Political pressure to crack down on evasion and Bribery Act-style powers are pushing tax disputes onto boardroom agendas, writes Dominic Carman
Tax investigations and disputes historically rarely made the headlines, except for the occasional world-class footballer or rows over globe-trotting firms slashing their tax bills.
Yet law firms are advising an increasing number of corporate clients on both, which have been given further impetus by new civil and criminal measures designed to penalise third parties who facilitate or enable tax evasion. Emboldened by fresh legislation, HM Revenue & Customs (HMRC) is prioritising investigations into multiple businesses as it struggles to close the tax gap in response to pressure to reduce the £34bn deficit between what UK taxpayers owe and what is collected.
‘Tax disputes are now coming out of the tax departments, onto the desks of GCs and into the boardroom,’ notes Nick Skerrett, head of contentious tax at Simmons & Simmons. ‘They are an area of legal risk with many potential consequences and they need to be managed as such. You cannot do that unless you really understand how HMRC operates as a political organ. The changing enforcement environment at HMRC is much more focused and much sharper than it was, while the media environment is also sharper with pressure groups and interest groups who blacklist investors.’
Evidence that HMRC has raised its game can be found on its website: ‘Maximising the collection of the tax and duties that are legally due goes to the heart of our vital purpose.’ This mission statement is supported by data for last year: £605.8bn in record total revenues, £30.3bn in compliance yield and more than 90% of tax prosecutions were successful.
‘We’ve probably never seen HMRC bare its teeth as much as they are doing now: corporates are being squeezed so hard by the revenue,’ says Jason Collins, head of tax, litigation and regulatory at Pinsent Masons. ‘Having said that, HMRC is still seen as probably less aggressive than the Italian or French tax authorities, but probably about the same as the Germans.’
New UK legislation has acted as a catalyst. The 2017 Criminal Finances Act introduced two new offences of failure to prevent the facilitation of tax evasion. As a result, HMRC can investigate and prosecute companies that have failed to prevent their staff from intentionally helping others evade taxes – critically, even if the company’s senior management was neither involved or aware.
‘It has created a corporate criminal liability for corporate tax misbehaviour – but it’s not just the legislation that has toughened, it’s HMRC’s approach to using it,’ says Graham Aaronson QC, founding partner of tax litigation boutique Joseph Hage Aaronson. ‘The Revenue recognises that the international taxation regimes have favoured companies like Apple that set themselves up in Ireland and the concept of transfer pricing: arm’s-length paying for licensing rights, licensing names and licensing facilities. Until very recently, the regime has enabled this to flourish: it’s been very difficult to tackle it. It will be interesting to see how strongly HMRC enforces the OECD base erosion and profit shifting (BEPS) changes.’
In the 2017-18 tax year, HMRC issued 1,414 requests to professional services firms demanding confidential information on clients suspected of tax evasion. Arrangements designed to reduce tax liability have included employee benefit trusts and film finance investments. Issuing a production order enables the taxman to obtain evidence that may lead to a criminal prosecution. Historically, HMRC challenged such arrangements almost exclusively via the civil route, ie, through tax tribunals. But not any more.
According to Aaronson: ‘What was already a high level of confrontation with what HMRC perceives to be unacceptable tax practices and what would have been dealt with as a normal revenue inquiry, it is now prepared to escalate to what they would regard as an inquiry dealing with intentional tax avoidance, which may involve some form of deception.’
By necessity, this pivot is making tax more of a boardroom issue. ‘The revenue starting point has been much more sceptical and aggressive than I’ve seen in the past,’ he says. ‘It takes a lot of hard work to show it that there is nothing out of the ordinary. That’s been a really big change. What HMRC would have regarded as tax avoidance a year or two ago, it is now more inclined to allege fraud. And whereas previously, where it has thought there has been tax fraud at a civil level, it is less inhibited in launching a criminal investigation.’
Sarah Lee, head of disputes at Slaughter and May, observes: ‘It’s partly because of the politicisation of certain issues that HMRC has become more aggressive. Things like WikiLeaks, the Panama Papers, and accusations of sweetheart deals very much put tax issues in the public spotlight and increase the pressure on HMRC to be seen to be acting robustly.’
Skerrett adds: ‘HMRC is being driven to look for revenue. It is much more aggressive in challenging interpretations, and is prepared to push interpretations of particular measures so that it can try to trade anti-avoidance rules that it would like. If it can’t stretch the legislation that far, then it is creating a political backdrop for it to push for further legislative change.’
‘Tax disputes are now coming out of the tax departments, onto the desks of GCs and into the boardroom. The changing enforcement environment at HMRC is much sharper than it was.’
Nick Skerrett, Simmons & Simmons
With the widespread adoption of The Common Reporting Standard (CRS) and the Automatic Exchange of Information (AEOI), Skerrett identifies international reporting and transparency as ‘a big theme’. Lee also points out: ‘The cross-border sharing of information and some of the data harvesting tools that are now available help feed into HMRC’s hunger for information, albeit lack of resource within HMRC often means this information is not prioritised or analysed as effectively as it might be.’
Tax is high on the agenda for some Slaughters clients. ‘Often what can start as an investigation can result in follow-on litigation in a significant way,’ says Lee. ‘We have seen an increased focus on multinationals and particularly technology companies and holders of intangible assets: tax authorities are under pressure to be seen to be tackling these issues.’
HMRC, she adds, is ‘going about it in a more aggressive and rigorous way – in particular, calling for lots of information, like some other regulatory bodies. This has resulted in information requests that are very wide-ranging, going back over long periods of time across many aspects of a taxpayer’s business, at times only tangentially related to the underlying tax issue in dispute.’
Dependent on the issues, determining how to deal with the tax authorities creates a range of possible options. ‘One of the things that we do with clients is guide them along the right strategy that is appropriate to resolve their dispute,’ says Skerrett. ‘That can be a combination of litigation, it can be negotiation or pre-litigation negotiation, or both in parallel. It could be alternative dispute resolution, or indeed, multiples and combinations of them.’
According to figures obtained by Pinsent Masons, in 2017-18, HMRC opened 27 investigations into potentially serious tax evasion ‘involving the UK’s biggest businesses’ – FTSE 100 or FTSE 250 companies. Meanwhile, every stage in the process is subject to bottlenecks and delay, as Collins notes: ‘The backlog of disputes is because HMRC has closed down large-scale tax avoidance schemes and those involved are settling less often and appealing more. In the corporate sector, the shortest inquiries last three to four years and the longest between ten and 15 years.’
Collins often sees HMRC involved in ‘classic prevarication – partly it is strategic to wear the corporate down into settling. The Revenue’s inquiry process is supposed to be about gathering information. Corporates have got the power, if they want, to close the whole inquiry down once they feel they’ve given all the information and HMRC needs to make its mind up. But they often don’t because it feels like they are jumping off a cliff edge. Everyone would rather come to an agreement rather than engage in uncertain litigation. Normally speaking, the corporate doesn’t have to pay the tax during the inquiry, or even during the first stage of litigation. The corporate is sitting there thinking it does not mind too much, from a cash flow perspective, having a long-running inquiry and not having to write a cheque.’
At Simmons & Simmons, ‘The type of tax disputes we advise on comprise roughly 75% domestic, 25% international,’ says Skerrett. ‘For multinationals doing business in territories where there is not an effective rule of law or access to the courts, tax disputes are increasingly common,’ he adds. ‘In dealing with these international regimes, the only way to get access to justice is to bring it outside the country’s courts and get it into a national sovereign investment treaty arbitration action. We are seeing that more and more in countries such as Kazakhstan and Kyrgyzstan, for example.’
He anticipates an increased crossover internationally in the line between tax and criminal law enforcement inquiries, particularly in the facilitation of evasion offences. Aaronson, meanwhile, predicts a further ‘ratcheting up of the level of inquiry and the intensity of scrutiny which HMRC has shown over the last few years’. Collins adds: ‘We expect disputes to grow because of the raft of new taxes and anti-avoidance laws being introduced to tackle perceived avoidance or gaps in the international tax system.’
See Simmons & Simmons’ market profile and briefing: ‘The taxman cometh – What GCs need to know‘