This country-specific Q&A provides an overview of Tax Disputes laws and regulations applicable in United Kingdom.
Is it necessary for a taxpayer to register with the tax authority? Are separate registrations required for corporate income tax and value added tax/sales tax?
Any taxpayer that is chargeable to UK tax must notify that chargeability to HM Revenue & Customs (HMRC) (unless the taxpayer’s complete liability to UK tax is deducted at source). HMRC then issues a Notice to File a Tax Return each year onwards until the taxpayer notifies HMRC that it is no longer chargeable.
A separate registration is required for UK VAT purposes. Registration is triggered by reference to a taxable turnover threshold. The two triggers are whether the taxpayer’s taxable turnover has exceeded the threshold in the past 12 months; or is anticipated to exceed the threshold in the next 30 days. Taxpayers can also voluntarily register if their taxable turnover is less than the threshold. The VAT threshold does not apply to overseas businesses. It is the responsibility of the taxpayer to ensure that that they comply with any tax registration obligations.
In general terms, when a taxpayer files a tax return, does the tax authority check it and issue a tax assessment – or there a system of self-assessment where the taxpayer makes their own assessment which stands unless checked?
The UK has a system of self-assessment. A tax return (whether corporate tax or VAT) must include a self-assessment of the taxpayer’s overall liability to tax. The self-assessment stands as the legal liability of the taxpayer (including for debt enforcement purposes) unless later corrected by the taxpayer or challenged by the tax authority.
Can a taxpayer amend the taxpayer’s return after it has been filed? Are there any time limits to do this?
Yes, a taxpayer may amend the return at any time within 12 months of filing it. After this, if the taxpayer wants to reduce the self-assessment, it has to write to HMRC and file an “error or mistake” claim. This must be made within 4 years. If the taxpayer wants to increase its self-assessment, it is necessary to make a disclosure to HMRC.
Once submitted, a VAT return cannot be amended. However, the taxpayer can typically correct lower value errors (up to a threshold limit) within the current VAT return and adjust the VAT account accordingly. For corrections that exceed the threshold limit it is necessary to formally notify the error to HMRC and await instructions before correcting the errors.
The time limit for adjusting returns and correcting VAT errors is 4 years from the end of the accounting period where the error occurred. Correction of errors through a VAT return does not qualify as a disclosure for the purposes of calculating any future penalties.
Please summarise the main methods for a tax authority to challenge the amount of tax a taxpayer has paid by way of an initial assessment/self-assessment.
If a return has been filed, HMRC can open an “enquiry” into the return (or any aspect of it) within 12 months. No reason is needed. At the end of the enquiry, HMRC can amend the return in order to impose HMRC’s own assessment.
If the enquiry window is missed, or after an enquiry has been opened and closed, HMRC can still raise its own assessment via an alternative route (it is commonly referred to as a “discovery” assessment). However, there are conditions to this (to ensure that the taxpayer has some degree of certainty once the 12-month enquiry window has passed). HMRC must show either that the taxpayer’s return and associated documents did not provide enough information to alert a reasonable tax officer to the possibility that the self-assessment was deficient; or that the self-assessment was deficient due to careless or deliberate behaviour on the part of the taxpayer. The time limits to issue a discovery assessment are 4 years (insufficient information), 6 years (careless behaviour) and 20 years (deliberate behaviour) after the end of the accounting period to which it relates.
These discovery assessments can also be used where a taxpayer has not registered for tax. See next question.
For both corporate tax and VAT, the tax authority has wide-ranging statutory powers to request information reasonably required to establish a tax position. The process typically starts with the taxpayer receiving a request for information from HMRC and most information requests are dealt with through the voluntary production of information by the taxpayer necessary for HMRC to satisfy itself that the position taken by the taxpayer is correct. However, HMRC may also carry out site visits of premises associated with the business, escalate a request for information to a formal “information notice” demanding that the taxpayer produces the information recorded in the notice within a stated time period (see also question 11), and / or request information from relevant third parties e.g., group businesses, suppliers, customers and competent authorities.
Based on the information received following a request for information, if the tax authority considers the VAT position is incorrect it has the power to assess the taxpayer for any VAT it considers has been underdeclared (including interest for the period from when it was due to when it is paid).The assessment must be made within the later of two years from the end of the accounting period and one year after evidence of facts, sufficient in HMRC’s opinion to justify the making of an assessment, comes to HMRC’s knowledge – subject to an absolute time limit of 4 years, unless the inaccuracy can be shown to result from deliberate conduct.
In all cases, HMRC will also consider whether penalties should apply.
What is the procedure where a taxpayer has not registered so is unknown to the tax authority (for example a newly incorporated company or a foreign company operating through a permanent establishment?)
As noted, if a company is chargeable to UK tax it is the responsibility of the company to register with HMRC and file tax returns. If the company does not do this and HMRC becomes aware of the chargeability, it can use its discovery assessment powers to charge the tax.
If a business is chargeable to UK VAT, it is the responsibility of the business to register for VAT and file VAT returns. If the business is not registered and has not filed VAT returns but has a VAT liability, the tax authority can issue assessments based on its best judgement.
As stated in answer 4, the tax authority has a number of tools and powers to secure information and insist compliance. In cases of non-compliant overseas businesses, a tax authority can compulsorily register the overseas business for VAT in the UK, direct them to appoint a UK-established VAT representative, and / or require an appropriate form of security. In cases of online sellers of goods, a tax authority also has power to make online marketplaces jointly and severally liable for VAT unpaid by overseas businesses using their marketplace.
In all cases, the business could be liable to penalties and / or interest on the outstanding amount.
What are the time limits that apply to such challenges (disregarding any override of these limits to comply with obligations to relief from double taxation under a tax treaty)?
HMRC can use these powers to reach back up to 20 years (they must prove negligence or fraudulent conduct for periods prior to 2010 but otherwise there is no need to attribute any wrongful conduct on the company).
In general, the time limit is 4 years after the end of the VAT period, although in limited circumstances this time period can be extended to 20 years e.g where there has been deliberate concealment of a VAT liability.
How is tax fraud defined in your law?
The principal definition is in the offence of “cheating the revenue”. It requires a dishonest intention to prejudice the collection of tax. There are no strict liability offences – in other words it is always necessary to prove a dishonest element to the taxpayer’s conduct. The dishonest conduct can be a positive act (such as knowingly providing false information) or by omission (e.g. knowingly failing to register with HMRC).
How is tax fraud treated? Does the tax authority conduct a criminal investigation with a view to seeking a prosecution and custodial sentence?
HMRC has discretion to prosecute all tax fraud. In practice, it prefers to deal with the matter on a civil basis, reserving prosecution for the most serious cases or also just to send a deterrent message in less serious cases. HMRC runs many civil investigations using “Code of Practice 9”. The taxpayer is told that fraud is suspected and is invited to sign a contract to say they will “confess”, i.e. disclose all the irregularities in return for immunity. After the contract has been signed, if the taxpayer does not then make the disclosure, or the disclosure is partial, HMRC reserves the right to prosecute.
If the taxpayer does not sign the contract, HMRC may either pursue a criminal investigation or a civil investigation. If it pursues a civil investigation, the penalties on any tax found to be underdeclared will be much higher than if the taxpayer had confessed.
In practice, how often is a taxpayer audited after a return is filed? Does a tax authority need to have any justification to commence an audit?
The frequency of audit depends on HMRC’s estimation of the risk posed by the taxpayer. HMRC does not operate any standard rules on frequency. However, with large businesses it conducts periodic Business Risk Reviews to decide the risk of tax loss due to things like complexity, resourcing of the tax function, culture of the business, approach to transparency – and this in turn determines the frequency of audit. HMRC does not need a justification to open an enquiry into a return and, as such, it is relatively common for a number of years to be under enquiry with large businesses.
HMRC also runs particular campaigns around a theme over a period of time, all with a view to identifying non-compliance. It will also send out “nudge” letters where it suspects that a population of taxpayers with particular characteristics may not be fully compliant.
Does the tax authority have to abide by any standards or a code of conduct when carrying out audits? Does the tax authority publish any details of how it in practice conducts audits?
HMRC operates various Codes of Practice about how it handles interventions. There is also a Taxpayer’s Charter. HMRC publishes its “operating manual”, which is written for the benefit and as an instruction to HMRC officers conducting their work. Some parts of it are operationally sensitive so are restricted from being published.
Does the tax authority have the power to compulsorily request information? Does this extend to emails? Is there a right of appeal against the use of such a power?
HMRC has the power to request the taxpayer to provide any document or prepare any information which is reasonably required to check a tax position. Certain statutory records must be provided as of right. The taxpayer has a right of appeal to the Tax Tribunal on the question of reasonableness. HMRC has the discretion to apply to the Tax Tribunal to pre-authorise an information notice, which takes away any right of appeal. The taxpayer is usually allowed to make written submissions to be put before the Tribunal but in the most serious cases HMRC can ask the Tribunal to approve the notice without the taxpayer being put on notice.
HMRC’s manual says that it will ask for information informally and only use formal information powers against a taxpayer where HMRC believes that the taxpayer is not cooperating.
Can the tax authority have the power to compulsorily request information from third parties? Is there a right of appeal against the use of such a power?
Yes. A third party notice can be served, either with the consent of the taxpayer or after a successful application to the Tax Tribunal for approval to issue the notice. The application is usually made on notice to the taxpayer and the third party, who can ordinarily both make submissions. A third party always retains the right to appeal a notice (even if issued with approval of taxpayer) on the grounds that it would be unduly onerous to comply.
Is it possible to settle an audit by way of a binding agreement, i.e. without litigation?
Yes, HMRC has a statutory power to enter into a binding contract to settle a taxpayer appeal.
If a taxpayer is concerned about how they are being treated, or the speed at which an audit is being conducted, do they have any remedies?
If HMRC has opened an enquiry, there is no formal timetable to which they must keep. However, the taxpayer has the right to apply to the Tax Tribunal for a direction that HMRC must close the enquiry. The Tribunal will grant this if satisfied that the taxpayer has provided HMRC with all the relevant documents and information that it needs to make a decision.
Where HMRC is investigating outside an enquiry (i.e. proposing to use its “discovery” assessment powers, or conducting a VAT audit) the taxpayer has no statutory right to force the pace. HMRC can use the full extent of the statute of limitations for its discovery powers to decide whether to assess.
A taxpayer can make a complaint to HMRC if they are unhappy with the service provided, for example, where there have been unreasonable delays. This can sometimes speed up the process as it requires a more senior Officer of HMRC to review the complaint and the matter, though increasing the speed of the audit is not guaranteed.
If a taxpayer disagrees with a tax assessment, does the taxpayer have a right of appeal?
Yes, the taxpayer has a full right of appeal.
Is the right of appeal to an administrative body (independent or otherwise) or judicial in nature (i.e. to a tribunal or court)?
The appeal is before a Tax Tribunal. This is judicial in nature.
A taxpayer also has the right, if they choose to, to have their matter reviewed by an independent HMRC officer unconnected to the case before filing an appeal with the Tribunal.
Is the hearing in public? Is the decision published? What other information about the appeal can be accessed by a third party/the public?
The hearing is in public but the Tribunal has the power to exclude third parties in limited circumstances. A third party can request copies of pleadings in an appeal which the Tribunal will consider on its merits.
The decision is published. The taxpayer can apply for commercially sensitive information to be withheld in the published decision, but this is rarely achieved.
Is the procedure mainly written or a combination of written and oral?
There are certain simple appeals that can be determined exclusively on the basis of the parties’ written submissions but commonly the procedure consists of a combination of written and oral submissions.
Is there a document discovery process?
The parties are obliged to provide only the documents on which they intend to rely. However, either party can make an application to the Tribunal for specific discovery of documents. This is in the discretion of the Tribunal.
Are witnesses called to give evidence?
Witness evidence is initially given in writing, via a sworn written statement. Either party can request that a witness attend to give their evidence orally. They are “examined” by the party who primarily relies on their evidence; “cross-examined” by the other party; and then “re-examined” by the first party.
The Tribunal has the power to issue a witness summons requiring the attendance of a person.
Is the burden on the taxpayer to disprove the assessment the subject of the appeal?
Yes, in most cases the burden is on the taxpayer. In some aspects of a case, the burden is on HMRC – for example where legislation requires HMRC to prove a tax avoidance motive or where HMRC is seeking to uphold a penalty determination.
How long does an appeal usually take to conclude?
From notifying it to the Tribunal to the oral hearing takes around 12-24 months for complex cases.
Does the taxpayer have to pay the assessment pending the outcome of the appeal?
Not in the case of direct tax. Yes, in the case of VAT unless the taxpayer can show it would cause financial hardship for it to have to pay.
Are there any restrictions on who can conduct or appear in the appeal on behalf of the taxpayer?
No. There is no need to hold any sort of professional qualification in cases heard before the Tax Tribunal.
Is there a system where the “loser pays” the winner’s legal/professional costs of an appeal?
Yes. In cases designated as “complex” under the Tribunal rules, the loser pays the winner’s costs. The taxpayer (only) can elect out of this regime. In simple cases before the Tax Tribunal however, each party will generally only be responsible for their own costs.
In onward appeals, unless otherwise agreed, the loser pays the winner’s costs.
Is it possible to use alternative forms of dispute resolution – such as voluntary mediation or binding arbitration? Are there any restrictions on when this alternative form of dispute resolution can be pursued?
There is a formal scheme for voluntary mediation and it is actively encouraged by the Tribunal in order to avoid disputes or at least refine the points of issue before trial. There is no scheme for binding arbitration between HMRC and a taxpayer.
Is there a right of onward appeal? If so, what are all the levels of onward appeal before the case reaches the highest appellate court.
The Tax Tribunal is split into two parts. The First-tier Tribunal is the tribunal of first instance and the fact-finding tribunal. Appeals from there go to the Upper Tribunal (some tax appeals can begin in the Upper Tribunal but this is rare and not as of right). Appeals from the Upper Tribunal go to the Court of Appeal. From there appeals are to the Supreme Court.
What are the main penalties that can be applied when additional tax is charged? What are the minimum and maximum penalties?
The main penalties are levied when the taxpayer has filed a return or claim containing an inaccuracy either carelessly, or deliberately, or deliberately and with concealment. The penalties are a percentage of the tax at stake. Each penalty will have a maximum which can then be mitigated according to the extent to which the taxpayer cooperates.
There are also penalties payable where a taxpayer has failed to notify chargeability to tax (i.e. registered with HMRC). This is not dependent on any conduct on the part of the taxpayer for periods after 2010, but if the failure to notify was deliberate a higher penalty is applied. For periods prior to 2010, penalties are payable to the extent there was negligent or fraudulent conduct.
There are also fixed penalties for the late filing of returns, and interest charged on late payment of tax.
Where a taxpayer has been issued with a penalty from HMRC for failing to comply with their tax obligations and they can show a reasonable excuse for the failure to comply then the amount may be waived. Alternatively, where a special circumstance (mitigation) exists, the amount can be reduced.
If penalties can be mitigated, what factors are taken into account?
For penalties for inaccuracies, the first consideration is whether the taxpayer brought the issue to HMRC’s attention without fear of imminent discovery (unprompted). The maximum and minimum penalty range for each category of conduct (careless, deliberate, deliberate and concealed) are lower where the taxpayer has brought the issue to HMRC’s attention on an unprompted basis. Mitigation from the maximum down towards the minimum is based on the extent to which the taxpayer cooperates (in terms of showing and providing information) to deal with this issue once in dialogue with HMRC.
Within your jurisdiction, are you finding that tax authorities are more inclined to bring challenges in particular areas? If so, what are these?
HMRC will pursue any corporate tax planning involving reducing UK tax through interest deductions, tax free-dividends and other receipts, and transfer pricing strategies.
HMRC does not just challenge out and out avoidance. One of the biggest risk areas is labelled “Legal Interpretation”. This is where there is a difference in view of what the law says between the taxpayer and HMRC but there is no express avoidance involved. It has recently introduced a “Notification of Uncertain Tax Treatments” under which it expects a taxpayer to proactively bring any uncertainties to HMRC’s attention. This was watered down during the consultation phase, but HMRC is still actively considering strengthening the regime.
HMRC are also quick to challenge taxpayers’ reliance on VAT exemptions or zero-rating provisions where they consider a taxpayer is seeking to extend their application beyond that which has been commonly accepted to date.
In your opinion, are there any areas which taxpayers are currently finding particularly difficult to deal with when faced with a challenge by the tax authorities?
Disclosure requests: HMRC is very quick to require disclosure of significant volumes of information when investigating a taxpayer’s tax position, such as internal emails and confidential professional advice (subject to legal professional privilege). Taxpayers often feel that these requests are excessive, extending in some instances to fishing expeditions, and could be better focused through meaningful engagement with the business.
Which areas do you think will be most likely to be the subject of challenges and disputes in the next twelve months?
Transfer pricing, as tax authorities are continuing to push for what they consider to be a “fair share” of tax to reflect the value of their country’s contribution, in some cases resulting in the potential for double taxation for multinationals.
The scope and applicability of VAT exemptions across sectors will continue to be a hot topic, as will issues concerning the VAT grouping of UK branches of overseas businesses.
Taxation resulting from an ever increasingly internationally mobile workforce is also likely to throw up significant future challenges.
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