Out-Law / Your Daily Need-To-Know

Businesses put under strain by increasingly lengthy tax investigations, says expert

Out-Law News | 15 Jan 2018 | 4:03 pm | 2 min. read

Businesses are being burdened by increasingly lengthy UK tax investigations carried out by HM Revenue & Customs (HMRC), Pinsent Masons, the law firm behind Out-Law.com, has said.

According to data obtained by Pinsent Masons, the average length of HMRC's tax enquiries during the year ended 31 March 2017 was 34 months, up from 31 months in 2015/16.

The upward trend could be attributed, in part, to HMRC's refusal to back down from arguments over disputed technical points even where they have a weak case, Pinsent Masons said.

The approach taken by case teams at HMRC is influenced by the authority's litigation and settlement strategy, the law firm said. Under the strategy, HMRC will not settle outside of court for anything less than it thinks it is owed and will not ‘split the difference on any tax bills’.

The problem for businesses is that they are finding that they have to devote a growing amount of time and resources to handling the enquiries. The length of the cases also exposes them financial and legal uncertainty, Pinsent Masons said.

Ian Hyde, a tax disputes expert at Pinsent Masons, said: "HMRC’s and perhaps more importantly, individual officers’, priority seems at times to be to avoid being seen to be 'doing deals' with large corporates. This means HMRC is digging its heels in and not backing down, even when there is a sensible settlement to be reached."

"Large corporates are no longer getting involved in avoidance schemes. Many more challenges from HMRC are of 'routine' technical tax issues, such as whether the accounting treatment is correct or capital allowance claims. Clients are more willing to defend strongly where the argument isn’t about a 'windfall' from tax avoidance but is tax on the core operations of the business," he said.

Hyde said that giving businesses certainty over the legal and tax environment is "an important part of a smooth-running economy". It does help for tax investigations to be left open for three years at a time, he said.

"Even if HMRC has a weaker case, the litigation and settlement strategy encourages them to give no quarter," Hyde said. "Cases are therefore being fought to the end despite growing costs on both sides."

Hyde said that HMRC has been particularly focused on scrutinising transfer pricing arrangements and business' diverted profits tax compliance in recent times. He said that this may be a factor behind the increasing length of time on average that it takes HMRC to conclude tax investigations with large corporates. This because these disputes "often involve complex businesses operating across multiple jurisdictions and can take many years to resolve", he said.

The rising average was also recorded despite there being fewer open tax cases at the end of 2016/17 compared to the year before. According to data obtained by Pinsent Masons, there were 3,617 cases open at the end 2016/17 compared to 3,875 in 2015/16.

"Ultimately, businesses need to stand firm where they think HMRC challenges are unmerited and prepare their case to the highest standard – as they may have to litigate if HMRC doesn’t concede," Hyde said.

HMRC has said that it expects large businesses to underpay £24.8 billion in tax in 2016/17, up from £21.8bn in 2015/16.

We are processing your request. \n Thank you for your patience. An error occurred. This could be due to inactivity on the page - please try again.