisms that are beyond the scope of this chapter, one example being diverted profits tax.

A taxpayer’s deadline for a claim varies depending on the type of claim being made. The majority must be made within a tax return and are therefore required to be made either within the usual deadlines (by twelve months from the end of the accounting period for a company, or January 31st of the following tax year for individuals) or within a further twelve months as an amendment.

A taxpayer is entitled to apply to the Tax Tribunal during the enquiry to ask for a closure notice to be issued so that the enquiry can be brought to an end and, on the presumption HMRC does not agree with the taxpayer, litigated through the courts.

Tax litigation begins when a taxpayer notifies the Tax Tribunal of an appeal it has made or makes another type of application to the Tax Tribunal; eg, for a closure notice.

A taxpayer will usually need to appeal to HMRC within 30 days of an assessment, setting out its reasons for disagreement. If this is not done, the taxpayer is deemed to have accepted HMRC’s assessment. The taxpayer then has the option of either notifying the appeal to the Tax Tribunal for the appeal to be litigated or to ask HMRC to conduct an internal review of the decision. Following an HMRC review, the taxpayer has a further 30 days to appeal to the Tribunal and if this is not done, HMRC’s review is deemed to be accepted by the taxpayer.

The process is different if a taxpayer wishes to review  judicially a decision by HMRC that is not appealable to the Tax Tribunal, such as a decision not to exercise discretionary powers. The detailed steps are beyond the scope of this discussion but, broadly, a taxpayer has a hard deadline of three months to issue judicial review proceedings at the administrative court. There are various procedural steps to be taken before this can be done.

There are broadly nine stages to a tax appeal.

Notification of the Appeal

The first step is for a taxpayer to notify an appeal to the Tax Tribunal. At this stage the taxpayer needs to set out its case against the assessment in more detail. The Tax Tribunal will direct a date for HMRC’s statement of case and for both parties to exchange lists of documents.

HMRC Statement of Case

HMRC then has to respond to the appeal with a statement of case, setting out the arguments as to why the assessment is correct. This is typically within 45 days of a Tribunal notifying the parties that it has received the appeals, but can be longer if requested by HMRC; it is not uncommon for this to be granted in larger or more complex cases.

Documents and Disclosure

Both parties have to exchange lists of documents that are in their possession that they intend to rely on at the hearing. It is expected that both parties will disclose all the relevant documents in their possession at this stage and, although it is possible to use additional evidence found later, the evidence in the appeal is expected all to have been disclosed at this point.

Witness Statements and Expert Evidence

Witness statements and expert evidence are prepared next. The appellant will prepare its witness statements first. This stage of the appeal will usually focus heavily on the facts and require significant input by the taxpayer to their legal advisers on detailed points of evidence.

HMRC then will be given a period of time to prepare its own witness statements in response.

If expert evidence is required – for example, on points of foreign law – then this will also be prepared at this stage by both parties, or jointly if so directed by the Tax Tribunal.

Bundle Preparation

Usually a month in advance of the hearing in front of the Tax Tribunal, the parties will need to prepare copies of the evidence that is to be placed before the Tax Tribunal, as well as any legislation and case law that will be referred to in a hearing. These are known as 'bundles' and in the UK it is the appellant’s duty to prepare these.

Skeleton Arguments

Skeleton arguments are written summaries of the arguments the parties intend to make in front of the Tax Tribunal at the hearing. They are generally prepared by the advocate, usually a barrister in the UK, and typically the taxpayer will submit its skeleton argument two weeks before the start of the hearing, with HMRC filing its a week later, one week in advance of the hearing.

Hearing (Including Possible Post-hearing Submissions if Directed by the Judge)

A hearing in the Tax Tribunal is usually in front of one judge and one non-legal member with particular experience (eg, a senior qualified accountant), although a judge can hear the appeal alone if considered appropriate for the case.

The structure of the hearing is for the taxpayer’s advocate to present its arguments, HMRC to respond and then the taxpayer can reply to HMRC’s arguments. The hearing’s length depends on the complexity of the case. At the hearing, both sides have an opportunity to examine and cross-examine witnesses and experts.

A judge may direct the parties to provide further written submissions following the hearing. This is uncommon and usually arises when an unexpected point has been discovered during the hearing, on which the Tax Tribunal wishes to have further guidance.


The Tax Tribunal will hand down its decision in the case at a later date following consideration. This is typically around three months after the hearing, although it can vary considerably depending on the complexity of the case, the timing of the hearing and the judge’s workload.

Appeal to Higher Courts

If either party disagrees with the Tax Tribunal’s decision, they may appeal to the higher courts, in the first instance to the Upper Tribunal. Appeals are discussed further below.

HMRC will request and consider documents from the taxpayer in the course of its enquiries. This process can be informal or formal using statutory powers, which compel a taxpayer or third parties to produce information. HMRC and the taxpayer can exchange information and documents many times during an enquiry.

During the appeal to the Tax Tribunal it is expected that all evidence on which each party wishes to rely should be presented on the lists of documents and witness statements exchanged by the parties. This differs from litigation in the High Court of England and Wales, in which there is a duty to disclose to your opponent not just documents that support your case, but also documents that support your opponent’s case. In tax litigation, it is expected that all such documents will have been disclosed to HMRC during the enquiry phase and it is therefore for HMRC to rely upon them if it wishes.

In the Tax Tribunal, and in judicial review, the burden of proof changes depending on the issue. The burden is with HMRC to show that an assessment is valid if that is disputed, and then it is with the taxpayer to show that HMRC’s assessment is incorrect, and then it is on HMRC again in relation to any penalties issued against a taxpayer. This is based on the usual UK civil standard of the 'balance of probabilities'; ie, more likely than not.

HMRC has the burden of proof in criminal prosecutions and this is to the higher standard of 'beyond reasonable doubt'.

HMRC will usually only have one chance to assess a taxpayer. If HMRC under-assesses a taxpayer, it cannot then reassess the taxpayer to a greater amount of tax. There are some exceptions that are mainly covered by the power to make 'discovery' assessments and there are also exceptions for payments made under a mistake as to the legal position. Likewise, a taxpayer can appeal once. Once the appeal is finally determined, this is the end of the matter for both parties. This is intended to provide certainty for all involved.

However, a tax appeal may be heard several times before it is finally determined. The court structure for tax appeals in the UK is (usually) as follows:

  • first instance – First-tier Tribunal (Tax Chamber);
  • second instance – Upper Tribunal (Tax and Chancery Chamber);
  • third instance – Court of Appeal; and
  • fourth and final instance – Supreme Court

All tax appeals start in the Tax Tribunal (ie, the First-tier Tribunal). Although some particularly complex cases may be transferred immediately to the Upper Tribunal for a first-instance hearing, this is not common.

If a taxpayer or HMRC disagrees with the Tax Tribunal’s decision, they can appeal to the Upper Tribunal, and in turn to the Court of Appeal, and then to the Supreme Court. If either party wants to appeal a decision, they need permission from the court that gave judgment, or from the superior court to which they wish to appeal. Applications for permission to appeal and appeals must be made within a time limit that depends upon the level of the court.

In general, appeals are only allowed on points of law and not on findings of fact, the decisions of the lower courts on which are usually final.

see 5.1 for relevant information.

The Tax Tribunal is usually composed of a judge, either a full or part-time judge who is legally qualified and (sometimes) still in practice, such as a senior barrister or law firm partner, and a non-legal member who has some relevant specialist skills. The Upper Tribunal consists of the same, but with more senior judges who are also, in some instances, High Court judges.

The Court of Appeal typically sits as a panel of three full-time senior judges. The Supreme Court is made up of 12 judges, who sit on odd-numbered panels of, usually, five to nine members to a case.

Decisions at all levels are generally relatively long and set out the tribunal or court’s reasoning in some detail.

When discussing ADR mechanisms, HMRC refers to the use of 'mediation' rather than arbitration, expert determination or adjudication. Mediation is available in the majority of compliance disputes with HMRC. It may involve a trained HMRC officer, normally a member of HMRC’s ADR team, or a third-party mediator appointed by the parties, or by an appointment authority, such as a mediation service provider. The mediator will act as a neutral third party between the taxpayer and the HMRC case owner, and will seek to identify areas of potential agreement and explore possible means for resolving the dispute.

Mediation is not a statutory process and HMRC reserves the right to reject applications for mediation if it considers that the dispute is unsuitable for mediation. HMRC’s Guidance (see CC/FS21 and HMRC, Guidance, Use Alternative Dispute Resolution to settle a tax dispute) confirms the availability of mediation in instances such as when:

  • communications between HMRC and the taxpayer have broken down;
  • there is a dispute about the facts;
  • a dispute appears to be the result of a misunderstanding;
  • the dispute concerns a technical point or a point of law; or
  • the taxpayer wishes to enquire why HMRC has not agreed evidence given to it, or why HMRC wishes to use other evidence.

Conversely, HMRC’s guidance states that mediation will not be available where the disagreement arises in connection with the following circumstances:

  • debt management or payment issues;
  • default surcharges disputes;
  • failure penalties (automatic late payment of late filing penalties);
  • PAYE coding notices;
  • extra statutory concessions; or
  • cases being dealt with by HMRC’s Criminal Investigators.

In cases where mediation is available, taxpayers can apply for mediation by completing an online application form available on HMRC’s website. Once received, HMRC will respond within 30 days with an answer as to whether mediation is appropriate for resolving the dispute. If the application to use mediation is accepted, the taxpayer will be asked to sign an agreement committing to full participation in the mediation process, which may include attending a meeting or teleconference, and replying to information requests from HMRC typically within a pre-determined timeframe. HMRC’s guidance outlines the format of a mediation hearing as follows:

  • the parties meet the mediator, who will then make the introductions for all persons attending the meeting;
  • the mediator opens the meeting and invites the attendees to present their statements, or to discuss their statements of the dispute if these had already been prepared by the parties and exchanged prior to the meeting;
  • the parties ask questions and make counter arguments in confidential joint or private discussions with the mediator; and
  • if agreement is reached, the mediator asks the parties to prepare and sign a document detailing the agreement reached. If no agreement is reached, this will also be documented.

If the application to use mediation is rejected, HMRC will state the reasons for its rejection and, if HMRC has made an appealable decision, the taxpayer may ask for a statutory review or can appeal and refer the appeal to the Tax Tribunal.

There is a statutory penalty regime that imposes a range of penalties relating to ‘careless’ or ‘deliberate’ behaviour in respect of tax matters. In terms of UK domestic law (unlike the jurisprudence of the ECHR), these penalties are classed as matters of civil law rather than criminal law. The penalty amount varies as it is based on a range of factors, such as whether the relevant disclosure of culpability was unprompted or discovered by HMRC, the degree of co-operation with HMRC and whether the tax issue involves offshore matters. Whilst not automatic, such penalties are likely when a tax enquiry is determined on the basis that there has been a relevant failure on the part of the taxpayer. The imposition of such penalties will always carry the separate right to appeal to the Tax Tribunal.

As a generalisation, tax evasion involves dishonesty and is a crime under UK general criminal law. As such, it must be viewed as a separate process from a tax enquiry. If HMRC discovers dishonest conduct, either during a standard tax enquiry or independently of such an enquiry, it may investigate the matter as a criminal case and ultimately hand over to the appropriate prosecuting authority depending on the area it involves. There are a range of possible criminal offences connected with tax: false accounting, offences under the Fraud Act, common law cheat, fraudulent evasion of income tax and corporate failure to prevent facilitation of tax evasion, among others. Money laundering offences are typically investigated alongside these. There are strict liability offences concerning failures in respect to offshore matters. These must all be seen as separate offences; they are not a natural or automatic adjunct of a tax enquiry.

HMRC is not obliged to investigate all cases of fraud as criminal offences. Its policy is to reserve the severe sanction of criminal proceedings, which carry the possible sentence of imprisonment, for cases where it needs to send a strong deterrent message or where the conduct involved is such that only a criminal sanction is appropriate. However, HMRC reserves complete discretion to conduct a criminal investigation in any case and to carry out these investigations across a range of offences and in all the areas for which the Commissioners of HMRC has responsibility. Nevertheless it is HMRC’s policy to deal with fraud by using the cost-effective civil fraud investigation procedures under Code of Practice 9 wherever appropriate. Code of Practice 9 is a published Code under which HMRC sets out that in cases of suspected fraud it will offer the taxpayer the opportunity to make a complete and accurate disclosure of all of their deliberate and non-deliberate conduct that has led to irregularities in their tax affairs. The taxpayer will then make payments of tax, interest and civil penalties consistent with their disclosures. If the taxpayer’s disclosure is less than full and accurate or if the taxpayer declines to accept unequivocally their culpable failure, HMRC reserves the right to commence a criminal investigation.

The two sets of proceedings – ie, the civil tax enquiry (including consideration of civil penalties) and the investigation of a criminal offence – are conceptually separate and may proceed independently. 

A criminal tax case will be heard in the standard criminal courts in the UK; ie, the Magistrates’ Court or the Crown Court. It will not be heard in the same court that determines the correctness of the corresponding tax adjustment or assessment.

If the issue in a tax enquiry is the imposition of civil penalties, the penalty will normally be reflective of the amount of additional tax payable as a result of corrections resulting from the enquiry.

If a taxpayer is convicted of a criminal offence in relation to his or her tax affairs in accordance with normal procedure in a criminal trial, he or she will be given the opportunity to enter a plea in mitigation of the sentence to be imposed by the court. Whether payment of tax legally due would be accepted as possible mitigation would depend on the court. 

See above in respect of the ninth Code of Practice. In most cases involving criminal conduct HMRC will seek to resolve the case using its civil powers and will offer what is known as a Contractual Disclosure Facility; ie, a full confession by the taxpayer and payment of tax, interest and civil penalties. If a taxpayer accepts the offer of a CDF and complies with its terms, it is unlikely that HMRC will instigate criminal proceedings in respect of the same matter.

In appropriate cases, the option of a deferred prosecution agreement may be available to the prosecuting authority. These agreements are only possible where the criminal defendant is a corporate body. The power to enter into such agreements is not vested in HMRC.

The appeal route after a criminal conviction follows that of any other criminal case; ie, to the Crown Court or the Court of Appeal depending on the level of the convicting court.

Cases challenged in the UK under anti-avoidance rules, including transfer pricing, are treated as civil tax enquiries. If there is a tax adjustment depending on the outcome of the enquiry, it is possible that a civil tax penalty will be imposed. There is no reason to anticipate that such a case will give rise to a criminal investigation. The UK recognises a distinction between tax avoidance and tax evasion, with only the latter having potential criminal consequences.

Following the CJEU and High Court judgments in the Franked Investment Income Group Litigation, an exemption system in respect of foreign dividend income (as well as domestic dividend income) was introduced in 2009. Distributions received by UK-resident companies are therefore largely exempt from corporation tax. Where the exemption does not apply, or where the recipient company elects that the distribution not be exempt, the credit method will apply. The credit method will also apply to relieve double taxation under domestic law for individuals and other non-corporate taxpayers.

Double tax credit relief may be available under tax treaties or domestic law. UK tax treaties generally grant credit for foreign tax paid against UK tax chargeable on the same item of income. In addition, tax-sparing provisions have been agreed in a number of tax treaties, allowing the tax spared (ie, the foreign tax that is not actually paid) to be treated as tax paid, thereby allowing UK companies to claim a credit to maintain the foreign tax incentive. Where there is no tax treaty providing for the relief then unilateral tax relief may be available as a residual relief. Under both tax treaties and domestic law, usually credit for underlying tax is granted where the UK-resident company directly or indirectly controls 10% or more of the voting power in the company paying the dividend.

Unresolved double taxation issues are generally dealt with by way of appeal to the Tax Tribunal (discussed in 4 Judicial Litigation: First Instance). Also, access to the mutual agreement procedure (MAP) is generally provided by most UK tax treaties except for those based on the colonial model. HMRC’s attitude to the interaction between the MAP and domestic legal remedies is to deny taxpayers from simultaneously pursuing the MAP and domestic legal remedies (eg, appeals or judicial review). Therefore, where court proceedings are in course, HMRC will generally require the taxpayer to stay the proceedings or delay the MAP until these are exhausted (in line with the Organisation for Economic Co-operation and Development (OECD) Commentary on Article 25 at paragraph 76).

Following the UK’s decision to apply Part VI of the Multilateral Instrument to Implement Tax Treaty Related Measures (MLI), taxpayers will be able to request that disputed issues that are unresolved after two years from the start date be submitted to mandatory binding arbitration. The ratification of the Part VI MLI provisions extend the scope of the EU Arbitration Convention.

Part 5 of the Finance Act 2013 introduced a GAAR in the UK, with effect from 17 July 2013, to counteract tax advantages arising from “tax arrangements” that are “abusive”. The test for abuse is whether the tax arrangements entered into by the taxpayer could not reasonably be regarded as a reasonable course of action, having regard to all the circumstances (the double reasonableness test). HMRC has subsequently published and updated its guidance about the application of the GAAR. The 2018 version of the HMRC’s General GAAR guidance gives one example on the application of the GAAR to tax treaties, based on the High Court and the Court of Appeal judgments in R (on the application of Huitson).

The UK has been very proactive in implementing the Base erosion and profit shifting (BEPS) Actions requiring amendments to tax treaties. Notably, the UK has chosen to adopt the optional preamble language (Article 6, MLI) and the proposed treaty GAAR (Article 7, MLI) described in the Action 6 Final Report, which will apply in place of similar provisions already included in UK tax treaties, and apply the rule in Article 3, MLI concerning hybrid entities to its tax treaties.

On 10 January 2019, HMRC introduced a new Profit Diversion Compliance Facility (PDCF) to encourage multinational enterprises (MNEs) to make voluntary disclosures about any transfer-pricing arrangements that fall within the scope of the Diverted Profits Tax (DPT) legislation. HMRC appears to have concluded that significant numbers of businesses have yet to align their transfer-pricing policies with the transfer-pricing outcomes of the OECD/G20 BEPS Project.

The PDCF guidance provides useful insight into HMRC’s views on what situations give rise to profit-diversion risk, how a transfer analysis should be carried out and what evidence is required to support intragroup transfer-pricing policies.

HMRC’s indicators of Profit Diversion Risk include situations where:

  • risks are contractually allocated to non-UK entities that cannot in fact exercise meaningful control over such risks;
  • no or insufficient profits are allocated to UK entities carrying out high-value functions; or
  • no or insufficient profits are allocated to UK entities that perform important functions, control economically significant risks, or contribute assets, in relation to valuable intangibles legally owned by non-UK entities.

The UK introduced an advance pricing agreement (APA) programme in 1999. Unilateral, bilateral and multilateral APAs are all potentially available, but there is a preference for bilateral or multilateral APAs. According to HMRC statistics, in 2017-18 16 APA applications were made and 27 were agreed.

HMRC’s guidance in Statement of Practice 02/10 and in the International Manual (at INTM 422000 and onwards) outlines the application process for obtaining an APA. These are the main stages.

  • Taxpayers interested in applying for an APA make first contact with HMRC to discuss their plans informally before making a formal application. This is termed the 'EOI meeting'.
  • If HMRC indicates its willingness to consider the APA proposal, the taxpayer must submit a formal written application within six months of the EOI meeting.
  • HMRC evaluates the APA proposal and seeks clarification and further information from the taxpayer. The parties attempt to reach an agreed position.
  • An agreement between HMRC and the taxpayer is reached, subject to the terms being observed. The typical term of an APA is three to five years.

HMRC aims to complete the APA process within 18 to 21 months from the date of the formal submission. The time taken to reach an agreement in 2017-18 was typically between 35 and 40 months.

A significant growth in tax disputes has resulted from HMRC’s efforts to tackle tax avoidance and profit diversion. HMRC’s latest statistics show that amounts received as a result of DPT charging notices increased from GBP31 million in 2015-16 to GBP388 million in 2017-18. Similarly, yields from transfer pricing enquiries doubled from 2014-15 to GBP1,682 million. The introduction of BEPS-related measures will likely drive an increase in the number of cases brought before UK courts.

The only costs or fees payable in the UK during a tax enquiry before the case is reported to the Tax Tribunal are the fees of the taxpayer’s professional advisers. However, applications under freedom of information or data protection legislation may attract fees.

There are no fees for reporting an appeal to the Tax Tribunal or for an appeal to the Upper Tribunal. There are court fees payable on subsequent appeals to the Court of Appeal or the Supreme Court. The party instigating the step in the proceedings that incurs the fee are responsible. Fees paid may be recoverable in a subsequent costs order against the unsuccessful party in the appeal.

The UK does not have a system of indemnities as such.

In the Tax Tribunal, the parties generally bear their own costs. However, the Tax Tribunal has the power to make an order for costs where it believes that costs have been wasted or where it is of the view that one of the parties in the appeal has behaved unreasonably. Also, in appeals that are categorised by the Tax Tribunal as 'complex', a cost-shifting regime applies (where the successful party can claim their legal costs from their opponent). The appellant is able to opt out of that regime by written notice.

In the Upper Tribunal and above, a cost-shifting mechanism normally applies, such that the unsuccessful party to the appeal will normally be ordered to pay the legal costs of the successful party. These costs are at the discretion of the court.

Each party to ADR proceedings will pay their own professional costs. HMRC will offer to supply a fully trained, independent mediator for the purposes of an ADR process. However, this mediator will be an HMRC employee, albeit independent. If the taxpayer party to the ADR process prefers that a mediator is external to HMRC, this may involve the payment of the mediator’s professional fees.

As of 31 March 2018, there were 25,291 appeals pending before the Tax Tribunal. This was a slight reduction from the previous year’s number of 26,669. There have consistently been in excess of 20,000 cases pending in the Tax Tribunal each year since 2012. However, this figure will include many very straightforward, paper cases. Furthermore, an extremely large number of these pending cases are ‘stood over’ awaiting the result in another appeal. Typically, this may be the situation with cases involving mass-marketed avoidance schemes. In 2018 it was thought that about 16,000 pending cases fell into that category. A case that is stood over will not be actively progressed by the Tax Tribunal and may remain pending for many years whilst a lead case is resolved.

The figures are much lower in the Upper Tribunal and above. Reportedly, there were 154 cases pending in the Upper Tribunal as of 31 March 2018 (although this figure would have included non-tax cases). There is a publicly available database of all cases, pending and determined, in the Upper Tribunal. The numbers of pending cases diminishes greatly as one goes up through the appeal courts.

According to HMRC, a case not stood behind a lead appeal would typically be resolved by the Tax Tribunal within 12 to 18 months of it being reported to the Tribunal.

According to HMRC, in the year ending 31 March 2018, 7,377 new appeals were notified to the Tax Tribunal. In that same year, 8,417 cases in the Tax Tribunal were settled by formal hearing or otherwise, such as by withdrawal or agreement. In fact, the Tax Tribunal itself reports having received 9,430 new appeals and having disposed of 10,188 cases in the same period. However, again, it is inferred that these Tax Tribunal figures include many non-tax cases and a great many of the cases received and disposed of will be basic or paper cases.

The Tribunal does maintain a publicly available database of its written decisions; not all cases heard will result in a written decision. From this database it is possible to estimate the number of cases by the tax involved; ‘estimate’ is used because it appears that there is some ‘double counting’ in the index to the database. However, in the year ending 31 March 2018, 40 of the Tribunal’s written decisions concerned capital gains tax, five concerned inheritance tax, 133 concerned VAT and 287 concerned income or corporation tax. 

HMRC claims a success rate of 78% before the Tax Tribunal, 74% before the Upper Tribunal, 90% in the Court of Appeal and 80% in the Supreme Court. In cases involving avoidance determined in 2018, HMRC claims to have succeeded in 23 out of 24 cases. Given the terms of its Litigation and Settlement Strategy, and the fact that it only litigates when it is confident that it is correct in its view, one would expect HMRC to enjoy such success in litigation. What the figures do not demonstrate is how many cases HMRC conceded before they were reported to the Tax Tribunal.

The key strategic guidelines to consider in a tax controversy are as follows.

  • Consider taking professional guidance from an adviser (lawyer or accountant) familiar with tax enquiries and the powers of HMRC.
  • Be transparent and frank with HMRC about the relevant facts; do not be disingenuous about disclosure as it may lead to penalties of greater severity.
  • Never be dishonest with HMRC as this could result in the most severe penalty; a criminal conviction.
  • Ask questions of HMRC and its approach.
  • Allow HMRC proper time to consider the evidence and arguments that you put forward, but also try to ensure that the enquiry moves on at a reasonable pace.
  • If appropriate, consider a payment of tax on account to mitigate any eventual charge to interest.
  • Remain calm in your dealings with HMRC and try to be non-confrontational at all times.
Joseph Hage Aaronson

280 High Holborn

+44 020 7851 8888

+44 020 7117 1838
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Trends and Developments


Old Square Tax Chambers is a specialist tax chambers in Lincoln’s Inn, London. It comprises 13 barristers, including three Queen’s Counsel, all focusing on UK tax matters. All UK taxes are covered, but a significant amount of chambers' work involves offshore matters and clients based outside the UK but with UK interests. Chambers’ clients include a mix of HNWIs (most frequently in relation to capital gains tax, income tax and inheritance tax, including UK and offshore trusts) and corporate clients (generally on corporation tax and VAT matters). Property taxes, including stamp duty land tax, are a significant part of chambers’ work. Chambers covers both tax advisory work and tax litigation. Advisory work involves one-off transactions (for example, M&A and corporate structuring) and more general tax structuring. Members have appeared in litigation at all levels of the UK court system, including the Supreme Court, and before the European Court of Justice. Recent cases have involved VAT, income tax, national insurance contributions, and HMRC enquiry and investigation powers.

UK Tax Litigation: Trends and Developments

Broadly, the trends and developments in UK tax litigation over the past few years have been, on the one hand, successful for the UK tax authorities (HMRC) in defeating tax avoidance schemes, but, on the other, a growth in litigation concerning focusing on procedural issues in tax compliance and disputes arising from genuine uncertainty in the interpretation and application of tax legislation. This will continue. The ‘Litigation and Settlement Strategy’ that HMRC adopted around ten years ago means that few cases settle. Alternative dispute resolution, involving a facilitator who is an employee of HMRC but not involved in tax collection or assessment functions, can be useful, but only in cases where real questions of judgment arise. Where cases are all or nothing, ADR tends to be unsuccessful. The future depends to a great extent on Brexit: whether it happens at all, and, if it does, what approach the UK Government takes to its greater freedom to make decisions in relation to tax, in particular in relation to VAT and customs and excise duties.

First, tax avoidance. HMRC has had significant success in the past ten years in litigation involving tax-avoidance schemes. There is no reason to suppose this will change. In the aftermath of the financial crash of 2008, there has been a general shift in society’s attitude to tax avoidance. This has, of course, been reflected in an increase and broadening of legislation directed at preventing it (for example, the introduction of the general anti-abuse rule by Finance Act 2013, rules permitting HMRC to publish details of individuals involved in tax evasion, and rules permitting HMRC to impose penalties on advisers who are involved in abusive tax schemes. However, it seems also to have been reflected in judicial attitudes, as the move that began with the case of Ramsay v Inland Revenue in 1980 to allow courts to approach tax legislation more purposively and the relevant facts more realistically has been expanded, so that tribunals and courts are perfectly willing to re-characterise payments and look through artificial schemes to apply the tax charge that has been sought to be avoided. This is true of well-known situations such as film finance and similar partnerships (for example, the Eclipse, Ingenious and Samarkand litigations) and also one-off planning. The latter in particular has been challenged by legislation requiring tax advisers to disclose to HMRC any avoidance schemes that they market, within a few days of them starting to do so. This legislation has gradually expanded so as to cover not only its initial targets of income tax, capital gains tax and corporation tax, but also now inheritance tax and VAT.

Second, more general litigation. Tax litigation in the UK goes through two different avenues. First, most decisions made by HMRC can be appealed to the tax tribunal (all appeals are under statute, so whether this avenue is available depends on whether any statutory provision permits it). The question is whether HMRC made the right or wrong decision. This type of litigation is available for all taxes, and for issues ranging from highly conceptual ones (for example, how claims for repayment of VAT work in the context of a VAT group: Taylor Clark v HMRC [2018] UKSC 35 and Lloyds Banking Group plc and others v HMRC [2019] EWCA Civ 485) to those involving detailed factual uncertainties (for example, how temporary school accommodation has been constructed, including precisely how any foundations have been formed, to work out whether it is ‘immovable property’ for VAT purposes: Sibcas v HMRC [2018] CSIH 49). This type of litigation is generally on the increase, as the UK tax code generally increases in size, and HMRC have become more willing to challenge taxpayers on these types of issues. It is only likely to continue to increase, particularly if Brexit takes place. This is because new legislation always brings uncertainty, and Brexit will bring a significant amount of new legislation.

The other avenue for litigation encompasses all the other decisions that HMRC makes, that cannot be appealed to the tax tribunal. This avenue is judicial review, which involves the supervisory jurisdiction of the general courts: was HMRC entitled to make the decision in question, was it reasonable for HMRC to do so? Thus, this is less advantageous for a taxpayer as (usually) the court is testing whether HMRC acted within its discretion, on points about which different people could reasonably reach different views. But likewise, taxpayers appear to have an increasing appetite for this type of litigation. Judicial review in tax matters in the UK is generally increasing, too, as taxpayers are more willing to test HMRC’s discretionary powers. Particularly in areas such as HMRC’s investigatory powers (for example, Derrin v HMRC [2016] EWCA Civ 15, Jimenez v HMRC [2019] EWCA Civ 51, and Kotton v HMRC (forthcoming)), HMRC’s powers to allow taxpayers to claim reliefs out of time, and general challenges to the lawfulness of legislation when held up to human rights and EU law, this type of litigation is on the rise. Human rights and EU challenges have been a particular growth area as HMRC has sought to expand its powers to attack tax avoidance by imposing more and more serious sanctions, such as accelerated payment notices (which require taxpayers to pay penalties up front in order to be entitled to appeal) and the new loan charge rules (charging income tax on any loans from employee benefit trusts outstanding as at 5 April 2019). These challenges to legislation are often class actions (in substance), and there has been a growth in taxpayers gathering together to undertake this type of litigation (often through the advisers who gave the initial advice on the structures being challenged by HMRC).

Turning to costs, appeals to the tax tribunal, at first instance, involve no cost risk: the taxpayer can ensure that, win or lose, they will be liable for their own legal fees but not for those of HMRC. In complex cases, there is the possibility of assuming cost risks; and, given that HMRC’s legal fees tend to be significantly lower than any taxpayer’s, a taxpayer with a strong case may generally prefer to take on the risk of costs. This is particularly because all appeals from first instance involve costs' risk: generally, the loser pays. And high-value, complex cases are more likely to be appealed, so that there is probably going to be costs' risk in those cases in any event. In judicial review, by contrast, there is inevitable costs' risk from first instance onwards.

This leads to funding. The past ten years have seen significant growth in third-party funding, with commercial funders becoming more and more involved in providing funding for big-ticket litigation. Funding is available not only by way of general insurance for legal expenses, before the event, but also after the event, in relation to a specific dispute that has already arisen. Either way, funders require independent legal opinions, normally from the bar; however, this is in fact a useful thing for a taxpayer considering embarking on significant litigation, as it provides a second, independent opinion on the merits of the taxpayer’s position.

Statistics on alternative dispute resolution are rather difficult to find. Within the past ten years, HMRC introduced a mediation function. This involves an employee of HMRC who has not previously been involved in the issue acting as a mediator, to try to facilitate discussions between the tax inspector and the taxpayer. It is a reasonably informal process, but taxpayers are entitled to have accounting, legal and other experts and representatives present. My experience of HMRC mediators is that they fulfil their role very well: indeed, because of the obvious potential for accusations of bias in favour of HMRC, my impression is that, if anything, the mediators tend to err on the side of ensuring fairness to the taxpayer. However, the problem with mediation is that it tends to take place at a point in the process when HMRC have already decided they are more likely to succeed in the case than not. So, if the issue is an ‘all or nothing’ type issue (is particular expenditure capital or income; is a taxpayer resident in the UK; which customs classification is the right one for particular goods), mediation is unlikely to lead to a settlement except by the taxpayer conceding the point. Mediation is much more helpful in cases involving a judgment which can be anywhere within a range of possible outcomes, such as the value of shares, or a fair and reasonable apportionment of expenditure between different parts of an asset, or a fair and reasonable apportionment of profits between two accounting or basis periods. In these circumstances, one can often find a solution that both sides are willing to live with, or sometimes a different perspective on the point that emerges through face-to-face discussion in an informal, without prejudice setting. But apart from mediation, very little, if any, ADR takes place in the tax sphere. One might suppose this to be because the main benefits of (for example) arbitration make less of a difference in the context of tax. The tax tribunal is a relatively informal arena. HMRC has an interest in cases being decided in public, given its obligation of equal treatment among taxpayers. There is no particular saving in cost that can be obtained by arbitrating instead of litigating in the tax tribunal, and the tax tribunal is composed of an impressive set of judges who have significant tax expertise.

In terms of who gets involved, the UK remains an unusual jurisdiction in that it has a split legal profession. On the one hand, solicitors (and accountants, of course) tend to be the first port of call for clients in dispute with HMRC. While solicitors have acquired more rights to plead cases in the higher courts (and any professional representative can act in the tax tribunal), the bar still offers a body of specialist litigators whose core function is pleading cases in court. Thus, in the more complex, high-value cases one often finds a team of advisers consisting of the taxpayer’s accountants and/or solicitors (both in-house and external), plus one or two barristers who will actually present the case in tribunal or court. So, a somewhat unusual situation, but one that has worked for several centuries, and will doubtless continue to do so for several more.

In summary, tax litigation in the UK is on the rise, and will continue to be so for the foreseeable future. It may be expected to shift gradually from avoidance schemes (as taxpayers and advisers are deterred by recent, procedural-type legislation from using them) to questions arising from the inevitable uncertainty in the interpretation and application of tax legislation, and procedural issues where challenges are not to outcomes of tax charges but to the processes leading to those charges.

Old Square Tax Chambers

Lincoln’s Inn

+44 020 7242 2744
Author Business Card

Law and Practice


Joseph Hage Aaronson LLP is based in London and has a contentious tax team that brings together specialist tax QCs, experienced tax dispute solicitors and forensic accountants. The team is led by Graham Aaronson QC, the leading tax silk of his generation. Other key members are Simon Whitehead, Paul Farmer, Michael Anderson, Ray McCann and Daniel Margolin QC. The JHA team has vast experience of dealing with tax enquiries and investigations (both in the UK and elsewhere), and tax litigation in all areas of the domestic courts and tribunal system, from the First-tier Tribunal to the Supreme Court. It has also represented clients in numerous references to the European Court of Justice (ECJ) and in high-value tax disputes in foreign jurisdictions. JHA acts for a variety of corporations, trusts and high net worth individuals in a wide range of domestic tax disputes, assisting clients in resolving issues and disputes with HMRC. This includes matters relating to transfer pricing, oil and gas taxation, life assurance taxation, structured finance, state aid, domicile and residence, and avoidance (including film schemes and pension liberation schemes).

Trends and Development


Old Square Tax Chambers is a specialist tax chambers in Lincoln’s Inn, London. It comprises 13 barristers, including three Queen’s Counsel, all focusing on UK tax matters. All UK taxes are covered, but a significant amount of chambers' work involves offshore matters and clients based outside the UK but with UK interests. Chambers’ clients include a mix of HNWIs (most frequently in relation to capital gains tax, income tax and inheritance tax, including UK and offshore trusts) and corporate clients (generally on corporation tax and VAT matters). Property taxes, including stamp duty land tax, are a significant part of chambers’ work. Chambers covers both tax advisory work and tax litigation. Advisory work involves one-off transactions (for example, M&A and corporate structuring) and more general tax structuring. Members have appeared in litigation at all levels of the UK court system, including the Supreme Court, and before the European Court of Justice. Recent cases have involved VAT, income tax, national insurance contributions, and HMRC enquiry and investigation powers.

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