From challenging the tax treatment of partnerships to taking a less collaborative approach on audits, HMRC appear to be taking a tougher approach on a host of corporate tax issues.
Some key themes we are seeing in UK corporate tax disputes are summarised below.
1. Partnerships: HMRC continues to test the tax treatment of partnerships, particularly in respect of their executive remuneration arrangements, and professional services firms and asset managers have found themselves embroiled in litigation as a result. A number of these cases are still outstanding (the Supreme Court has recently granted permission to appeal in HFFX LLP v HMRC and BlueCrest Capital Management LP v HMRC may head the same way following the recent Court of Appeal decision) and others are on hold pending their outcome. Depending on where the case law ends up, there may well be a flurry of more challenging enquiries ahead for partnerships, especially in respect of the mixed member, salaried member and sales of occupational income rules.
2. Debt: Debt structures – especially those involving intra-group debt – continue to be an area of focus. HMRC appears to have been emboldened by recent court successes relating to the loan relationships ‘unallowable purposes’ anti-avoidance provision (s 441), taking an increasingly robust stance in reliance on aspects of the decided cases which support their view.
We are also seeing more challenges to the deductibility of debt using other aspects of the UK tax code. Those include the thin capitalisation and transfer pricing arguments that often go hand-in-hand with s 441, but also beneficial ownership requirements, the anti-hybrid mismatch rules and even the CFC rules.
3. Deductibility: Going back to basics, HMRC is looking at the deductibility of a variety of other business expenses. For example, in Centrica Overseas Holding Ltd v HMRC [2024] UKSC 25, professional fees relating to the sale of a subsidiary’s business were found to be non-deductible. We are also seeing tech and life sciences companies in particular facing challenges about the deductibility of royalties and R&D costs (typically on the basis of the ‘wholly and exclusively’ test).
4. Reliefs: HMRC has been carefully scrutinising claims for R&D reliefs (at least in respect of the pre-April 2024 regime), but capital allowances claims and balancing charges are in the spotlight too. The availability of statutory exemptions such as the dividend exemption and the substantial shareholding exemption may also become more contentious.
5. Transfer pricing of cross-border arrangements: Cross-border structures and arrangements that are perceived as being UK-base erosive remain a key area of focus for HMRC, with transfer pricing a primary tool used in this space. In particular, we are seeing:
transfer pricing challenges accompanying s 441 challenges to interest deductions on shareholder debt (see, for example, BlackRock);
increased scrutiny of payments related to IP (including under cost contribution agreements and following business restructurings); and
HMRC testing the boundaries of the transfer pricing concept of ‘accurately delineating the transaction’ to the point of (arguably) claiming accurate delineation as a basis for economic recharacterisation.
6. Less collaborative audits: In recent years, many large corporate groups have commented that HMRC’s approach when scrutinising their tax affairs has felt more aggressive and one-sided. While not true in every case, examples include:
issuing protective assessments to leave open multiple lines of enquiry, including where the conditions for doing so are not obviously met;
disputing legal professional privilege and pressuring taxpayers to waive privilege;
imposing tight deadlines for taxpayer responses (sometimes followed by long periods of silence); and
a reluctance to engage in technical debates with a view to reaching a settlement.
There are also concerns that HMRC is leaving money on the table by stretching out enquiries and pushing cases to litigation rather than resolving them efficiently in accordance with HMRC’s published Litigation and Settlements Strategy.
7. Other focus areas: We’re also seeing
HMRC asking for details about large or unusual transactions, and sometimes going on to challenge them, even where the transaction in question was proactively raised with HMRC before the tax return was filed;
questions being raised about transactions which are (perceived as being) designed to reduce a group’s effective tax rate;
criminal tax investigations of positions taken by taxpayers that HMRC considers aggressive and/or indicative of fraud; and
a tougher approach when imposing civil penalties on corporate taxpayers, including a hesitancy to agree suspension conditions for careless penalties.
Home >Articles > Themes in UK corporate tax disputes for 2025 (and beyond)
Themes in UK corporate tax disputes for 2025 (and beyond)
From challenging the tax treatment of partnerships to taking a less collaborative approach on audits, HMRC appear to be taking a tougher approach on a host of corporate tax issues.
Some key themes we are seeing in UK corporate tax disputes are summarised below.
1. Partnerships: HMRC continues to test the tax treatment of partnerships, particularly in respect of their executive remuneration arrangements, and professional services firms and asset managers have found themselves embroiled in litigation as a result. A number of these cases are still outstanding (the Supreme Court has recently granted permission to appeal in HFFX LLP v HMRC and BlueCrest Capital Management LP v HMRC may head the same way following the recent Court of Appeal decision) and others are on hold pending their outcome. Depending on where the case law ends up, there may well be a flurry of more challenging enquiries ahead for partnerships, especially in respect of the mixed member, salaried member and sales of occupational income rules.
2. Debt: Debt structures – especially those involving intra-group debt – continue to be an area of focus. HMRC appears to have been emboldened by recent court successes relating to the loan relationships ‘unallowable purposes’ anti-avoidance provision (s 441), taking an increasingly robust stance in reliance on aspects of the decided cases which support their view.
We are also seeing more challenges to the deductibility of debt using other aspects of the UK tax code. Those include the thin capitalisation and transfer pricing arguments that often go hand-in-hand with s 441, but also beneficial ownership requirements, the anti-hybrid mismatch rules and even the CFC rules.
3. Deductibility: Going back to basics, HMRC is looking at the deductibility of a variety of other business expenses. For example, in Centrica Overseas Holding Ltd v HMRC [2024] UKSC 25, professional fees relating to the sale of a subsidiary’s business were found to be non-deductible. We are also seeing tech and life sciences companies in particular facing challenges about the deductibility of royalties and R&D costs (typically on the basis of the ‘wholly and exclusively’ test).
4. Reliefs: HMRC has been carefully scrutinising claims for R&D reliefs (at least in respect of the pre-April 2024 regime), but capital allowances claims and balancing charges are in the spotlight too. The availability of statutory exemptions such as the dividend exemption and the substantial shareholding exemption may also become more contentious.
5. Transfer pricing of cross-border arrangements: Cross-border structures and arrangements that are perceived as being UK-base erosive remain a key area of focus for HMRC, with transfer pricing a primary tool used in this space. In particular, we are seeing:
transfer pricing challenges accompanying s 441 challenges to interest deductions on shareholder debt (see, for example, BlackRock);
increased scrutiny of payments related to IP (including under cost contribution agreements and following business restructurings); and
HMRC testing the boundaries of the transfer pricing concept of ‘accurately delineating the transaction’ to the point of (arguably) claiming accurate delineation as a basis for economic recharacterisation.
6. Less collaborative audits: In recent years, many large corporate groups have commented that HMRC’s approach when scrutinising their tax affairs has felt more aggressive and one-sided. While not true in every case, examples include:
issuing protective assessments to leave open multiple lines of enquiry, including where the conditions for doing so are not obviously met;
disputing legal professional privilege and pressuring taxpayers to waive privilege;
imposing tight deadlines for taxpayer responses (sometimes followed by long periods of silence); and
a reluctance to engage in technical debates with a view to reaching a settlement.
There are also concerns that HMRC is leaving money on the table by stretching out enquiries and pushing cases to litigation rather than resolving them efficiently in accordance with HMRC’s published Litigation and Settlements Strategy.
7. Other focus areas: We’re also seeing
HMRC asking for details about large or unusual transactions, and sometimes going on to challenge them, even where the transaction in question was proactively raised with HMRC before the tax return was filed;
questions being raised about transactions which are (perceived as being) designed to reduce a group’s effective tax rate;
criminal tax investigations of positions taken by taxpayers that HMRC considers aggressive and/or indicative of fraud; and
a tougher approach when imposing civil penalties on corporate taxpayers, including a hesitancy to agree suspension conditions for careless penalties.
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