Tax Disputes Comparative Guide

1 Legal framework

1.1 Which laws govern taxation and tax disputes in your jurisdiction?

Individual taxes in the United Kingdom have their own specific statutory provisions dealing with administration, including the process for appealing any tax assessments or determinations. In most cases, taxpayers have the right to ask the UK tax authority - His Majesty's Revenue and Customs (HMRC) - to undertake a statutory review of a HMRC decision or assessment and the right to appeal to an independent tax tribunal, the First-tier Tribunal.

In addition, it may be possible for taxpayers to apply for judicial review of HMRC's decision to impose tax in particular circumstances - for example where the decision to impose tax would be procedurally unfair or irrational. Judicial review requires permission from the court and strict time limits apply. In general, the application must be made promptly and in any event within three months.

1.2 Do any other regional, national or supranational rules or regulations have relevance in this regard?

A number of taxes have been devolved to national governments within the United Kingdom - for example:

• land transaction tax in Wales; and
• land and buildings transaction tax and Scottish income tax in Scotland.

The United Kingdom is no longer part of the European Union, although some EU law principles remain relevant for particular purposes, such as the application of value-added tax rules.

The provisions of bilateral double tax treaties may be relevant to tax disputes in cross-border scenarios. For example, double tax treaties may include provisions for the resolution of disputes through the mutual agreement procedure (MAP).

1.3 Which authorities are responsible for enforcing the tax laws? What is their general approach to enforcement?

HMRC is responsible for enforcing the tax laws in the United Kingdom. HMRC has a statutory duty to collect the correct amount of tax as required by statute and has only limited discretion to decide to do otherwise, based on its collection and management powers. In particular, HMRC has published both:

• a Charter, setting out expectations of how HMRC should behave when interacting with taxpayers, including using its powers correctly and fairly; and
• a comprehensive Litigation and Settlement Strategy.

1.4 To what extent do the tax authorities cooperate with (a) other national authorities and (b) their international counterparts in enforcing the tax laws? Does this vary depending on the applicable tax?

HMRC has frameworks in place that govern its cooperation with other domestic authorities. This facilitates the exchange of information and collaboration. HMRC often conducts joint operations with other regulators and with law enforcement agencies such as the police and the National Crime Agency, particularly where the matter at hand is potentially criminal in nature.

HMRC will actively cooperate with other national tax authorities - for example, in relation to MAP situations or exchange of information (EOI) requests. For example, HMRC may use formal information powers on behalf of other tax authorities following an EOI request. In all such cases, HMRC will check the legal basis of the request before using formal powers. However, UK courts will not enforce the tax laws of another country based on the general legal principle that the courts of one country will not enforce the tax laws of another country (the revenue rule).

2 Tax investigations

2.1 How do the tax authorities monitor compliance with the tax laws? Does this vary depending on the individual taxpayer or the applicable tax?

His Majesty's Revenue and Customs (HMRC) has a number of mechanisms for monitoring compliance with tax laws.

The general approach involves:

• investigating tax returns that appear high risk - for example, if the return:
• • discloses that the taxpayer has participated in a tax planning scheme; or
  • records significantly different figures from previous returns or improbable figures;
• investigating returns that relate to taxpayers in certain sectors or certain types of taxpayers; and
• investigating a random sample of returns every year.

For larger organisations, there are two additional tools that HMRC uses:

• a process of regular engagement with larger taxpayers through a business risk review, which takes the form of meetings between the tax and finance teams of the organisation and named HMRC contacts. HMRC will ask questions designed to help the organisation to comply with the law; and
• a requirement to notify to HMRC transactions or arrangements where the taxpayer is taking a position that does not accord with HMRC's published guidance. This is referred to as the 'uncertain tax treatment'

2.2 What typically triggers a tax investigation in your jurisdiction?

Tax investigations might be triggered by:

• audits of tax filings;
• receipt of intelligence by HMRC; or
• sector-wide initiatives (where HMRC focuses on a number of similar taxpayers with what it considers might be common issues).

2.3 What is the limitation period for commencing a tax investigation in your jurisdiction?

The limitation period for commencing a tax investigation in the United Kingdom will depend on the particular statutory provisions of the relevant tax.

In relation to corporation tax, for example, HMRC may open an enquiry into a tax return within 12 months of the date on which the tax return is filed. This period is extended where a return is amended. HMRC may also issue a 'discovery assessment' after the expiry of the usual corporation tax enquiry window if there has been an incomplete disclosure leading to a loss of tax of some kind. The time limits on raising a discovery assessment depend on the underlying conduct of the taxpayer or its agent in preparing the return, as follows:

• four years from the end of the relevant accounting period where the loss of tax is not due to careless or deliberate behaviour;
• six years from the end of the relevant accounting period where the loss of tax is due to carelessness; or
• 20 years from the end of the relevant accounting period where the loss of tax is due to deliberate behaviour of the company.

In relation to value-added tax (VAT), there is no time limit as such for HMRC to begin to investigate the return, but there are time limits for HMRC to notify a VAT assessment if it considers that tax has been under-reported, as follows:

• two years from the end of the prescribed VAT accounting period;
• four years from the end of the prescribed VAT accounting period, provided that the assessment is notified within one year of HMRC having knowledge of facts that justify the making of an assessment; and
• 20 years from the end of the prescribed VAT accounting period in more extreme cases (eg, where the loss of VAT is brought about deliberately or fraudulently).

2.4 How does a tax investigation typically unfold in your jurisdiction?

Civil tax investigations generally start with:

• a formal notice of enquiry (for direct taxes); or
• informal correspondence (for indirect taxes).

There is then almost always an evidence-gathering stage, during which HMRC will request information - often informally at first, but with the use of formal statutory information-gathering powers if it considers this necessary. The conclusion of the investigation for direct taxes is a closure notice: this will either amend the tax filing or leave it unchanged. For indirect taxes, HMRC will either:

• issue an assessment if it considers that tax has been under-declared; or
• simply inform the taxpayer that the matter is at an end.

2.5 What is the typical timeframe for the investigation?

Most tax investigations conclude within a few years. For direct taxes, the taxpayer has the power to ask the First-tier Tribunal to close the enquiry if it remains open without good reason. With regard to indirect taxes, HMRC has statutory time limits for the raising of an assessment.

2.6 What powers do the tax authorities have in conducting their investigation, in relation to (a) the taxpayer itself, (b) its employees and (c) third parties?

HMRC's investigatory powers (and critically, the power to request documents) apply in a similar way to:

• taxpayers;
• their employees; and
• third parties.

The only difference is that slightly stricter internal controls apply before HMRC can request documents from certain third parties.

2.7 On what grounds, if any, can taxpayers refuse to disclose commercial information during the investigation?

There is no legal basis for refusing to disclose commercial information simply because it is commercially sensitive. However:

• legally privileged documents are not disclosable (note that in England and Wales, accountants' advice on tax law does not attract legal professional privilege);
• it is often possible to agree on redactions to commercially sensitive information if the information is also irrelevant to the subject of the enquiry; and
• HMRC is entitled to request disclosure only of information and documents that are reasonably required for the purpose of checking the return and there is recent case law that demonstrates the tax tribunals enforcing this limit on HMRC's powers.

2.8 Can the taxpayer object to or challenge the tax investigation? Are any other avenues available for resolving the matter?

A taxpayer cannot object to or challenge the fact of the investigation or enquiry.

If the investigation is prolonged, then in direct tax cases, the taxpayer can apply to the First-tier Tribunal to direct HMRC to close its enquiry. The direction will be given unless HMRC can show that there is good reason for the enquiry to remain open.

2.9 What actions can the tax authorities take if the taxpayer does not cooperate in the investigation?

HMRC has statutory powers to require taxpayers and certain third parties to provide information and documents. Daily penalties can be issued for failure to comply with a statutory notice.

2.10 Can the tax authorities exercise discretion in their treatment of the taxpayer in exceptional circumstances (eg, insolvency)?

Yes, but only to a limited extent. HMRC can offer 'time to pay' arrangements, but these are typically for relatively modest tax debts owed by individuals.

HMRC is not empowered to settle for less than 100% of the tax it considers due, and practically this means that HMRC is often the party that brings insolvency proceedings against taxpayers with large tax debts.

2.11 Do tax authorities have any leeway to settle in the course of tax investigations?

HMRC and a taxpayer can settle a dispute at the investigation stage by reaching an agreement as to the outcome. Any such outcome must reflect and accord with the strict terms of HMRC's Litigation and Settlement Strategy.

2.12 If the investigation concludes that taxes are overdue, what powers do the tax authorities have to collect them? Does this vary depending on the applicable tax?

The specific requirements for collecting unpaid taxes will depend on the particular tax applicable. However, in general, HMRC will either:

• issue an assessment for the unpaid tax and interest thereon; or
• amend the tax filing, which creates a liability to pay the unpaid tax together with any interest. Penalties must always be assessed.

HMRC has a range of powers to enforce the collection of taxes. These include:

• bringing debt recovery actions in the courts; or
• using distraint powers to seize and sell assets.

In certain cases, HMRC may be able to enforce payment by obtaining direct recovery of tax debts by instructing banks and building societies to deduct amounts directly from a taxpayer's bank account.

2.13 On what grounds are penalties imposed and how are these calculated?

The imposition of penalties and how they are calculated will depend on the statutory rules of the specific tax in question. However, there are general provisions that apply to a number of taxes which impose interest and penalties in relation to:

• errors in tax returns;
• failure to tell HMRC about a tax liability;
• late payment of tax; or
• late filing of tax returns.

In relation to penalties for inaccuracies, the amount of the penalty will generally be a percentage of the amount of tax that would have gone unpaid if the error had not occurred (up to 100%). The actual percentage imposed will depend on the taxpayer's behaviour, including:

• whether the error was careless or deliberate and whether the taxpayer tried to conceal the error;
• whether the taxpayer made an unprompted disclosure of the error; and
• how cooperative the taxpayer is once the error has been disclosed or identified.

2.14 On what grounds is interest levied and how is this calculated?

Interest is levied on late paid tax. In general, a harmonised late paid interest regime applies to most taxes under which simple interest accrues from the date on which the payment was due until the date on which the payment is made, calculated on a daily basis. The rate of interest is linked to the Bank of England base rate plus 2.5%.

2.15 What defences are typically available to the taxpayer?

Collection activity: During the course of a dispute, it may be possible to suspend payment of tax pending the final outcome (see question 5.6). However, once the tax liability is the subject of a final determination or settlement between the parties, there is no defence to collection activity - that is, the taxpayer does not get a further opportunity to dispute liability by opposing the collection.

Interest: There is no defence to payment of interest because both the interest and the applicable rate of interest are prescribed by statute.

Penalties: Penalties for error will be chargeable only where a taxpayer has failed to take reasonable care. While not strictly a defence, whether the taxpayer took reasonable care is often the key issue in penalty appeals. Depending on the facts, reliance on third parties such as professional advisers may demonstrate reasonable care: the test seems broadly to be whether, in relying on the third party, the taxpayer took reasonable care.

Penalties for error are calculated as a statutory percentage (depending on the conduct - for example, a deliberate and concealed error has a 70%-100% range) of the 'potential lost revenue'. For example, if a taxpayer's return underdeclared income of £100 that would have been taxed at the basic rate of 20%, the potential lost revenue would be £20. The penalty is assessed at 100% of the statutory maximum - so if the taxpayer's under-declaration of income was deliberate and concealed, the penalty would be £20 (100% of £20). The penalty is then reduced by taking into account the conduct of the taxpayer once the error came to HMRC's attention - for example, did the taxpayer:

• admit the error, provide useful documents and generally assist HMRC; or
• refuse to admit there was an error, refuse to provide documents and generally not take steps to assist HMRC?

While not a true defence, this is a means of reducing the quantum owing.

HMRC must, when considering a penalty for error, consider whether it can be suspended. HMRC will generally do so only where it considers that a suspended penalty would have a sufficient deterrent effect on the taxpayer.

Where administrative penalties are levied for failure to comply with a tax obligation (eg, to file a return), taxpayers may argue that they had a 'reasonable excuse' for non-compliance. HMRC considers a 'reasonable excuse' to be an unexpected or unusual event that:

• is either unforeseeable or beyond the taxpayer's control; and
• prevents the taxpayer from complying with the relevant obligation.
• In general, lack of funds to pay tax is not a reasonable excuse. This defence is obviously more naturally suited to individuals and smaller businesses than to large organisations.

HMRC also has the discretion to reduce a penalty where there are special circumstances involving any factor which means that the decision to charge a penalty at the level determined by statute would not be right in that specific case. However, these circumstances are very rare and will not be available in the vast majority of cases.

2.16 Can the results of the tax investigation have criminal implications for the taxpayer? Does this vary depending on the individual taxpayer?

Yes, the results of a tax investigation may result in criminal implications for a taxpayer. Most tax investigations will be carried out under HMRC's civil investigation powers, even where tax fraud is suspected. HMRC will follow its civil investigation of fraud procedure known as Code of Practice 9.

HMRC will generally reserve a criminal investigation for cases where:

• it needs to send a strong deterrent message; or
• the conduct involved is such that only a criminal sanction is appropriate.

Examples of the kinds of circumstances in which HMRC will generally consider starting a criminal rather than civil investigation include:

• in cases of organised criminal gangs attacking the tax system or systematic fraud where losses represent a serious threat to the tax base, including conspiracy;
• where an individual holds a position of trust or responsibility;
• where materially false statements are made or materially false documents are provided in the course of a civil investigation;
• where, pursuing an avoidance scheme, reliance is placed on a false or altered document;
• where deliberate concealment, deception, conspiracy or corruption is suspected; and
• in cases involving the use of false or forged documents.

2.17 If the tax investigation has criminal implications for the taxpayer, are the answers to any of the above questions different?

Yes. HMRC has a different suite of criminal law powers, including powers to enter premises and powers to seize (rather than simply demand) documents. These powers are governed by the Police and Criminal Evidence Act 1994.

3 Voluntary disclosure and amnesties

3.1 Are any voluntary disclosure or amnesty programmes applicable in your jurisdiction? Does this vary depending on the applicable tax?

His Majesty's Revenue and Customs (HMRC) occasionally makes available a disclosure facility on advantageous terms. More generally, HMRC will often run campaigns to encourage taxpayers that have undeclared income or gains to voluntarily make disclosures on the basis that any penalties imposed will be more lenient where unprompted and voluntary disclosures are made. These will invariably relate to particular taxes or situations. Recent examples include:

• HMRC's profit diversion compliance facility for multinationals; and
• HMRC's voluntary disclosure service for individuals who may have failed to pay tax on any income or gains from crypto-assets.

4 Forum for tax disputes

4.1 In what forum(s) are tax disputes heard in your jurisdiction? Is there any choice of forum available?

Statutory appeals against decisions of His Majesty's Revenue and Customs (HMRC) are heard in the specialist First-tier Tribunal. Where a taxpayer brings judicial review proceedings against a decision of HMRC, they will be heard in the Administrative Court, which is part of the King's Bench Division of the High Court of England and Wales. Claims for judicial review (but not generally statutory appeals to the First-tier Tax Tribunal) are subject to a different procedure in Scotland, which is beyond the scope of this Q&A.

4.2 Who is the fact finder in a tax dispute? Does this change based on venue?

The First-tier Tribunal is the fact-finding body in a statutory appeal. On further appeals, any higher tribunals or courts have very limited ability to reconsider the facts as found by the First-tier Tribunal.

5 Filing a tax dispute

5.1 What is the limitation period for filing a tax dispute in your jurisdiction?

In general, a taxpayer has 30 days from the date of His Majesty's Revenue and Customs' (HMRC) formal decision notice - such as the notice of assessment or determination - to notify an appeal against that decision. This is 30 days from the date on which HMRC posts the decision notice, not the date of receipt.

In direct tax cases, the taxpayer must first notify its appeal to HMRC. HMRC may agree to accept a late notice of appeal and must do so if it is satisfied that:

• there is a reasonable excuse for not meeting the time limit; and
• a request was made without unreasonable delay after the excuse ended.

In indirect tax cases, the taxpayer must notify the appeal directly to the First-tier Tribunal. HMRC can agree not to object to a late notice of appeal, but the final decision on whether to accept a late notice of appeal lies with the First-tier Tribunal.

5.2 What are the formal requirements for filing a tax dispute?

If a taxpayer wishes to appeal a decision by HMRC, in general, it must do so by notice in writing sent to HMRC or the First-tier Tribunal as applicable (see above). HMRC provides a number of different appeals forms for use depending on the matter being appealed. However, a taxpayer is generally not required to use a specific form and may instead appeal by writing a letter.

A statutory review process is also available for taxpayers that disagree with a tax decision made by HMRC. A taxpayer can request a review of the decision by another HMRC officer not involved in making the original decision. This suspends the taxpayer's right of appeal until the review process has concluded. The statutory review system is an optional additional step that gives taxpayers a right to ask HMRC to look again at its decisions. HMRC must then:

• undertake the review in accordance with the statutory provisions relevant to the tax in question; and
• generally notify the taxpayer of the outcome within 45 days.

In general, if a taxpayer disagrees with the review officer's decision, it has 30 days in which to notify an appeal to the First-tier Tribunal if it still wishes to contest the decision.

5.3 What are the procedural and substantive requirements for filing a tax dispute?

See question 5.2. The appeal must be notified to the relevant body (HMRC or the First-tier Tribunal) in writing and within the relevant time limit. The appeal must also give details of the grounds on which the taxpayer relies in support of the appeal.

In some cases, any disputed tax must have been paid to HMRC before the First-tier Tribunal can progress an appeal.

5.4 Is there any possibility for collective proceedings (eg, involving several taxpayers or multiple tax assessments)?

All taxpayers affected by a particular issue must file their own individual proceedings in the First-tier Tribunal if they wish to contest HMRC's position. However, once the individual appeals have been filed, there are two common ways in which the First-tier Tribunal will manage multi-party proceedings:

• First, a formal procedure allows the First-tier Tribunal to nominate a lead case or lead cases from a number of other appeals which give rise to common or related issues of fact or law. Where the First-tier Tribunal makes a formal 'lead case direction', its decision in the lead case will bind the others.
• Second, HMRC and affected taxpayers can agree to treat one or more appeals on a particular issue as an informal 'test' case. Where this happens, the parties will ask the First-tier Tribunal to stay the appeals of other affected taxpayers pending the outcome of the test case. In the absence of a formal lead case direction, the outcome of the test case will not bind the parties to the stayed appeals; although in practice, the outcome of the test case will often be followed without further dispute.

The First-tier Tribunal can also direct that appeals which raise the same issues should be 'heard together' at a single hearing, even if the taxpayers are otherwise unconnected with one another. The First-tier Tribunal will not typically direct that more than two or three taxpayers' appeals should be heard together in this way; otherwise, the proceedings can become unwieldy. For larger groups of affected taxpayers, the 'test case' and stay approach discussed above is more common.

5.5 Must the sum in contention be paid into court before a tax dispute is filed?

The sum in contention is never paid into court. However, in indirect tax cases, the taxpayer must either:

• pay the disputed sum to HMRC; or
• satisfy HMRC or the First-tier Tribunal that to pay the tax before the resolution of the dispute would cause it 'undue hardship'.

5.6 Has the filing of a tax dispute any effect on the payment of tax or the collection possibilities for the authorities?

In indirect tax cases, where there is a certificate of hardship, payment of the tax will be suspended until the end of the appeal. In direct tax cases, HMRC has discretion to agree that collection of the disputed tax will be held over or suspended until the dispute has been resolved.

5.7 If the tax dispute is decided in favour of the authorities, is late interest due if the tax has not been settled? If the tax dispute is decided in favour of the taxpayer and the tax had already been settled, is interest due by the state?

Yes (to both questions). Late payment interest on tax due to HMRC is awarded at a higher rate than repayment interest on tax repaid to the taxpayer.

6 Disclosure and privilege

6.1 What rules apply to disclosure in your jurisdiction? Do any exceptions apply?

Disclosure in the First-tier Tribunal is generally less broad than disclosure under the Civil Procedure Rules. Each party must list and provide for inspection the documents on which it intends to rely in the proceedings; but there is no general requirement for the taxpayer to disclose documents that would adversely affect its case and/or support His Majesty's Revenue and Customs' (HMRC) case. However, disclosure is often wider than this in practice because:

• HMRC has extensive powers to obtain documents from taxpayers (and in some cases third parties) during enquiries (see question 2.4); and
• the First-tier Tribunal may order the disclosure of additional documents during the proceedings (on application by a party or on its own initiative).

Two key exceptions to disclosure apply:

• Documents covered by legal professional privilege can be withheld (see question 6.3); and
• Personal data and/or confidential information can be redacted from disclosable documents, provided that:
• • the data in question is not relevant to the issues in dispute; and
  • its redaction would not distort or otherwise affect the reading of the unredacted parts of the document.

6.2 What rules on third-party disclosure apply in your jurisdiction?

HMRC has extensive powers to obtain information or documents from third parties during the course of an investigation and the First-tier Tribunal has a separate power to order disclosure from third parties during the course of appeal proceedings. With regard to HMRC's powers, the information or documents must be reasonably required to check the taxpayer's tax position or to collect a tax debt of the taxpayer. Before it can require a third party to provide documents, HMRC must generally obtain either:

• the taxpayer's consent; or
• the approval of the First-tier Tribunal (this does not apply if the third party is a financial institution).

HMRC often seeks third-party disclosure on a voluntary basis in the first instance. In such circumstances, the third party may prefer - and can insist on - a formal notice to override any duty of confidentiality that the third party owes to the taxpayer in respect of providing information or documents to HMRC.

6.3 What rules on privilege apply in your jurisdiction?

Documents covered by legal professional privilege can be withheld by taxpayers or third parties. Legal advice privilege protects communications between lawyers and clients that are made for the sole or dominant purpose of giving or receiving legal advice. Litigation privilege protects communications between lawyers or their clients and any third party for the purpose of obtaining advice or information in connection with existing or reasonably contemplated litigation. Legal advice privilege does not apply to communications between clients and tax accountants regardless of whether the purpose of the communication was the giving or receiving of advice on tax law.

7 Evidence

7.1 What types of evidence are permissible in tax disputes in your jurisdiction? Is expert evidence accepted?

The First-tier Tribunal has broad case management powers to admit, require, limit or exclude evidence. The First-tier Tribunal also has powers to determine the nature of the evidence and the manner in which it is to be given. In practice, the parties usually agree a hearing bundle which includes documentary evidence and witness statements by witnesses of fact. This evidence is supplemented at the hearing by oral evidence from witnesses. The evidence may include expert evidence if the First-tier Tribunal grants permission.

7.2 What is the applicable standard of proof?

The standard of proof is the 'balance of probabilities' - that is, more likely than not.

7.3 On whom does the burden of proof rest?

The taxpayer has the burden of proof in most First-tier Tribunal appeals. However, the burden may shift to His Majesty's Revenue and Customs (HMRC):

• for certain types of appeals, such as appeals against information notices; or
• on particular issues, such as the validity of assessments and taxpayer culpability.

8 Proceedings

8.1 Are tax proceedings in your jurisdiction public or private? If the former, are any options available to the parties to keep the proceedings or related information confidential?

Tax proceedings are normally public and exceptions are rarely made. However, the proceedings often do not become public until the hearing because hearing details are only released on the preceding Friday and there is no public record of cases pending in the First-tier Tribunal (save where an appeal has been selected to be a 'lead' case).

The First-tier Tribunal may prohibit the disclosure or publication of documents, information or any matter that can lead the public to identify any person that the tribunal has decided should not be identified. There is also power to anonymise or part-anonymise information in a decision. However, such powers are rarely exercised.

8.2 How do the proceedings unfold in your jurisdiction?

On receipt of the notice of appeal, the First-tier Tribunal will categorise the appeal. 'Basic' appeals proceed directly to a hearing, usually without His Majesty's Revenue and Customs (HMRC) providing a statement of case (ie, its legal and factual arguments). In 'standard' or 'complex' appeals, HMRC must provide a statement of case and the First-tier Tribunal will normally issue 'directions' to the parties to ensure the appeal is properly prepared. The directions usually cover the following:

• list/disclosure of documents;
• exchange of witness statements;
• preparation of hearing bundles;
• exchange of skeleton arguments; and
• hearing arrangements.

The parties in particularly large or complex appeals may ask the First-tier Tribunal to:

• extend the time period for compliance with directions; and/or
• make further directions for:
• • additional disclosure;
  • expert evidence; or
  • statements of agreed facts and issues.

8.3 What is the typical timeframe for proceedings?

The timeframe for First-tier Tribunal proceedings varies significantly depending on:

• the complexity of the issues; and
• the availability of judges and the parties.

In particularly large or complex appeals:

• it may take longer for the parties to be ready for the hearing; and/or
• the hearing itself may need to be longer.

The timeframe in such appeals could be 18 to 24 months or more from the taxpayer filing the notice of appeal to the First-tier Tribunal hearing.

8.4 Are settlements possible between the taxpayer and the tax authorities once judicial proceedings have been opened?

Yes. The First-tier Tribunal's June 2020 Practice Statement on Alternative Dispute Resolution (ADR) affirms that "all parties should ... keep the possibility of ADR in mind as the appeal progresses". We have often found HMRC to be willing to reconsider settlement once all the evidence (documentary, witness and expert) has been exchanged.

8.5 Do the courts in your jurisdiction have full power to review facts and legal questions?

The First-tier Tribunal does not have an unlimited jurisdiction to review facts and legal questions: it can only hear tax appeals to the extent that a statute provides a right of appeal against a particular HMRC decision or assessment. This means that there are certain instances where the taxpayer will have no right of appeal to the First-tier Tribunal against a HMRC action. Where this is the case, the taxpayer will need to consider the availability of alternative procedures such as judicial review of HMRC's action. Examples of this often arise in the context of partnership taxation, where an individual member of the partnership will have no right to appeal to the First-tier Tribunal against action taken at partnership level with consequential effects on his or her individual tax position. In other instances, the relevant statute may specify that the First-tier Tribunal has only a limited 'supervisory' jurisdiction rather than a full 'appellate' jurisdiction. Examples include the jurisdiction of the First-tier Tribunal to hear appeals against certain decisions relating to the membership and composition of value-added tax groups.

Unless the statute confers a supervisory jurisdiction, the First-tier Tribunal in general has little or no jurisdiction to decide public law questions, such as whether HMRC has acted unfairly or unreasonably. These challenges must typically be brought with a claim for judicial review in the High Court.

9 Remedies

9.1 What remedies are available in tax disputes in your jurisdiction?

The jurisdiction of the First-tier Tribunal is appellate. If it is satisfied that the taxpayer has discharged the relevant burden of proof, it will allow the appeal against the decision or assessment that is the subject of the proceedings. The First-tier Tribunal does not have discretion to award other remedies such as damages, injunctions or orders for specific performance.

9.2 What factors will the court consider in deciding on the appropriate remedies?

The First-tier Tribunal will:

• make findings of fact;
• consider the relevant legal principles; and
• apply those principles to the facts.

10 Appeals

10.1 Can the decision of the court be appealed? If so, on what grounds and what is the process?

Yes, the decision of the First-tier Tribunal can be appealed to the Upper Tribunal. The grounds of the appeal are restricted to points of law - that is, an error of law or a factual finding that no reasonable tribunal could have made. In terms of process, the losing party must seek permission to appeal from the First-tier Tribunal within 56 days of the release of the First-tier Tribunal's decision. If permission is refused by the First-tier Tribunal, the losing party can make a second application to seek permission directly from the Upper Tribunal. If permission is granted, the Upper Tribunal will issue directions for the progression of the appeal, including bundles, skeleton arguments and hearing date(s).

A right of appeal lies from the Upper Tribunal to the Court of Appeal and from the Court of Appeal to the Supreme Court. In each case, permission to appeal must be requested first from the lower court and then, if it refuses, from the higher court. If the higher court refuses permission to appeal, that is the end of the matter.

In all cases, permission to appeal should be granted only where the appeal has a real prospect of success. If a case has already been heard by the First-tier Tribunal and the Upper Tribunal, permission to appeal to the Court of Appeal should be granted if:

• the appeal has a real prospect of success; and
• either:
• • the appeal raises an important point of principle or practice; or
  • there is some other compelling reason for the Court of Appeal to hear it.

Permission to appeal to the Supreme Court is granted only if the appeal raises an arguable point of law of general public importance which ought to be considered by the Supreme Court at that time.

11 Costs, fees and funding

11.1 What costs and fees are incurred in tax disputes in your jurisdiction? Can the winning party recover its costs?

Taxpayers are not required to pay a fee to take an appeal to the First-tier Tribunal, but the parties will still incur litigation costs, such as legal or accountancy fees and expert witness fees.

The normal position in the First-tier Tribunal is that each party bears its own costs. However, costs may be recoverable for appeals that are categorised as 'complex' - that is, which:

• require lengthy or complex evidence or a lengthy hearing;
• involve a complex or important principle or issue; or
• involve a large financial sum.

Taxpayers with 'complex' appeals can ordinarily recover some (but usually not all) of their costs from His Majesty's Revenue and Customs (HMRC) if their appeal is successful, but will be liable for HMRC's costs if they are unsuccessful. If a taxpayer does not wish to take on the risk of paying HMRC's costs, it can request an opt-out from the costs regime within 28 days of being notified that the appeal has been categorised as 'complex'.

The First-tier Tribunal cannot generally award costs in appeals that are categorised as 'basic' or 'standard'. There is an exception to this rule if:

• one party has behaved unreasonably in bringing, defending or conducting the proceedings; or
• one party's representative has caused the other party to incur costs unnecessarily (called 'wasted costs').

The general rule in the Upper Tribunal, High Court, Court of Appeal and Supreme Court is that the unsuccessful party will be ordered to pay the costs of the successful party. However, the tribunal or court has the discretion to make a different order and may do so, for example, where:

• a party has been partly successful; or
• the tribunal or court considers it appropriate to decline to award the successful party some of its costs.

11.2 Are contingency fees and similar arrangements permitted in your jurisdiction?

Yes, contingency fees and similar arrangements are permitted.

11.3 Is third-party funding permitted in your jurisdiction?

Yes, third-party funding arrangements are permitted.

12 International tax disputes

12.1 What is your jurisdiction's position on the resolution of international tax disputes (eg, advance pricing agreements, mutual agreement procedures, arbitrations)?

These are increasingly popular. Taxpayers, especially large multinationals, are increasingly using advance pricing agreements (APAs) and the mutual agreement procedure (MAP) to obtain certainty on transfer pricing issues and His Majesty's Revenue and Customs (HMRC) is committing more and more resources to these processes.

APAs: The United Kingdom has a programme for agreeing APAs to:

• provide an increased level of certainty in both jurisdictions;
• lessen the likelihood of double taxation; and
• proactively prevent transfer pricing disputes.

Complex cases or cases most likely to involve double taxation are more likely to be accepted. Based on recent updated guidance, APAs will not be used to settle tax disputes. The new guidance specifically states that where HMRC has commenced an enquiry into the relevant transactions or related transactions, those enquiries will need to be completed before HMRC will consider an APA request. This will be the case whether the APA is for future years or whether it is with rollback to earlier periods. Once an enquiry is complete, an APA request can be made. This is a significant change from HMRC's previous guidance, which provided more flexibility in terms of how an APA could interact with an ongoing enquiry.

HMRC prefers bilateral/multilateral APAs and generally does not accept unilateral APAs.

MAP: The legal framework for the MAP in the United Kingdom is governed by the Taxation of International and Other Provisions Act (TIOPA) 2010. To invoke MAP under a UK tax treaty, TIOPA 2010 requires that a case be presented before the expiration of:

• six years following the end of the chargeable period to which the case relates; or
• such longer period as may be specified in the tax treaty.

More recent UK tax treaties follow Article 25 of the Organisation for Economic Co-operation and Development Model Tax Convention. This provides that a person must present its case within three years of the first notification of the action (ie, the notice of assessment or decision requiring tax to be paid) which results or is likely to result in double taxation. Because the first notification may occur after the expiry of six years following the chargeable period to which the claim relates, the relevant tax treaty article may extend the basic six-year time limit.

In practice, HMRC encourages taxpayers to bring any potential MAP cases to its attention at earlier stages before any notice of assessment or decision requiring tax to be paid is formally issued. It possible to lodge a MAP request on a protective basis.

The Finance Bill 2021-22 amended TIOPA 2010 to make UK diverted profits tax one of the taxes in respect of which, subject to the terms of the relevant treaty, a MAP outcome can potentially be implemented. This is expected to be further clarified through HMRC's recent announcement to bring diverted profits tax within the UK corporation tax regime.

Arbitration: It is UK policy to include a provision for arbitration in its double tax treaties and the United Kingdom is in favour of using arbitration to eliminate double taxation where the competent authorities have been unable to reach agreement.

12.2 Has your jurisdiction implemented the Organisation for Economic Co-operation and Development (OECD) minimum standards with respect to international tax dispute resolution or is it a party to other agreements in this respect?

Yes, the United Kingdom has committed to implementing the minimum standards in respect of:

• prevention of disputes;
• availability and access to MAP;
• resolution of MAP cases; and
• implementation of MAP agreements.

Further details are set out in HMRC Statement of Practice 1 (2018).

12.3 Does your jurisdiction's position differ significantly from Article 25 of the OECD Model Tax Convention (including commentary)? If so, in what respects?

The United Kingdom seeks to follow the OECD Model Tax Convention in its bilateral treaties, including Article 25(5) on arbitration.

12.4 How do domestic and international tax dispute resolution mechanisms interplay in your jurisdiction?

Both international tax dispute resolution mechanisms and domestic mechanisms often form part of an effective overall strategy. Where, for example, HMRC enquires into a tax return from a transfer pricing perspective and/or issues tax assessments based on adjusted arm's-length pricing, a taxpayer may be advised to commence a MAP procedure to ensure that the position taken in the United Kingdom does not result in double taxation of the same element of profit in other relevant jurisdictions. To invoke MAP, a taxpayer should present its case to either HMRC or the tax authority in the relevant other jurisdiction in accordance with the terms of the applicable tax treaty. There may be a requirement to stay the domestic tax proceedings while the MAP is attempted.

The United Kingdom seeks to work MAP cases in the most effective manner. HMRC's annual statistics on the use of MAP show that more taxpayers are using MAP and that HMRC is accepting and resolving more cases within shorter timeframes. In appropriate cases, where the relevant treaties allow, the United Kingdom will engage with other tax authorities to work MAP cases multilaterally. If the relevant treaty network does not provide a mechanism to work multilateral cases, the United Kingdom will seek to work the bilateral cases in a coordinated manner and make use of exchange of information powers where this will help to resolve the cases efficiently.

13 Trends and predictions

13.1 How would you describe the current tax dispute landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

The United Kingdom has seen quite significant changes in the tax landscape over the past 10 years. In general, there is far less scope for tax planning that might be regarded as artificial (eg, marketed avoidance schemes). Those cases have now mostly worked their way through the courts and are regarded as 'legacy' issues.

A number of statutes now include 'main purpose' tests. These generally work by asking why a taxpayer entered into certain arrangements that had a tax advantage: was it because there was a genuine commercial justification or was it really motivated by the tax advantage (in which case the tax advantage is denied by the legislation)? Many taxpayers are now facing enquiries about these arrangements and cases are starting to work their way through the courts.

We are seeing particularly extensive activity in relation to:

• the taxation of partnerships, following the BlueCrest litigation; and
• the taxation of financial services businesses, particularly in relation to indirect taxes.

14 Tips and traps

14.1 What would be your recommendations to parties facing a tax dispute in your jurisdiction and what potential pitfalls would you highlight?

Disputes often turn on the strength of the taxpayer's record-keeping. It is absolutely critical that taxpayers keep good records not only of their filings and the underlying calculations, but also of the business decisions that were taken over the tax period or in relation to the transaction in question.

At the start of a tax dispute, parties should be particularly careful in their responses to information requests from His Majesty's Revenue and Customs (HMRC). HMRC often makes very broad requests and taxpayers should bear in mind that HMRC can only compel production of documents and information that it reasonably requires for the purpose of checking the return. Not every request must thus be complied with on its terms and there is often an opportunity to consider more targeted responses. This is an important way in which taxpayers can keep their disclosure obligations proportionate and prevent HMRC from overreaching.

The selection of professional advisers is also key. Those who advised on the structure or tax treatment that has been challenged may have useful factual background, but there are often a number of benefits to asking other advisers to step in: they may bring new perspective and have no stake in the previous advice. Additionally, in the early stages of an investigation before it is clear that there will be a dispute, accountants' advice will not be privileged (but lawyers' advice will).

Maintaining privilege is critical. Limit document circulation and ensure that any circulation is on confidential terms.

Developing a clear strategy from the outset matters. HMRC's enquiries can often be protracted; the way to cut through this is to be direct about the scope of the enquiry and monitor when it is going off-track. This can mean pushing for HMRC to bring the enquiry to a close and forcing the matter into litigation. Equally, there are times when the taxpayer's best option might be some form of settlement, based on a favourable factual analysis.

Tax and legal teams within large organisations need to know and trust each other. Each will have something important to offer to the dispute. Putting together the right in-house team is a critical part of ensuring that issues are properly identified and escalated and disputes properly responded to.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.