Tax Disputes & Investigations

Depending on the type of tax dispute at hand, it may be possible to try to settle the matter with HMRC without litigating all the way to a hearing. Mediation is the main form of ADR used in tax disputes. It involves a third-party being engaged to try to assist HMRC and the taxpayer in reaching a settlement.

The Tax Tribunals are the civil courts dedicated to dealing with tax disputes. They have their own specific procedural rules and powers that are different from those in the general civil courts. On hearing an Appeal, the Tax Tribunal can allow taxpayer’s appeals against HMRC assessments and penalties. It can also order HMRC to reconsider decisions.

Our lawyers are frequently instructed in appeals ranging from a few thousand pounds in value up to highly complex allegations with values in the multi-millions.

It may be necessary for a business to have certain approvals, authorisations and licences from HMRC before they’re able to undertake specific activities — for example, being approved under the Alcohol Wholesale Registration Scheme (AWRS) before being permitted to sell alcohol on a wholesale basis from specified premises or being approved under the Warehousekeepers and Owners of Warehoused Goods Regulations (WOWGR) before being able to hold goods subject to excise duty (such as tobacco).

We can assist with any queries that may arise during the course of applying for such approvals, authorisations or licences and with challenging any revocation decision by HMRC.

Different rates of VAT or duty apply to different goods and services, with some being exempt or outside the scope of VAT and duty altogether.

It’s important to be certain of the correct application to avoid charging customers and paying HMRC incorrect sums, which may later result in recovery by customers and/or HMRC.

This tends to be used by HMRC for tax avoidance matters and where criminal proceedings are unanticipated. However, if HMRC becomes aware of potential serious tax fraud during the course of the COP8 procedure, it may choose to convert to a COP9 procedure or criminal investigation.

If a taxpayer chooses to cooperate with a COP8 investigation, they’ll be expected to attend meetings with HMRC, provide HMRC with the requested information and documentation and possibly be subject to visits by HMRC to business premises.

Having concluded a COP8 investigation, if HMRC believes that tax is owed by a taxpayer, it will try to reach a settlement based on the amount of tax and any interest and penalties. If a settlement can’t be reached, HMRC will likely issue formal assessments, which can then be appealed by the taxpayer if necessary.

This disclosure procedure is used for cases that involve tax fraud or tax evasion. It isn’t used for errors, mistakes or avoidance schemes that don’t involve fraud.

You can choose to make a voluntary disclosure regarding tax fraud that you’ve been involved in. HMRC may also send correspondence to notify you of its suspicion and invite you to disclose details relating to the fraud. If you decide to disclose under this procedure, HMRC can look to recover any lost tax, as well as interest and penalties.

If you fail to cooperate with HMRC during this process, HMRC may then choose to criminally prosecute you instead. If HMRC offers disclosure and you reject this, HMRC can launch its own civil or criminal investigation.

It’s therefore important that trusted legal advice is sought as soon as possible, whether you’re considering making a disclosure or HMRC has written to you under this process.

This specialist scheme allows for tax deductions at source from certain payments pertaining to construction work and bears certain similarities to the PAYE system. 

The level of tax deductions required under the scheme can vary. In addition, not all payments made in relation to construction work falls within the scheme. 

As such, it’s important to ensure that you understand how the scheme applies to your business and any payments you may make to avoid action being taken by HMRC against you. 

We have experience of acting in criminal investigations and prosecutions that involve Missing Trader Intra-Community fraud, VAT evasion and Construction Industry Scheme.

These schemes were introduced by the Government to assist in alleviating some of the financial pressures businesses faced as a result of the COVID-19 pandemic, in which around £400bn of support was provided.

Unfortunately, these schemes were a target for fraud, which has culminated in an HMRC taskforce being specifically set up. It aims to recover up to £1.5bn in fraudulent or incorrect payments. HMRC also has a specific voluntary disclosure facility for those that have over-claimed Coronavirus Job Retention Scheme grants.

These apply to corporation tax, income tax and capital gains tax and are HMRC’s only chance to recoup underpaid tax once the usual self-assessment enquiry period has ended.

Where HMRC discovers that there has been a tax loss — either through a discovery investigation or by using its information powers — and that has arisen either through the careless or deliberate behaviour of the taxpayer (or related person) or an officer couldn’t have been reasonably expected to know of the facts concerning the tax loss prior to the enquiry period ending, it can issue a discovery assessment in respect of that loss.

The Criminal Finances Act 2017 introduced a corporate criminal offence of failing to prevent the facilitation of tax evasion. Under this legislation, a business will have a defence to such an offence where it can demonstrate that it has reasonable prevention procedures in place that are actively promoted and engaged with.

We can assist with the preparation and implementation of such procedures, including the drafting of risk assessments, policies and delivery of training to staff. We can also assist with any enquiries opened in respect of the Criminal Finances Act 2017.

HMRC is able to issue an array of information notices, including taxpayer information notices, third-party information notices, financial institution notices, identity unknown information notices and identity not fully known information notices.

These are used to assist HMRC in collecting relevant material during an investigation into an individual’s or organisation’s tax position.

If an information notice isn’t complied with, HMRC is able to issue penalties, which can be appealed to the Tax Tribunal (along with the issuance of the notice itself).

HMRC can seek a production order against a third party that it reasonably believes has in its possession or power documents pertinent to a serious tax fraud investigation. This can include ‘special procedure material’ such as documents held by accountancy firms or financial institutions on behalf of a client.

As the information sought under a production order may sensitive and/or confidential, it’s important to obtain appropriate advice before delivering up any material — particularly if legal professional privilege may apply.

HMRC has the power to inspect premises and other property during the course of a civil investigation. 

For a criminal investigation, HMRC can also obtain search warrants and exercise its seizure powers to uplift relevant evidence. 

There are certain conditions that must be met before HMRC can embark on any of these, together with strict procedures that it must follow when exercising such powers. Accordingly, legal advice should always be sought as a matter of urgency in these situations.

This regime is intended to help reduce the prevalence of the avoidance of tax and National Insurance contributions by the insertion of a third-party between a client and a worker.

It’s important that businesses understand the correct employment status of workers and its impact on payments to those workers. A failure to do so may lead to an HMRC enquiry and financial consequences.

Judicial Review deals with arguments concerning public law — for example, the correct interpretation and application of legislation, the reasonableness of HMRC’s decisions and decision-making process or where there’s no statutory right of appeal to the Tax Tribunal.

Very strict time limits and procedural steps must be adhered to when undertaking Judicial Review proceedings. That’s why it’s critical to take advice from experienced lawyers when embarking on this course of action to ensure that your case isn’t defeated on a technicality.

This is prevalent in industries where temporary labour is used. As well as potentially resulting in assessments and penalties from HMRC, min-umbrella fraud can lead to reputational and financial damage and workers not receiving their full entitlements.

There are different models to this fraud, which are ever-changing. It’s therefore an area of increased focus for HMRC. As such, it’s imperative that any businesses using temporary labour are aware of who pays the workers (and how) and ensure the integrity of the labour supply chain.

We can assist with supply chain due diligence with the aim of preventing your involvement in mini-umbrella fraud, as well as assisting should you become embroiled in an HMRC investigation.

The NCA is able to take on the functions of HMRC in cases where it’s employing asset recovery powers. Where the NCA has reasonable suspicions that income or assets were obtained from unlawful conduct, it’s able to raise and pursue tax assessments, as well as penalties and interest.

The NCA has its own cases and also takes referrals from the police and other law enforcement agencies, with over 120 active investigations currently underway.

Given the significant repercussions of an NCA tax investigation, legal advice should be sought without delay.

HMRC frequently embarks on campaigns that encourage taxpayers to bring their tax affairs up to date in a particular area, such as the current Let Property campaign. One method deployed by HMRC is the sending of ‘nudge’ letters to target taxpayers, prompting them to make voluntary disclosures of any tax irregularities to avoid the issuing of penalties or criminal prosecution.

HMRC has introduced the digital disclosure service for the voluntary reporting of errors concerning income tax, capital gains tax, inheritance tax, corporation tax, National Insurance contributions and annual tax for enveloped dwellings.

If a disclosure relates to income, assets or gains abroad, the worldwide disclosure facility can be used to make a voluntary disclosure.

Penalties can be issued by HMRC for errors or inaccuracies in returns, failing to notify a tax liability and late filing in respect of offshore territories. There are also specific penalties aimed solely at offshore non-compliance, for example offshore asset moves, failure to correct previous offshore non-compliance and a strict liability criminal offence where a taxpayer fails to declare offshore income and gains and the tax underpaid exceeds £25,000.

Where HMRC issues a company with a penalty in respect of behaviour that has resulted in a tax loss, in certain circumstances HMRC also has the power to issue officers of that company with liability notices or personal penalties, making them individually liable to pay some or all of the company penalty.

This can, of course, have serious personal ramifications, including possible bankruptcy and director disqualification. Such penalties can be appealed even if the company doesn’t appeal its underlying assessments and penalties. It’s therefore crucial to take independent legal advice should you be issued with an Officer’s Liability Notice or personal penalty.

Organisations that engage in qualifying research and development activities may be able to make use of specific tax reliefs that reduce the amount of tax its required to pay.

However, these reliefs have been subject to abuse since their introduction and as such, organisations claiming these reliefs may find themselves under scrutiny by HMRC to ensure that they’re not being claimed inappropriately.

Where a taxpayer has engaged in abusive tax arrangements that HMRC has been able to defeat, it’s possible for HMRC to issue sanctions against enablers of such arrangements.

Enablers can include those that design, manage or market (to taxpayers) the arrangements, provide financial products that they know (or suspect) are being used for such arrangements or are active participants in such arrangements, as well as taxpayers themselves.

Sanctions may include the issuing of financial penalties or assessments and publication of the enablers’ details, with enablers potentially also being subject to an enquiry by HMRC into their own tax affairs as well as an asset freezing order.

An accelerated payment notice is issued by HMRC to prevent taxpayers from retaining disputed tax while a tax avoidance scheme is adjudicated on by requiring the taxpayer to pay that tax upfront. HMRC can enforce accelerated payment notices through insolvency proceedings and penalties can be imposed for non-payment.

Follower notices are issued by HMRC to taxpayers that are claiming tax advantages or proceeding with appeals regarding those advantages in circumstances where those tax advantages have already been judicially ruled upon. These aim to reduce the resources required to deal with such claims and appeals and to avoid taxpayers retaining the benefit of the tax in dispute until it’s resolved. Penalties can be applied by HMRC for failing to take corrective action once a follower notice has been issued.

The ‘promoters of tax avoidance schemes’ (POTAS) regime aims to make the promotion of tax avoidance schemes more difficult. Under this, HMRC may issue conduct notices to impose conditions on the activities of a promoter, monitor promoters that have breached conduct notices, issue stop notices to prohibit a promoter from promoting a scheme (or schemes specified within) — each of which carries serious repercussions for failing to comply.

The Serial Tax Avoidance Regime was introduced to target those that repeatedly engage with tax avoidance schemes that HMRC is able to defeat. It’s intended to discourage future use of similar schemes.

HMRC is able to issue warning notices to taxpayers (that generally last for five years), issue relief restriction notices for certain tax reliefs that taxpayers may otherwise have been able to use, publicise details of repeated tax avoiders and impose penalties.

While VAT fraud can take place via many different methods, it can generally be divided into three categories — fraudulent evasion of VAT, furnishing false information and committing evasion over a period.

Missing Trader Intra Community (MTIC) fraud falls within the first of these categories and has been a particular target for HMRC since the early 2000s, due to the enormous amounts of VAT that can be evaded. It encompasses carousel fraud, contra trading and acquisition fraud. HMRC is able to recover VAT from not only those actively perpetrating the fraud, but also those that may be involved elsewhere in the supply chain and it’s considered that they ‘should have known’ of the fraud. As such, robust supply chain due diligence is critical in avoiding liability.

We also have extensive experience in acting in criminal MTIC and VAT evasion prosecutions.

HMRC is able to impose penalties in circumstances where a taxpayer fails to register for VAT when required, fails to file a VAT return on time, fails to pay VAT on time, submits an incorrect VAT return or breaches regulatory requirements.

Default surcharges were previously applied by HMRC to taxpayers that had failed to file their VAT returns on time or failed to pay VAT on time. These were recently repealed, with a points-based system being introduced for VAT periods starting on or after 1 January 2023.

As the government body tasked with collecting tax, HMRC has been afforded a magnitude of investigatory powers, both criminal and civil. These include search warrants, seizure powers, document production orders, disclosure notices, information notices (which can be issued to the taxpayer and to third parties), inspection of premises and other property, and interviews.

These vary depending on whether HMRC is pursuing you through the civil or criminal courts and what decision(s) it has made in respect of your tax affairs. 

Broadly speaking, you can initially request that HMRC undertakes an independent review of its decision (e.g., an assessment issued to you). If HMRC upholds that decision, you can usually appeal to the First-Tier Tribunal (Tax Chamber). 

In some circumstances, it may be necessary for you to bring special proceedings against HMRC, known as judicial review. You may also be able to engage in Alternative Dispute Resolution to reach a settlement with HMRC prior to the dispute being dealt with by a Judge at a hearing.

Again, this depends on what’s being challenged and how. Any alleged tax liability may fall away (in part or in full), any penalties imposed may be withdrawn, seized goods may be returned to you, tax you’re reclaiming for HMRC may be paid back to you or you may not be criminally convicted of a tax-related offence.

In some circumstances, you may also be able to seek a contribution from HMRC to the costs you’ve incurred in challenging a tax decision. 

You may be criminally convicted if prosecuted for a tax-related offence, required to pay any outstanding tax liabilities and associated penalties, have any seized goods destroyed or you may not receive any tax being reclaimed from HMRC. 

Aside from the immediate consequences, there are wider repercussions that should be taken into account. There are also occasions where HMRC may be able to recover some of its costs from you in dealing with your challenge. 

There are many advantages to engaging a lawyer with experience in tax disputes, including legal professional privilege (which other professionals don’t have), rights of audience before certain courts and legal and practical tactics gained from many years of dealing with HMRC.

However, you’re not obliged to instruct a lawyer to assist with a tax dispute. It may be possible for your accountant or tax adviser to act on your behalf when dealing with HMRC or you may even wish to represent yourself without any professional assistance.

We understand that you may be concerned about having a lawyer act for you, perhaps due to increased costs, not having dealt with lawyers previously or maybe even having had a negative experience in the past.

We pride ourselves on being approachable and available whenever you need us, keeping you informed of progress at every step of a matter, acting promptly, explaining legal issues in clear terms so that you have a full understanding of what’s taking place and working with you wherever possible to keep costs manageable and proportionate.

In addition, as a full-service law firm, we’re able to assist with any associated issues that may arise from a tax dispute, so that you don’t have to engage multiple firms and can keep matters streamlined.