'Public opinion has changed tax avoidance disputes'

The head of tax disputes and investigations at Pinsent Masons says public sentiment has sharply turned against tax avoidance in recent years, which has meant outcomes of ever mounting cases have changed even in the courts.

While cases are heavily reliant on facts, there is always the grey area of interpretation and this can be critical, he says.

"Even relatively recently, like 10 years ago, you could have got a decision from a tribunal which was very like 'you've stuck within the confines of these rules therefore you get the relief'," says Porter. "Now you wouldn't get that I don't think.

"Public sentiment sort of [changed] the output from the courts, particularly the Supreme Court as well, it just influences where they fall on that interpretation piece."

For taxpayers and their advisers this means working effectively with HMRC when a dispute arises is vital to mitigate the potential fallout.

And while advisers might not be on the hook when it comes to their clients' tax disputes with HMRC, as everyone has a responsibility to declare their tax themselves, they could nevertheless face claims coming from their clients for the advice they gave. 

"There are a lot of civil claims flying around," says Porter, "so if you're an IFA and were involved in that in the past...perhaps you might have done it with a straight back at the time, you could still be exposed to claims by your clients to try and make them whole for the losses that they've incurred as a consequence of using the scheme that [the adviser] may have recommended."

So it's important advisers understand how tax disputes work and what to do to help clients get the best outcome possible under the circumstances.

No more horse trading

HMRC has a litigation and settlement strategy in place, which basically says the revenue can't agree to anything with a taxpayer unless it's likely that a court or tribunal would find that that situation applied, that tax analysis applied, says Porter.

This means the process is fairly structured and the 'horse trading' of the past no longer applies.

It's all about finding the facts and then applying the law, he says. "That's been quite helpful in establishing the sort of rules of the game for both HMRC and the taxpayer and what realistically HMRC can accept."

But facts can sometimes be sparse, especially when the case is a decade old. That's why it's key to give HMRC context for what's happened, why it happened, says Porter "That sets the parameters really."

"They got in trouble [some time ago] with Goldman Sachs where they had like a sweetheart deal. And then after that it caused HMRC to look internally and sort of self-reflect on what its governance should be, you know, and since then it's been really good to be honest, you don't get that sort of horse trading anymore."

HMRC itself promises to work with customers "promptly and professionally". "It’s everyone’s own responsibility to get their tax right, but we’re here to help," it says on its website.

Lowering penalties

When it comes to penalties, "there's no carrots left, it's all stick," says Porter. At the same time, "it's all behaviour based, so if you've been really naughty, you get the highest penalty [but] you can mitigate that down if you cooperate effectively."

In an unprompted disclosure, where the taxpayer approaches HMRC, this might even be mitigated down to zero.

Though this doesn't mean everyone should approach HMRC as a precaution. "If you took reasonable care on your tax affairs, then there can be no penalties applied to it," says Porter.

If you lose the credibility and the revenue comes to their own interpretation of your facts, that's when it's very hard to dig yourself out of that hole

There are long stops in place for both fraud and tax avoidance. But Porter says tax schemes, especially historic ones, are complicated, "and we've had a raft of case law come in as well, which confirms there's a broad principle that tax avoidance schemes don't work."

For him, if it's a marketed tax avoidance scheme it's not worth considering at all, because it will be subject to a lot of scrutiny from HMRC "and they have a really good track record of defeating marketing tax avoidance schemes.

"But there's a difference to legitimate tax planning and there is a recognition of the fact that tax is complicated and there's sometimes a grey space. People do plan their affairs to pay the lowest amount of tax, but you've got to judge that threshold just right."

HMRC seems to confirm this. It says: "While we don’t have a problem with tax planning that is within the intent of the legislation, we won’t hesitate to act against contrived arrangements that seek to artificially minimise tax liabilities, whether it’s multinationals diverting profits out of the UK or tax avoidance schemes used by individuals.

"We’re increasingly focusing on measures to tackle issues at source, including focusing on the small minority of tax advisers who make money by promoting tax avoidance and even enabling fraud."

HMRC has dedicated teams which are responsible for certain themes and can detect risk and approach people that way. There's also a fraud team with dedicated themes and dedicated approaches to these. In both cases HMRC would typically begin its investigation by sending people nudge letters.

When such a letter comes it should not be ignored. Clients and their advisers "need to cooperate with HMRC effectively, because the more they tell, help and give information, you can lower the penalties that apply effectively."

What not to do

"Whether it's avoidance or evasion, don't ignore HMRC," says Porter.

In evasion cases the key to keeping it in the civil arena is to work with HMRC, he says. For avoidance, an ongoing relationship matters. "You can expect a lot of scrutiny in the future from [HMRC] if you don't engage."

When engaging it is important not to provide information without any context. Firstly, it might contain information HMRC has no right to view, including about third parties, secondly it gives the revenue a chance to look at it through its own lens.

The result could be guilty until proven innocent rather than innocent until proven guilty, he says.

"If you've got context for something and why it happened, I think that can go a long way to explaining why it happened and de-escalate things.

"You have to recognise that you've got two angles to this, you've got the law and the facts and then you've also got the individuals on the other side of the table.

"It's just like building credibility with someone, if you lose the credibility and the revenue comes to their own interpretation of your facts, that's when it's very hard to dig yourself out of that hole. Whatever you do after that point, it's all coloured by what's happened before."

Opting for the 'safe' space

There is a sense the government is trying to collect more tax to make up for Covid debts as well as resume a backlog of investigations that were stood down during Covid, says Porter.

This means times are busy for HMRC. At the same time there are numerous exchange agreements floating around with other jurisdictions.

For Porter himself, who works with a range of large corporations as well as high net worths and smaller cases, his time is filled with sorting IR35 cases, pension trustee takeovers and SDLT transactions.

He believes there will be more scrutiny of large organisations going forward, as they are already being held responsible for their supply chains under IR35.

But he is doubtful as to whether HMRC has the resources to deal with its many avenues of tax information and investigation.

He describes the digital disclosure service, where people can voluntarily disclose tax mistakes as "a bit cumbersome" and "a round peg in a square hole".

Similarly, for larger businesses, which get assigned a customer compliance manager, there are often long delays between them interacting and getting a response from HMRC, he says.

"I'm not hearing anyone saying that the revenue is well resourced enough to do the job."

On the flipside, this means taxpayers in some smaller cases, after they have been notified by HMRC, can ask to investigate their own tax affairs with their own advisers and then report back.

"That's obviously much less intrusive than the revenue doing it. And gives you the opportunity to sort of review the situation in a bit of safe space and then report back to them what you found," says Porter.

He adds: "Those are the best outcomes you get from investigations where you engage early, get the safe space, get to do the investigation in the background and then report back to HMRC what you find.

"Those have the best outcomes overall because you've shown positive engagement with HMRC and that's looked on favourably for penalties as well. The only downside to that is it obviously costs you more in fees."

carmen.reichman@ft.com