Tax disputes in 2016

Every year, someone asks me how I will keep busy in years to come. Surely UK tax disputes will die out? Every year, I give the same answers. One is that HMRC has, and in my view always will have, resource focused on interventions. There are others too. 2016 certainly does not look like the year in which tax disputes fade into history. This piece comments briefly on key areas where HMRC will focus in 2016, or where the law regulating HMRC and tax disputes will be developed.

 

 

In corporate tax disputes, transfer pricing (TP) is likely to be the highest profile area, and the most important to many. There are two issues, separate but linked. First, in recent weeks there has been extensive press coverage of what appear to be historic transfer pricing disputes. It is likely that a small number of these will keep tax on the front pages. Nothing needs to be added here.

 

Second, real engagement with HMRC on diverted profits tax (DPT) will start this year. This is of wide importance. Many groups have already had informal – and frequently inconclusive – DPT discussions with their customer relationship managers (CRMs). HMRC still seems to have internal work to do in developing and disseminating its own thinking on DPT. However, groups with calendar year accounts must make their first DPT disclosures by 31 March. The engagement on DPT which will follow is likely to lead straight back to TP discussions. HMRC’s view is understood to be that DPT is really a tool to ensure appropriate TP policies. And the DPT teams are, of course, led and heavily staffed by TP specialists. 

 

Groups with possible DPT exposure should also focus on the unpublicised timetable that DPT imposes on TP enquiries. DPT is intended as a top-up tax. This is effected by provisions like FA 2015 s 83, which excludes profits from DPT if HMRC accepts the group’s transfer pricing, and FA 2015 s 100, which envisages a credit against DPT for UK corporation tax paid. However, these relieving provisions cease to apply – at the latest – three years and three months after the end of the accounting period. This is a very short time indeed. Transfer pricing discussions should be accelerated; otherwise, groups risk needing to accept unfavourable adjustments in early 2019 to avoid double taxation.

 

One key point of tension between DPT and TP may well be explored. The final OECD report on BEPS Actions 8–10, published on 5 October 2015, retreated significantly from the proposals in the interim report, published on 1 December 2014. Those proposals envisaged transactions being disregarded for a wide range of reasons. This has now been rejected, except for transactions which are not commercially rational (see page 12 of the final report, and draft paragraphs 1.121 to 1.125 of the TP guidelines). In the DPT charge under FA 2015 ss 80 and 81, however, a commercially rational transaction will be disregarded when computing DPT if a tax saving tipped the balance between entering a transaction of that sort, or not. Will HMRC enforce this despite the OECD’s views?

 

 

If DPT is a new issue, old and long running issues will also play their part in 2016. 

 

Some that have run for many years will simply continue. The EU group litigation orders (GLOs) are still a long way from completion. HMRC will surely continue its strategy of fighting every point. The Supreme Court has also decided to hear the Littlewoods compound interest case (the last decision is [2015] EWCA Civ 515), but that will likely not be until 2017. New issues continue to emerge.

 

For others, 2016 will see a change of focus in a long running narrative. The end of the Liechtenstein disclosure facility closes a chapter in the offshore fraud story that started nine years ago with the 2007 offshore disclosure facility. As long promised, HMRC now moves to a tougher enforcement based approach, with increased penalties and new criminal offences proposed for the Finance Act 2016. 

 

Despite the end of the EBT settlement opportunity, it is understood that there are substantial EBTs still alive and well, and significant EBT litigation still to come. At last, Scots cases need permission for an appeal to the Supreme Court, which may mean that the Rangers FC case Murray Group Holdings Ltd v HMRC [2015] CSIH 77 will not go further.

 

Other issues are really just getting started. The broad spectrum SDLT antibiotic in FA 2003 s 75A will be in focus this year. This section has been almost unused since enacted almost a decade ago. However, a specialist team, operating as part of ‘offshore Solihull’, has now invoked it in what seems to be a wide range of enquiries, some of which involve structured planning and some of which really do not. Those arguments are at an early stage and should advance significantly during 2016. We can also expect the Court of Appeal decision in Project Blue (the appeal from [2014] UKUT 564 is to be heard in early May).

 

 

In the UK tax world, there is an idea that dealing with HMRC is not quite the same as dealing with anyone else. Different rules apply. The courts have chipped away at that idea for at least 35 years. Two cases on appeal in 2016 may take that further.

 

First, when two parties agree on an issue, and they mean their agreement to resolve it, that generally makes a contract. Each side is bound. In Southern Cross Employment Agency Ltd v HMRC [2015] UKUT 122, an HMRC officer and the taxpayer’s accountant agreed on the resolution of a VAT claim. HMRC head office did not like the outcome, and the officer was told to issue a further assessment. Did the agreement stop HMRC from doing so? Most people outside tax would say ‘yes’. Many tax professionals would say ‘no’. Both the FTT and UT said ‘yes’. In my view, this is right. HMRC was granted permission to appeal to the Court of Appeal, but the case is now not easily found. 

 

Second, when a public authority publishes a policy – in documents such as Revenue and Customs Briefs, or HMRC’s Manuals – it must generally stick to that policy. This stems from a public law duty of good administration. HMRC has long argued that this duty does not apply to it in the normal way. It says that its ‘collection and management’ (CRCA 2005 s 5) duty to collect tax comes first, except where the taxpayer has actively relied to its detriment on one of these publications. In Queen (Hely-Hutchinson) v HMRC [2015] EWHC 3261 (Admin), a case on the bizarre events following the Court of Appeal decision in Mansworth v Jelley [2003] STC 53, Whipple J (a VAT and public law specialist when at the bar) held that normal rules applied. The Court of Appeal is considering HMRC’s application for leave to appeal. 

 

These cases have been mentioned before. In some ways, the issues they address are not at all novel. It is the pattern of increased acceptance that HMRC must play by normal rules that is significant.

 

 

One way in which HMRC is special is its ability to demand information. It has long had bulk information powers (now consolidated in FA 2011 Sch 23). Rather than looking to identify fraud by collecting information piecemeal, it is cost effective for HMRC to ask corporates to provide it with standard form information about their customers. HMRC acknowledges this will have a cost for business, and is unapologetic. 

 

New powers to be introduced in FA 2016 will allow HMRC to ask any business that ‘provides services to enable … transactions between suppliers and their customers’ to provide a data set for each such supplier, subject only to protections where there is a ‘reasonable excuse’ or the request is ‘unduly onerous’. This can apply to a lot of businesses. HMRC will be starting to contact them during 2016. For them, negotiating and tailoring the terms of the information request may be one of their key HMRC discussions of this year.

 

 

The tax tribunals have seen a period of very significant change in recent years, which has been managed with surprisingly little disruption. The blockages that followed the tax tribunals’ 2014 centralisation of functions at the Hagley Road offices seem to be clearing. Appeals are understood to be listed promptly. There are delays reported further down the track, however. An unusually long wait (in some cases, of over six months) is reported for cases ready for hearing by the First-tier Tribunal to actually be heard. And there are several appeals where the hearing finished over a year ago but the parties are still waiting for a decision. 

 

The hot overarching issue in major tribunal appeals is the relationship between the tribunal rules and the High Court’s civil procedure rules (CPR). How much of the CPR must be applied? There is no express provision. But tribunal judges in the tax chamber rightly look outside for guidance, to procedural decisions from other chambers and to the High Court. 

 

As tribunal judges started to fill the gaps in the (short form) tribunal rules, some thought that the whole CPR might come in by the back door. Important 2015 decisions show that now to be unlikely. Warren J, then president of the relevant chamber of the Upper Tribunal, warned robustly against this (Clavis Liberty Fund LP1 v HMRC [2015] UKUT 72 (TCC) at para 18). Tribunals are meant to be less formal, but it is clearly now impossible to understand the tribunal fully without knowing key aspects of the CPR. The president of the tax chamber of the FTT has confirmed the practice of looking to the CPR for assistance (Leeds City Council v HMRC [2014] UKUT 350 (TCC)). 

 

For example, neither the newly robust High Court approach to missed deadlines (Leeds City Council), nor the detailed rules on searching for documents to disclose to the other side, have been adopted wholesale, but each strongly informed the tribunal’s conclusions. And the tribunal is not afraid to import parts of the CPR when it wants to, such as when determining whether to hear one point of law first (Anderson v HMRC [2015] UKFTT 191 (TC)), or when dealing with expert accountancy or other evidence (Chandanmal v HMRC [2012] UKFTT 188 (TC)). Tax tribunal appeals can be sophisticated, and the judges increasingly have a sophisticated set of tools to help manage them.