Post Brexit, HMRC is renewing its litigation focus on corporate tax evasion, enhanced by new powers to investigate corporate criminal offences. Dominic Carman reports
Like stargazing through a telescope, tax disputes look back in time. The typical gestation period between issues first catching HMRC’s attention and a dispute reaching court can take up to five years, sometimes longer. Nick Skerrett (pictured), head of contentious tax at Simmons & Simmons, says there has been a maturation of the governance processes within HMRC. ‘It is starting to bed down and HMRC has become more adept in its approach to working out those cases that it ultimately wants to come before the courts from those that it does not,’ he says.
Liesl Fichardt, tax partner at Quinn Emanuel Urquhart & Sullivan, suggests there has been ‘a clear shift away from legacy disputes involving tax structures or schemes under historic legislative provisions towards negotiations and settlement discussions with various tax authorities including HMRC’. Much of the decline, she adds, is because HMRC has been very successful in challenging them: winning up to 80% or higher. However, Rupert Shiers, tax partner at Hogan Lovells, counters: ‘I don’t think that there are more or less disputes reaching litigation. HMRC has a finite amount of available litigation resource that is pretty constantly fully utilised and always has been.’
Following a sharp rise in mediation to settle tax disputes in 2017/18, HMRC figures showed a 25% drop last year, with the number of cases entering mediation falling from 553 to 417, according to research published by RPC, which concluded that ‘HMRC refuses to mediate in far too many cases’. Skerrett comments: ‘The cases that HMRC won’t settle now are those where there are clear reasons that drive it to fight: perhaps a point of policy where it draws a red line – sometimes where it would die in a ditch over the point.’
‘Cases HMRC won’t settle are those where there are clear reasons to fight: sometimes it would die in a ditch over the point.’Nick Skerrett, Simmons & Simmons
According to Heather Gething, head of the London tax disputes practice at Herbert Smith Freehills, HMRC focuses on all forms of avoidance and evasion. ‘It will continue with the enhancement of information: it has been receiving a lot of it from offshore jurisdictions,’ she notes. ‘I expect there will be a large number of cases involving the correct returns that ought to have been made in relation to these foreign assets. The multinationals and high-net-worth individuals are in its sights.’
Under pressure
Simultaneously, disputes arising from a variety of historic tax avoidance schemes have had a long tail. ‘They are still occupying court time,’ says Shiers. ‘It’s striking that many of those cases relate to things that happened in the early to mid-2000s when schemes were still being promoted before the disclosure of tax avoidance schemes was introduced and the subsequent demonisation of tax avoidance around the financial crisis. The corporate tax avoidance industry, which is what we had in the mid-2000s, substantially does not exist anymore.’
In HMRC v Raymond Tooth, which dealt with a tax avoidance scheme dating back to 2009, the Court of Appeal decided last June that finding a different reason for under-assessment, or a different mechanism for assessing an insufficiency of tax HMRC already knew about, was not enough to enable it to issue a discovery assessment. ‘Because HMRC is under so much pressure on tax avoidance, it pushed the boundaries on its own legislation,’ says Jason Collins, head of tax, litigation and regulatory at Pinsent Masons, who acted for Tooth. ‘It’s striking,’ says Shiers. ‘And it must be particularly galling for HMRC, having thought that it had broadly closed down marketed avoidance 15 years ago.’
Reputation also impacts on the volume of litigation involving tax schemes, according to Fichardt. ‘Increasingly, clients are concerned about their reputation – either alleged to have been involved, or being seen to be involved in tax schemes and litigation,’ she says. ‘The reputational issue has resulted in many cases being negotiated and settled with HMRC.’ Quinn Emanuel has been involved in discussions and settlements, involving hedge funds, corporates and individuals. ‘Many of them did not have the appetite to litigate in court,’ she adds.
Another key trend, notes Skerrett, is a hardening of attitudes on transfer pricing, both in the UK and internationally. ‘We’re seeing more matters coming into litigation: there is no room for manoeuvre once HMRC has decided to take a very hard-line approach,’ he says. ‘It is saying: we’re going to take a tougher stance across the board; let’s push interpretations, utilise our anti-avoidance provisions, and when it comes to transfer pricing, we’re going to be more aggressive on that too.’
Recognising that its officers are tasked with a difficult job matched by limited resources, HMRC has become highly politicised, according to Collins. ‘It’s clearly trying to be seen to be as tough as possible in relation to the collection of taxes,’ he says. ‘But disproportionately tough in its relationship with large corporates, which in the past haven’t necessarily adopted the best behaviours.’
Purpose tests
Gething suggests that cases determined by the Supreme Court and the Court of Appeal last year fell into two buckets: those that dealt with the rules of construction of tax statutes, and others dealing with the scope of HMRC’s powers. Since purpose tests occur throughout the tax code, HMRC is testing the scope of anti-avoidance provisions in the courts.
On construction, she points to Hancock & Anor v HMRC [2019], where the appeal was unanimously dismissed by the Supreme Court. The lesson from the judgment, Gething suggests, is that ‘you need to look at the purpose of the legislation [Taxation of Chargeable Gains Act 1992]. If your objectives accord with that, you’ll be successful. If it doesn’t, you won’t be.’ Collins adds: ‘There is a “main purpose” test in the legislation, but it is drawn in such broad or badly-delineated terms.’
A prominent Court of Appeal case involving a major corporate was Aozora GMAC Investment v HMRC, which dismissed the claim that a statement in HMRC’s international manual created a legitimate expectation because the taxpayer had not relied on it substantively. ‘A number of very large corporates have litigated on unfair treatment and this case may have a really wide impact,’ says Shiers. ‘So many situations require very close analysis of HMRC guidance and this case is potentially incredibly important for companies and their advisers.’
Corporates also now face the impact of the Criminal Finances Act 2017, which introduced new corporate criminal offences (CCOs). ‘The Act applies to corporates: it puts an additional onus on them to take reasonable steps to prevent the facilitation of tax evasion and adopt a zero-tolerance approach,’ says Fichardt.
But despite several investigations, no prosecution has yet been brought, although the first wave is expected later this year. ‘HMRC has moved more slowly in the past year, not least because of Brexit,’ says Shiers. ‘It has been transparent about the fact that general Brexit preparations have placed such a demand on HMRC time that it’s been more difficult for it to give resource to move inquiries and investigations along.’ Last October, Melissa Tatton was appointed as HMRC’s new Tax Assurance Commissioner to oversee the speedy resolution of tax disputes.
For multinationals, tax litigation invariably has a multi-jurisdictional dimension. ‘UK-connected companies doing business in other countries also have significant tax disputes elsewhere,’ notes Fichardt. ‘In some jurisdictions, there are ongoing tax disputes both in the tax courts and sometimes connected with tax evasion. It’s very much in clients’ minds – the concern that how they are handling disputes in one jurisdiction may impact upon the potential for disputes in another.’
Cum-ex reverberates in the UK
One international case has had a notable domestic impact: cum-ex trading (dividend stripping) was a tax fraud scheme undertaken by a network of banks, traders, and lawyers who obtained more than $60bn from a spectrum of European treasuries through speculation involving dividend taxes.
‘Germany has been the epicentre of cum-ex,’ notes Skerrett. ‘It’s a great example of where institutions had thought the trading that they were doing was acceptable – financial transactions signed off by some leading lawyers. That’s blown up into criminal prosecutions, investigations, financial settlements and all manner of regulatory oversight issues.’
Some cum-ex activity was carried out in London: banks, law firms and accounting firms are understood to be subject to regulatory attention. In January, German prosecutors charged Ulf Johannemann, former global head of tax at Freshfields Bruckhaus Deringer, with fraud over his suspected involvement in cum-ex trades that allegedly allowed a client to reclaim more than €380m in tax.
Fichardt adds: ‘It’s had a notable domestic effect, because many UK financial institutions may have had information of interest to the German authorities who have since engaged with the UK tax authorities to get it. We expect to see more of this type of activity.’
Looking ahead, Collins anticipates more litigation around the main purpose test and a lot of corporate litigation. ‘Two things you’ll probably find: much more focus on supply chain management by corporates and more criminal investigations in relation to corporate criminal offences.’ LB