Tax Disputes Guide in United Kingdom

Investigations by the UK tax authority, HM Revenue and Customs (HMRC), can vary depending on the issues they address. A “compliance check” is generally the term used by HMRC to describe any investigation where it is seeking to verify that the correct amount of tax has been paid. In the case of self-assessment tax returns, these are referred to as “enquiries”. While some enquiries or other compliance checks are initiated randomly, most taxpayers are selected for a reason, on the basis of specific information held or a risk-based assessment. Careful consideration should be given to the scope of the investigation, and challenges may be possible on procedural grounds to limit investigations.

For tax return enquiries, HMRC must generally give written notice within 12 months post-filing (although this differs if a return is late or amended, for example). If HMRC is out of time, it may be possible to raise assessments if criteria are met.

Limitation periods are, broadly, 4 years from the end of the relevant tax year, with longer limits (for example) where behaviour is “careless” (6 years) or “deliberate” (20 years). For VAT assessments, the time limit is generally 4 years (or 20 years for deliberate behaviour).

Limitation points and assessment/enquiry validity can be complex, with a large volume of case law; specialist advice should be obtained.

Under its criminal investigatory powers, HMRC can conduct searches of business and personal premises if it has an appropriate search warrant. These are known as “dawn raids”. Dawn raids will often represent the first step in a protracted criminal investigation conducted by HMRC. They commonly raise complex issues of law, such as legal privilege. Some of the other HMRC criminal investigatory powers include applying for production orders, applying for and executing search warrants, making arrests and recovering criminal assets. In a civil context, information notices can be issued to taxpayers and third parties, and there are specific provisions for financial institutions.

HMRC has broad information powers, but an information request may be challenged – for example, based on relevance (whether documents are reasonably required for checking the tax position) – and certain information withheld – for example, under legal privilege. Initially, HMRC often makes informal information requests. The recipient is under no legal obligation to comply with such requests, but they can be a good opportunity to engage with HMRC to narrow down the scope of any future formal notice. Once a formal information notice has been issued, failure to comply, or carelessly/deliberately providing incorrect information, may give rise to penalties.

Late payment interest will apply on an unpaid amount of tax. Regardless of any postponement or appeal application, late payment interest will accrue on the amount of any disputed tax until it is paid (if found to be due). In addition to late filing and payment penalties, where tax infringements involve careless or deliberate behaviour, taxpayers may become subject to tax-geared civil penalties. These penalties can be heavily mitigated by the timing and quality of taxpayer disclosure and, in certain cases, eliminated altogether or suspended.

Enquiries/investigations can last for many years pre-litigation.

Taxpayers usually have 30 days to appeal a decision by HMRC to the tax tribunal (or have it reviewed by an independent HMRC officer), but procedures can vary depending on the circumstances and the tax involved. Taxpayers appealing a direct tax decision (e.g. income tax) are required to appeal to HMRC first; but for indirect taxes (e.g. VAT), an appeal can be made directly to the tribunal.

For judicial review proceedings, a claim must be made promptly to the High Court (Administrative Court) and no later than 3 months after the grounds for making the claim first arose.

This will depend on the specific circumstances and taxes involved. For most direct taxes, HMRC will generally accept a postponed payment of the disputed tax until the appeal is finalised.

For most indirect taxes, the disputed tax must be paid upfront unless the taxpayer can demonstrate financial hardship. If an appeal is successful, HMRC will repay any previously paid tax with interest.

In some cases, alternative dispute resolution (ADR) procedures can present a faster and more cost-effective solution that achieves the best commercial result for taxpayers. ADR is generally encouraged by the courts, but due consideration should be given as to whether a case is suitable or not.

Statutory tax appeals are heard in the First-tier Tribunal (Tax Chamber) in the first instance. Subsequent appeals are to the Upper Tribunal (Tax and Chancery Chamber), on to the Court of Appeal, then to the Supreme Court (all subject to permission to appeal).

Judicial review proceedings follow a different structure as they start in the High Court, with appeals directly to the Court of Appeal, then to the Supreme Court.

It can take several years for an appeal to progress through the various stages of the appeal system. A number do not reach the highest court, whether due to refusal of permission or the appeal being dropped.

• HMRC has recently received significant government funding to recruit additional compliance and debt management staff in a continued effort to recover further tax revenue.
• We anticipate an increasing focus on fraud and avoidance-related tax investigations, and the use of tech and AI to improve compliance.
• HMRC is using “nudge” letters to prompt taxpayers to take specific actions related to their tax affairs (particularly for anti-avoidance provisions for loan relationships, crypto-assets and online sales reporting). While nudge letters rarely make specific accusations, failure to respond may lead to investigations.

Taxpayers should retain accurate records for an appropriate length of time, ensure prompt compliance with HMRC’s requests, ensure procedural points are considered and, where errors are identified, consider disclosures with the help of local counsel in order to regularise the position and mitigate penalties.