Nick Skerrett examines the trend of tax dispute management falling to GCs and tax litigators, as HMRC takes a tougher enforcement stance
Tax used to be an area where lawyers feared to tread. That has changed dramatically as the environment for resolution of tax disputes has evolved over recent years. We are seeing a growing trend of the management of tax disputes shifting out of the tax department and onto the desks of general or litigation counsel. In parallel, board-level scrutiny and engagement, and responsibility, have increased. This change to managing tax disputes as an area of legal risk, set against a backdrop of increasing complexity and scrutiny, raises new challenges.
Given the increasing involvement of general counsel (GCs), it is unsurprising that we have seen a change in how corporate clients handle and resolve tax disputes. GCs will often, being distanced from the tax position concerned, want to see a fuller independent risk assessment before committing to litigation against HMRC. They will also want to understand how managing the tax risk interconnects with other areas of legal risk, such as regulatory compliance or investigations, criminal conduct, money laundering, market disclosure, data protection, customer actions and so on. Stakeholder management is key.
Public scrutiny and criticism of taxpayer behaviour has led to an increased sensitivity to the reputational impact of tax disputes, driving clients to ensure tax disputes are handled in a way that protects their wider corporate interests. Whether that be managing customers, regulatory stakeholders, brand protection or share value, how a dispute is handled from the outset is important. Well-advised clients will look to develop at an early stage, a strategic approach with an eye for the ultimate end game. What is said and done can be scrutinised in court, and once in the public domain will be judged in the court of social media by an audience on whom the intricacies of the tax dispute will be lost. Tax disputes do not exist in isolation any more; they are fully interconnected with other areas of legal risk.
Tax disputes have become a staple of scrutiny and challenge at board level (our attendance at board meetings to brief directors has increased incrementally over recent years). Directors are far more likely to challenge the approach being adopted and not merely rely on the recommendation of the tax department or their tax advisers. That in turn drives GCs’ desire to demonstrate independent risk assessment of the disputed position.
Many of the themes that have driven an increase in the number and scale of tax disputes – the trends towards transparency, data reporting, international co-operation and multi-agency approaches – are also driving a change in the way those disputes are handled by tax authorities and other regulators. We increasingly see a move towards tax authorities using the full range of tools and powers to challenge taxpayers. In parallel, the increasing awareness of tax disputes has fuelled a growth in secondary civil disputes and regulatory actions.
That intensified public scrutiny has also driven a change in HMRC’s and international tax authorities’ approach to dispute resolution. In the UK, there is an increasing reluctance from HMRC to settle disputes where there might be criticism for giving something up; it is seen as better to pursue the matter until all avenues are exhausted and lose than to face the criticism for giving up tax that is due to the exchequer. A similar trend can be seen elsewhere.
‘We often see clients struggle in understanding the motivations and behaviours of HMRC.’
This pressure has manifested in a notable shift by HMRC away from negotiated resolution and a greater incidence of intransigence, fuelling litigation. We see many situations where negotiations with HMRC have gone on for years and become stuck, where in the past the matter would ultimately have been resolved by agreement. That causes tax stakeholders to have to adjust their expectations and reassess the position through the lens of litigation. While clients will have sophisticated, well-managed tax strategies and be concerned to preserve the tax authority relationship, they equally will have well-developed approaches to litigation and assertion of their legal rights. There can be an inherent tension in devising a strategy that balances tax stakeholders’ desire to maintain a constructive and collaborative tone in their dealings with the tax authority while robustly defending the organisation’s legal rights.
Many organisations are responding to this change in environment by performing more rigorous litigation assessments at an early stage, or even in advance of engagement with the tax authorities. We find that, where litigation counsel is involved, there will often be an appetite for a fuller investigation pre-action to understand what the risk scenarios and possible outcomes are. In the past that may not have happened until a matter was under appeal and in the litigation process, if at all.
An area where we often see clients struggle is in understanding the motivations and behaviours of HMRC. The agency does not behave like a commercial counterparty, being driven by a mixture of policy objectives, politics and revenue raising. It is governed by a clear governance and dispute resolution framework, which needs to be properly understood.
Complexity increases when handling cross-border international disputes, which will become more prevalent in the age of tax transparency and international co-operation. It is not unusual for us to help clients understand the interaction of domestic tax disputes with transfer pricing and treaty actions, alongside blurred lines of civil and criminal standards of enforcement. Increasingly we are advising clients on the opportunity to resolve disputes through sovereign bilateral investment treaty arbitration where there is no effective domestic remedy or rule of law. This is likely to be a significantly growing area of practice in coming years.
This has, in turn, changed our firm’s approach to our clients on tax disputes. This is different to the approach that would traditionally be taken by tax lawyers advising tax clients. We increasingly see the demand for us to lead multi-disciplinary strategic advice for our clients bringing together deep technical tax expertise, an understanding of the relevant tax authority’s governance framework and policy objectives, procedural knowledge, litigation strategy and wider legal needs. That can be anything from guiding the client through market announcement rules to professional negligence actions against previous advisers. To serve this growing demand, we have built closer links with key practices across our firm, so we can provide clients with a single collaborative solution.
What clients increasingly look for is an ability to bring together all of those disparate parts and technical complexity, and deliver clear strategic commercial advice. Given there will be an inevitable growth in the number and complexity of tax disputes, there will be plenty of challenges ahead for GCs and tax litigators alike.
Nick Skerrett, Simmons & Simmons.