A recent survey of senior in-house tax professions has revealed a number of findings on the UK tax and disputes landscape. Most survey respondents agree that the UK has a competitive tax regime. Recent exposure in the media of the tax affairs of large multinationals has resulted in increasing concern about reputational risk. A substantial majority of respondents believe that HMRC has achieved its aim of working more closely with taxpayers in a more cooperative manner, but concerns remain about consistency of treatment. A majority believe that tax disputes have increased dramatically and cases have become more complex, with 88% of respondents being of the view that it has become more difficult to resolve matters with HMRC. HMRC is thought to have been effective in clamping down on avoidance, but a number of concerns remain in relation to the approaches adopted by HMRC when dealing with taxpayers and tax disputes.
A recent survey undertaken by the Clifford Chance tax disputes team, which covered industries ranging from financial services, hedge funds, media, mining, telecommunications, oil and gas, insurance and retail, gives a snapshot of the current UK tax and disputes landscape. This survey, 14 questions for 2014, was completed by leading tax professionals and identified the industries’ views and their main concerns. This is a summary of the outcome, capturing their views in their own words.
The government has stated on many occasions that one of its main aims is to ensure that the UK’s tax regime becomes more competitive. Most respondents (88%) were of the view that the UK’s current tax regime is competitive. ‘There are other places which are more competitive but the UK is now well placed’ was one comment. However, this is not shared by all. One respondent agreed that the regime is competitive on ‘rate’, but commented that it remained ‘appallingly awful on complexity … and it negates to some extent the rate attraction’. This supports a broader view that the UK regime remains one of the most complex tax regimes in the world. A particular concern was that the ‘constant threat of retrospective changes to the rules is an impossible environment to operate in’.
Commenting on competitiveness, a respondent noted that ‘on the surface [the UK tax regime] looks attractive, but HMRC is still unnecessarily aggressive’. The majority of respondents (76%) shared the concern that HMRC has become more aggressive in recent years; in particular, as one respondent commented, aggressive ‘in pursuing what it considers to be avoidance – but that is probably because the avoidance [has become] more aggressive’. At the same time, HMRC is more ‘focused in its dealings with LBS clients’. Respondents noted that HRMC’s aggression was ‘targeted at payroll and VAT’, but that it ‘depends on your risk status’. One respondent reflected that: ‘[I’m] not sure I would use the word aggressive, but it is definitely digging further and more robustly than 12 to 18 months ago’. Another respondent formed the view that HMRC was ‘still pragmatic and [followed] a better risk-based approach than most tax authorities’. Comments confirmed that ‘more audit is carried out’ and that as the ‘UK is fiscally challenged so the aggression will continue’. It was noted that there are fewer ‘low value nuisance queries; [HMRC] focuses resource on larger ticket items, which is where you would expect robustness’.
Recent exposure in the media of the tax affairs of large multinationals has resulted in taxpayers becoming more concerned about reputational risk in relation to their tax affairs. Not surprisingly, all respondents (100%) confirmed that reputational risk is a significant factor when considering the tax affairs of their organisations. Some stated that ‘this is a major [issue] for our business’ and is even ‘critical’. Most organisations (82%) confirmed that they are well prepared to deal with an investigation by HMRC and the media, but that they are concerned about ‘resources’ and the ‘recent approach adopted by the media’; one observed ‘it is impossible to know what will come’, while another asked ‘how can you defend against the media ... it is almost unwinnable’.
HMRC has launched a number of initiatives in the past few years to work more closely with its ‘customers’. Respondents were asked whether HMRC has succeeded in working in a more cooperative manner. A substantial majority (82%) of respondents agreed that HMRC has achieved its aim of working more closely with taxpayers in a more cooperative manner. However, it was noted ‘this seems to depend on who your CRM is’ and that ‘there is still room for improvement’. A respondent commented that there was likely to be more cooperation where the ‘CRM controls all the moving parts and is assertive’. A view was expressed that HMRC may sometimes be ‘insensitive to the difficulties in fully complying, partly brought about by [the] overly complicated regime in the UK’. In addition, it was felt that ‘HMRC still appears very remote’. One respondent observed that HMRC is ‘behaving as if we are all tax avoiders’.
The majority of the respondents (58%) agreed that their CRM does not seem to have authority to give appropriate and binding guidance in the current tax environment. Most comments confirmed that it is ‘very mixed’ and that it ‘depends on the issues and area’, as well as that the CRM ‘has less autonomy than two or three years ago’ and ‘had a decreasing level of authority in recent years’. Strong concern was expressed over the consistent referral by the CRM to ‘head office’. It was commented that the CRM ‘needs to refer to head office on all issues even though not necessarily involving significant amounts of tax involved’ and ‘when it comes to more technical international matters then the CRM appears to have no authority and everything is still dealt with at head office’.
Only a small majority (59%) felt that HMRC is transparent in its dealings with taxpayers. Respondents commented that HMRC’s governance is sometimes ‘a bit opaque’ and that ‘the left hand doesn’t know what the right hand is doing – extremely disingenuous’. One respondent felt that HMRC ‘will still use its old tricks’ and another thought that HMRC was ‘slow’. A particular concern ‘appears to be inconsistency of treatment between taxpayers’.
A large group (71%) felt that HMRC seemed to apply the law fairly. ‘I consider it is fair and reasonable – this does not mean it agrees with your analysis’ was the view of one respondent. Another felt that the ‘rationale underlying HMRC’s view is not always clear’ and ‘there appears to be a strong desire to raise as much revenue as possible and bending the interpretation of the law to achieve this aim’. Also in this instance, the concern was expressed that not all taxpayers are treated the same.
Tax disputes have increased dramatically and cases have become more complex in recent years. Most of the respondents (82%) share this view. Of the group, most commented that this is not surprising given the ‘complexity of the legislation in the UK’. Respondents felt that it was ‘also more costly with less chance of a positive outcome’ and that there was ‘less opportunity for pragmatic solutions’. One respondent commented that the ‘political and press environment is challenging for HMRC as well as taxpayers’. All the respondents agreed that there is likely to be an increase in cross-border transfer pricing disputes. ‘Transfer pricing accounts for most cross-border movements and I would expect this to get more headlines going forward’ was noted by one respondent. Another commented that ‘EU legislation looks to be against the UK, particularly the finance industry’. Some respondents believed that there may be an increase in cross-border disputes on EU legislation and the CFC rules. Only a small group expect dispu
tes on treaty qualification and VAT to increase.
A substantial majority of respondents (88%) were of the view that it has become more difficult to resolve matters with HMRC. While it is recognised that ‘HMRC is bound by the [litigation and settlement] strategy’, it has resulted in ‘binary outcomes’. Respondents expressed general concern that ‘pragmatic decisions are slow’, that ‘governance changes in HMRC mean it is more difficult in practice’ and note that ‘with its enhanced governance around settlements and penalties, it is arguably a bit more difficult, particularly when compared with ten years ago’. It was noted that if ‘HMRC sees a point of principle, it can be more difficult’ to reach a settlement on a dispute with them. However, some respondents did feel that HMRC is ‘less able to do a deal’. A respondent commented that experience did not suggest ‘that things have improved in this area’ and another put it more strongly by stating that there ‘has been a complete breakdown in trust’.
Following the general international trend, HMRC has focused increasingly on tax avoidance and has, in the recent past, introduced a number of measures to clamp down on tax avoidance. A large group (88%) of respondents believed that the clampdown is effective. Respondents commented that ‘tax products have virtually disappeared’ and that the clampdown was effective ‘particularly across FTSE [companies] and starting to penetrate “big four” [accounting firms]’. It was noted that ‘there has been an impact with regard to the behaviour of major UK headquartered groups and small UK based boutique promoters. This has provided non-UK headquartered groups a potential competitive advantage when operating in the UK’. Some respondents were more critical and one commented that: ‘HMRC should have all the legislative ammunition to be effective, but still appears to be failing in some areas’. In addition, it was felt that HMRC ‘does not have the resource or expertise’ to be truly effective.
Only a small minority of respondents (24%) were supportive of HMRC being allowed to ‘name and shame’ taxpayers for certain ‘bad behaviour’. Some respondents were of the view that such a policy would be supported ‘as long as it applies the rules correctly’; and ‘taxpayers should be entitled to confidentiality, unless they have committed criminal acts’. Others expressed a real concern that this could be ‘open to abuse by HMRC’ and should be ‘used with caution’. It was noted that ‘this is a blunt instrument’, but ‘if it helps taxpayers to become more responsible, then an aim will have been achieved’.
Listening to industry, by assessing their comments and taking their concerns into account, it is clear that the tax disputes landscape remains a difficult and complex environment. Significantly, the role of the media cannot be underestimated. It seems that while major strides have been made to make the UK regime more competitive and to achieve greater cooperation with taxpayers generally, a number of legitimate concerns remain, in particular in relation to the approaches adopted by HMRC when dealing with taxpayers and tax disputes. n
Clifford Chance’s survey, 14 questions for 2014, was completed anonymously by tax directors and senior tax managers from a range of industries. The full findings are available from the firm’s website.
