HMRC enquiries can be a frustrating process. There is no time limit for HMRC to complete an enquiry and enquires can continue for many years, with numerous requests for information. Compliance costs can mount and potentially awkward disclosures may need to be made. For example, provisions may need to be made in financial statements and/or in public documents such as annual reports, or equity or debt prospectuses. Complications may arise if there are plans to sell the taxpayer entity as part of an M&A process, and a potential buyer wants information about ongoing enquiries as part of their due diligence exercise. All in all, taxpayers inevitably want enquiries to be concluded as efficiently as possible. 

This fifth post in our series of blogs on tax disputes in the UK explores the limited remedies available to speed up an enquiry or bring it to a conclusion. We previously covered the opening of an enquiry, how to respond to information requests and five key points on legal professional privilege.

Can you do a “deal” with HMRC?

The short answer is no. When settling with a taxpayer, HMRC must act within the parameters of their litigation and settlement strategy (LSS). Under the LSS, HMRC must always resolve a dispute on its own merits, not as part of a “package deal” or by horse-trading, and HMRC must resolve a dispute in accordance with the law. This means, for example, that HMRC cannot agree to charge capital gains tax on an amount that they think is more likely to be chargeable to income tax as a technical matter. Whilst the LSS does emphasise a preference for a collaborative and non-confrontational approach to dispute resolution, in practice, HMRC will continue with disputes where they believe they would succeed in litigation.

There may be more scope for negotiation or “doing a deal” where there is no disagreement on the “black and white” technical points of law, but there are “grey areas” in the facts which can reasonably be seen in different ways. Heavily fact-dependent disputes (for example, in the transfer pricing arena) often fall into this bucket. But the key in seeking to resolve any dispute with HMRC is that the taxpayer must present a principled case that can be justified by reference to the relevant law.

Can you rely on a tax treaty?

If a tax treaty is engaged, it may be possible to ask HMRC to consider how that tax treaty will interact with the enquiry. However, a formal tax treaty claim, including under the mutual agreement procedure (MAP), cannot usually begin until a closure notice has been issued by HMRC. We will cover key points around MAP in the next post of the tax disputes series.

Can you avail of alternative dispute resolution?

HMRC are keen on alternative dispute resolution. They prefer mediation, rather than arbitration, and the government seems keen to encourage settlements outside of court. Even if no formal alternative dispute resolution or mediation occurs, ongoing discussions with the HMRC team (collaborative where possible) are important in trying to reach a resolution.

Can HMRC be forced to close an enquiry?

Yes, although in our experience this is not regularly done.

You can ask the First-tier Tribunal (FTT) to force HMRC to issue a closure notice (or partial closure notice) under paragraph 33 of Schedule 18 of the Finance Act 1998. The FTT must direct HMRC to issue the requested closure notice (or partial closure notice) unless satisfied that HMRC have “reasonable grounds” for not doing so. 

If HMRC really do require more information in order to properly close their enquiry (which they will often claim), this would constitute “reasonable grounds” for keeping the enquiry open. Detailed debates over what information is (or is not) needed can easily arise. Where an application to the FTT for a closure notice is likely to be disputed by HMRC on this basis, the resulting process can therefore be costly and time-consuming. Accordingly, it will be necessary to decide whether it would be simpler to provide HMRC with the information they have requested in your particular case. 

Applying for a closure notice can be a good option in some scenarios, for example, where HMRC appear to be keeping their enquiry open as a “tactical” matter. 

Refinitiv  is a recent example of a successful application for a closure notice. HMRC had opened corporation tax enquiries and issued diverted profits tax (DPT) notices for the same periods. The DPT notices were the subject of an ongoing claim for judicial review. The taxpayer had complied with HMRC’s requests for information during the corporation tax enquiries. The FTT ultimately decided that the outstanding judicial review was not a sufficient reason for HMRC to keep the enquiries open. Accordingly, closure notices for the corporation tax enquiries were directed.  

Are there other ways to get a court or tribunal involved?

Yes. You can also refer specific issues to the FTT for decision under paragraph 31A of Schedule 18 of the Finance Act 1998. This may be useful if, for example, the overall outcome of an enquiry turns on a specific technical issue and early clarity on that will help speed things up. However, this route is also not regularly used. This is because the referral has to be made jointly by HMRC and the taxpayer, and we understand that HMRC usually consider that it is more efficient to proceed to closure notices and deal with all issues in an appeal in the round. 

Judicial review may offer an alternative remedy for taxpayers, but it is rarely successful. The bar for a taxpayer to succeed is very high. In practice, HMRC’s conduct in an enquiry is unlikely to have been so bad that this threshold is met save in the most exceptional of circumstances. In addition, judicial review is often referred to as a “remedy of last resort”. Courts are therefore quick to find that taxpayers have a suitable alternative remedy (and therefore do not have a successful judicial review claim) through appealing a closure notice to the tax tribunals in the ordinary way once it is issued. Glencore provides an illustration (although it concerned DPT rather than corporation tax): the Court of Appeal decided that the appeal of a DPT notice was a suitable alternative remedy even though the taxpayer had to wait for the relevant 12-month review period to expire before the appeal could be brought.

How we can help…

Please get in touch with any of us or another member of Slaughter and May’s market-leading tax disputes team if you have any questions on the topics discussed in this blog or another tax disputes query. 

We have extensive experience in advising at every stage of a wide range of from questions of UK corporation tax, partnership taxation and VAT grouping to treaty interpretation and transfer pricing. Whether you are looking for strategic advice in respect of an ongoing issue or proactive risk management through the creation of defence files or an audit of existing processes, we can help.