The Tax Disputes and Litigation Review: United Kingdom


The primary mechanism for resolving disputes with HM Revenue & Customs (HMRC), the UK's tax authority, is via appeals to the Tax Tribunal, which has both a lower and upper chamber. The Tax Tribunal system was created by the Tribunals Courts and Enforcement Act 2007, with a view to unifying systems which had historically differed across areas of tax and customs. The Tax Tribunal's jurisdiction to hear disputes arises from statutes; it does not have a general jurisdiction to hear all tax disputes. The effect of this is that some tax disputes will fall to the UK courts (typically the High Court) for resolution (see below).

In recent years, Parliament has sought to limit situations where a taxpayer can seek recovery of overpaid taxes outside of the Tax Tribunals under common law. However, there remain some circumstances where it may be possible to bring a claim under the common law against HMRC in the High Court. This has arisen most frequently in two scenarios. First, where the taxpayer seeks to invoke public law rights (i.e., claims against HMRC on grounds that they have acted unfairly, irrationally or in breach of the law or procedural rules). These claims are brought by way of judicial review, and while they can be heard by the Tax Tribunal, most such claims are still initiated in the High Court. Second, where a taxpayer claims a breach of rights and they either do not have a right of appeal to the Tax Tribunal or that their right of appeal is limited such that it cannot give rise to an effective remedy. This has arisen historically in cases where the taxpayer claims a breach of EU law. Parliament has legislated several times to restrict claims of this nature, so they are now rarer, and will become more so as we move further past 31 January 2020, when the United Kingdom left the European Union.

Tax disputes with HMRC now follow the same Tax Tribunal procedure. However there are still some important differences between direct taxes and indirect taxes in terms of commencing disputes.

In addition, (as noted above) some decisions of HMRC cannot be appealed, and can only be challenged on public law grounds via an application for judicial review (which include fairness, procedural impropriety or unreasonableness). In most cases, challenges on the grounds of public or administrative law in the UK require a claim for judicial review in the High Court. This is an issue which needs to be considered carefully in the light of recent decisions which leave the scope of the Tribunal's jurisdiction l.

Although Tribunals Courts and Enforcement Act 2007 could arguably have gone further to create a properly unified dispute resolution system, it created a robust and usually efficient Tax Tribunal. Judges are fair and capable and the rules are balanced and are reasonably straightforward.

HMRC has also begun to embrace alternative methods of dispute resolution. In 2012, HMRC published its Litigation and Settlement Strategy and guidance on the use of alternative dispute resolution (ADR) in large and complex cases.2 The Litigation and Settlement Strategy established a framework within which HMRC was required to manage disputes and to consider the use of ADR mechanisms. More recently, the Tax Tribunal has issued general guidance on the use of ADR in tax disputes, which has caused HMRC to extend its own position. There is therefore likely to be an increased use of ADR in tax disputes in the future.

Finally, it is also possible for HMRC to offer, or for a taxpayer to seek, an independent review of a decision prior to any appeal to the Tax Tribunal. A review, while not compulsory, is conducted by an HMRC officer who has had no previous involvement in relation to the relevant matter. A review officer can uphold, vary or cancel the original decision of HMRC. Subject to the outcome of the review it is then open to appeal to the Tax Tribunal.

Commencing disputes

i Corporation tax

Corporation tax disputes typically arise after a company files its tax return and HMRC opens an enquiry into that return, suspecting that it contains errors. In other words, there is either something on the face of the return that gives cause for concern, or HMRC has information from other sources3 that conflict with what is shown on the tax return (e.g., an apparent omission of income, gains or an erroneous claim for tax relief).

Corporation tax, just like income tax and VAT, is a self-assessed tax.4 Self-assessment imposes an obligation on taxpayers both to notify the tax authorities when they come into the tax system and to make returns of profit, gains or losses and the tax payable thereon.5

Generally, returns must be filed within 12 months of the end of the accounting period for which the return is made if it has not been given a notice requiring it to make a tax return.6 The return must incorporate a declaration that it is correct and complete to the best of the signatory's knowledge.7 Companies must file their returns, accounts, computations and any claims for tax relief electronically save for in exceptional circumstances.8 A company may amend its return by notice to HMRC within 12 months of the filing date.9

Once a taxpayer (such as a company) has notified HMRC of a liability to pay tax and then filed a tax return, HMRC is entitled to enquire into the return, any amendment to it or any claim or election related to it. HMRC does not need to give a reason for opening an enquiry, and there is no right of appeal against such a decision. However, HMRC must start an enquiry by giving notice to the company of its intention to do so – normally within 12 months from the date the return was filed.10 If HMRC does not do so within the statutory prescribed time limit, it cannot challenge the return unless it can make a discovery assessment (discussed further below).11 However, HMRC's enquiry window may be extended if the return was filed late or was amended.

The enquiry notice is usually given by a letter sent to the taxpayer telling them that HMRC intends to enquire into the tax return. If an agent is acting on behalf of the company, HMRC will, at the same time, contact the agent advising them of the enquiry and enclose a copy of the enquiry notice sent to the company. This enquiry notice generally includes questions regarding any claim or election in the return and questions about any amount that might affect the tax liability of the company or another company, in that accounting period or another accounting period.12 HMRC can make only one enquiry into each tax return, unless the company has made subsequent amendments to the return.13 If HMRC is otherwise out of time to issue a notice of enquiry into the original return, the scope of enquiry is limited to the amended content.14 The scope of enquiry would also be restricted if the amendment giving rise to the enquiry consisted of the making or withdrawing of a claim for group relief.15

Once an enquiry has begun, an iterative process will begin where HMRC gathers information, raises queries and the parties engage in dialogue in relation to the taxpayer's return. Interaction is generally through correspondence but the parties may also choose to meet. HMRC also has limited powers to carry out inspections at premises. There is no maximum duration set for an enquiry and HMRC is entitled to maintain an enquiry as long as it still reasonably requires information relevant to the company's tax position. An enquiry finishes when HMRC issues a closure notice.16 However, where a taxpayer believes that an enquiry (or part of an enquiry) should be brought to an end, the taxpayer may apply to the Tax Tribunal for a direction that the enquiry (or part of it) be closed.17 The closure notice may be:

  1. partial, to indicate that HMRC has concluded the enquiry in relation to discrete matters within a tax return, but is still investigating other aspects; or
  2. final, where HMRC has concluded the enquiry into all matters within the return.18

HMRC's policy, however, is that partial closure notices should only be issued in serious or complex cases.19 Closure notices, whether partial or final, only take effect once issued.20 Once a closure notice has been issued, HMRC cannot unilaterally withdraw it.21 Although there is no prescribed form for a closure notice, such notice must state the officer's conclusions and what, if any, amendment is required to the tax return under enquiry to give effect to them.22 A final closure notice will take account of any partial closure notices and amendments to the return already issued. An appeal against any amendments to the tax return may be made in writing within 30 days after such amendments were notified to the company.23

Once a taxpayer has appealed a closure notice, there are three main options:

  1. a different HMRC officer can be asked to carry out a review of the closure notice decision;
  2. the taxpayer may ask the Tax Tribunal to decide the matter in dispute; or
  3. the appeal can be settled by agreement at any time.

Reviews are not compulsory and, where HMRC carries out a review but the taxpayer still disagrees with the decision, the taxpayer can ask the Tribunal to decide the issue or continue negotiations with HMRC to settle the appeal by agreement.

HMRC and the taxpayer can agree to refer questions to the Tax Tribunal during the course of an enquiry,24 although this can be of limited use to taxpayers, as HMRC's consent is required. Enquiries can remain open for a number of years and the ability of the taxpayer to apply to the Tribunal for a closure notice is an important safeguard.

If, during an enquiry, HMRC forms the view that the amount of tax stated in the company's self-assessment is insufficient and that, unless it is immediately increased, there is likely to be a loss of tax, HMRC may amend the company's self-assessment to make good the deficiency (a 'jeopardy amendment').25 In doing so, HMRC can seek payment from a taxpayer without having to wait until it is ready to issue a closure notice. The circumstances likely to give rise to a jeopardy amendment include where a taxpayer intends to dispose of significant assets or become non-resident or insolvent.26

The self-assessment system is designed to give finality to the taxpayer. The general principle is that once an enquiry has been closed, or the enquiry window has passed, HMRC can no longer challenge the return.27 HMRC's discovery powers provide an exception to this general principle. These powers broadly enable HMRC to assess tax in relation to closed years if HMRC discovers that tax has been under-assessed and the under-assessment is attributable either to:28

  1. careless or deliberate conduct of the taxpayer or a person acting on his or her behalf; or
  2. something of which the officer could not have been reasonably expected to be aware at the time the enquiry window closed on the basis of the information made available to him or her before that time.

Similarly, if HMRC discovers that a return for an accounting period incorrectly states an amount that affects, or may affect, the tax payable for another accounting period or by another company within a group, they may make a discovery determination or assessment of the amount of tax due by the company based on the information available to the officer.29

Discovery assessments must be made within a certain time limit as follows:

  1. four years from the end of the year or accounting period in question;
  2. six years from the end of the year or period, if tax has been lost because the taxpayer (or their agent) was careless; or
  3. 20 years from the end of the year or period if the loss of tax was:
    • brought about deliberately by the taxpayer (or their agent);
    • as a result of failure to notify liability without a reasonable excuse or failure to comply with an obligation to provide HMRC with information in relation to a tax avoidance arrangement; or
    • as a result of arrangements expected to give rise to tax advantages.

Often, particularly where a dispute has run over several years, more than one HMRC officer will have been involved in a case. This complicates questions about whether an HMRC officer has made a discovery. The courts have generally resisted suggestions that HMRC can 'refresh' a discovery by handing a file to a new officer who 'discovers' a matter that the first officer already knew about.30 In any event, the burden of proving, on the balance of probabilities, that the conditions for issuing a discovery assessment have been met falls on HMRC.

HMRC frequently issues discovery assessments in order to protect HMRC's position where a compliance check (not a self-assessment enquiry) for the period is ongoing and assessment time limits are soon to expire. The taxpayer has the right to challenge a discovery assessment on the grounds that HMRC did not meet one or more of the tests for their issue or the substantive grounds for the assessment or its amount. In the same way that, as described above, the terms of a closure notice (following an enquiry) limit the scope and subject matter of an appeal against that closure notice, so too an appeal against a discovery assessment is generally limited to the scope of that assessment. Such an appeal must be made in writing within 30 days of the date of the assessment. The taxpayer can again decide whether to request an internal HMRC review or a Tax Tribunal hearing.

ii Disclosure

HMRC has the right to enquire into a tax return, but this power would be very weak if it were unable to access the documents and other information it believes is needed to enable it to check the accuracy of a return.

Thus, during the course of an enquiry, HMRC may request, if reasonably required for the purpose of checking the taxpayer's tax position, that the taxpayer provide information and documents that are in that taxpayer's possession or power and that are relevant to its own tax position. If HMRC issues such an information notice,31 the taxpayer must produce the information within such time, by such means and in such format as provided for in the notice.32 HMRC's information powers extend to being able to seek information from third parties by the issue of third-party notices. HMRC can seek the advance approval of the Tax Tribunal to the issue of either a taxpayer or third party notice, if certain conditions are satisfied. HMRC can also seek information relevant to tax liabilities in certain overseas jurisdictions through its network of double taxation treaties or via other international instruments that provide for mutual assistance and exchange of information by tax authorities.

There is limited right of appeal to the Tax Tribunal against an information notice from HMRC. Limited, because there is no right of appeal against a requirement in the notice to provide any information or produce any document that forms part of the taxpayer's statutory records.33 Statutory records are records that the taxpayer is required to keep and preserve under relevant statute or any other enactment relating to a tax.34

An appeal must be made to HMRC, in writing and specifying the grounds of appeal, within 30 days of receipt of the notice.35 The simplest solution is to appeal against the requirement on the basis that the document in question is not a statutory record, that it is not reasonably required for the purpose of checking the taxpayer's tax position, or that it would be unduly onerous to comply with the information notice.

iii Other direct taxes

Save for certain time limits, statutory provisions, specific anti-avoidance rules, and other complexities intrinsic in each specific area of tax, identical rules apply for other self-assessed taxes such as in respect of income tax and taxation of partnerships (including limited liability partnerships).

iv VAT

VAT disputes are usually driven by a taxpayer or HMRC trying to amend a VAT return. In most cases the time limit for either the taxpayer or HMRC to amend a return is four years from the end of the relevant tax period.

Where taxpayers fail to make VAT returns, or make incomplete or incorrect returns, HMRC may issue an assessment. They may also issue default surcharges or penalties where VAT returns are late or inaccurate. HMRC assessments, default surcharges or penalties are decisions that the taxpayer has a right to have reviewed by HMRC, or to appeal to the Tax Tribunal.

Where taxpayers seek to amend a historic return, HMRC may either accept or reject the amendment. Again, taxpayers have the right to request a review of a rejection, or appeal directly to the Tax Tribunal.

If a taxpayer disagrees with all or part of a decision from HMRC, the taxpayer must either appeal to the Tax Tribunal within 30 days of the date of the decision, or request that HMRC conducts an internal review of their decision. Any internal review must be conducted within 45 days of the request, and the taxpayer can appeal the outcome of the review to the Tax Tribunal within 30 days.

The Tax Tribunal does not have jurisdiction to deal with issues of public law (fairness, reasonableness and procedural impropriety) and these must be pursued by way of judicial review.

v Stamp duty land tax

With effect from 1 March 2019, the filing deadline for stamp duty land tax returns was reduced from 30 days to 14 days after the effective date of the transaction. HMRC must notify taxpayers within nine months of the filing date if they intend to investigate a transaction. Thereafter HMRC can only investigate if they feel the error was careless or deliberate, or if the taxpayer failed to disclose information. The investigation process and the resolution of any dispute follows a similar, if not the same, process as outlined above for other taxes.

The courts and tribunals

A taxpayer has a right of appeal against:

  1. an amendment of a self-assessment by HMRC;
  2. a conclusion stated or amendment made by closure notice;
  3. an amendment of a partnership return;
  4. an assessment that is not a self-assessment (such as a discovery assessment).

However, before looking at appeals to the Tax Tribunal, it may be appropriate to first consider requests for a review by an independent HMRC officer.

i Independent review

Even where there is a right of appeal, HMRC may offer or the taxpayer may request an independent review of the decision. HMRC is obliged to offer a review of decisions which relate to VAT. There is no formal obligation on HMRC to offer review in direct tax cases, but they often do so. This only arises after the taxpayer have notified HMRC of their appeal. The taxpayer has 30 days to accept HMRC's offer of a review36 or, if they do not wish to accept the offer of a review, to notify the appeal to the Tax Tribunal.37

If the taxpayer elects for a review, then an independent officer will carry out the review. If the taxpayer accepts HMRC's offer (or elects for a review to be conducted), the taxpayer's right to appeal to the Tribunal is suspended while the review takes place. HMRC has 45 days to complete the internal review and notify the taxpayer of its conclusions. The review period can be extended by agreement.38 The conclusion of a review can be appealed to the Tax Tribunal within 30 days of the date of completion of the review.39 Although there is a provision in the Tax Tribunal rules for appeals to be made late, this requires the Tribunal's permission, and the Tribunal will assess the reason for and length of the delay before deciding whether or not to grant permission. In the absence of a review or appeal to the Tribunal, the matter will be deemed settled in HMRC's favour.40

ii Courts and tribunals

The First-Tier Tribunal is the first-instance tribunal for most jurisdictions; the majority of appeals commence in this tier. The Tribunal system is organised into specialist divisions or 'chambers'. Judges can sit alone, or with up to two other judges. The typical panel comprises a chairperson and a panel member. Panel members will not necessarily be lawyers but do usually hold one or more tax qualifications. The losing party may appeal decisions of the First-Tier Tribunal to the Tax and Chancery Chamber of the Upper Tribunal; however, permission is required and appeals are limited to matters of law. It is possible for complex cases to go straight to the Upper Tribunal, but in practice this rarely occurs. The Upper Tribunal can also hear judicial reviews of the tax functions of HMRC.41

Upper Tribunal panels follow a similar format, with between one and three judges, although at least one must also be a judge of the Chancery Division of the High Court.

Appeals from the Upper Tribunal are to the Court of Appeal (which sits as three judges), then to the Supreme Court. Appeals to the Supreme Court can only be made with permission and (except in very rare cases) only on questions of law. The Supreme Court will also only hear cases of general public importance. A case could take three or four years to progress through all tiers of the Tribunal and appeal system, though most cases will not reach the higher appellate courts.

Certain types of claims, such as claims concerning public law matters (Judicial Review), must be started in the High Court (either in the Chancery Division or the Administrative Court), rather than via the Tribunal system (although they may subsequently be transferred to the Upper Tribunal). Judicial review cases tend to be completed more quickly. Appeals from the High Court lie by permission to the Court of Appeal and then the Supreme Court.

The Tribunal has revisited the scope of its jurisdiction to hear public law arguments in two recent decisions.42 It appears to have concluded that it will have limited jurisdiction to hear pubic law or judicial review type arguments where such jurisdiction is not expressly or impliedly excluded by the particular provisions under which a given appeal is made.

Penalties and remedies

The UK penalties regime is highly complex and has been amended on a number of occasions. The current system is largely but not wholly a behaviour-based system. In July 2020, the government released a new 10-year plan for digitalising the tax administration system that included a proposed future wide-ranging review, including the penalty regime. HMRC has previously announced, following extensive consultation, its intention to make changes to tax penalties as follows:

  1. Late submission penalties: replace late filing penalties with a new system of late submission penalties using a points-based model.
  2. Late payment interest: harmonise late payment interest (and repayment interest) rules for VAT, income tax and corporation tax.
  3. Late payment penalties: replace the current late payment penalties with a hybrid regime of penalties and penalty interest. Half the penalty, which will be an as yet unspecified percentage of the unpaid tax, will arise when a payment is late by 15 days; the second half of the penalty will arise when a payment is late by 30 days; followed by penalty interest from 30 days (at a rate not yet set) (in addition to late payment interest).

The new late submission penalty regime will apply to VAT from 1 April 2022, and to Income Tax returns mandated for Making Tax Digital for Income Tax from 6 April 2024, with all other Income Tax returns following on 5 April 2025. The points based system is moderately complex, however it is intended to avoid heavily penalising inadvertent or one-off non-compliance.

HMRC is separately also conducting a review into the policy on interest within the tax regime.

Generally, penalties apply to:

  1. errors in tax returns;
  2. not telling HMRC about a tax liability (this is referred to as a 'failure to notify');
  3. paying tax late;
  4. filing tax returns late; and
  5. certain types of VAT and excise wrongdoing.

In some circumstances there may also be criminal sanctions. Criminal penalties relate to:

  1. fraudulent evasion of income tax;
  2. offshore income, assets and activities;
  3. tonnage tax, under HMRC's information powers for the destruction of documents;
  4. fraudulent evasion of VAT; and
  5. the corporate offence of failure to prevent facilitation of tax evasion.

The maximum penalty is, on summary conviction, imprisonment for up to six months (which in certain circumstances can be increased to 12 months) or a fine of up to £5,000 (which is the statutory maximum) or both; and on conviction and indictment, imprisonment for up to seven years or an unlimited fine or both.43

The penalties for errors in tax returns and the documents regime apply to all the major taxes, including corporation tax, income tax, capital gains tax, inheritance tax, VAT and stamp duty land tax. The amount of the penalty will be a percentage of the amount of tax at stake (i.e., the tax that would have gone unpaid if the error had not been discovered). This is known as the 'potential lost revenue'. The penalty percentage depends on the degree of culpability based on a person's behaviour. A penalty may be reduced depending on whether disclosure of the error was prompted by HMRC or unprompted; and on the quality of such disclosure. A higher penalty can apply to an offshore matter. HMRC has the discretion to reduce a penalty below normal minimum levels if it thinks it is right in special circumstances to do so.

Taxpayers may be liable to penalties if they fail to notify HMRC, by the relevant deadline, that they are liable to pay tax. As with penalties for inaccuracies, penalties for failure to notify are calculated by multiplying the potential lost revenue by a percentage that is determined by the taxpayer's behaviour.

Penalties apply to individuals within the self-assessment regime who do not pay income tax, capital gains tax or Class 4 National Insurance contributions by the 31 January deadline. Under the current regime, late paid corporation tax attracts only interest but not penalties, unless a company deliberately or recklessly fails to pay the right amount on an instalment date. A new penalty regime for late paid corporation tax will be brought into effect, though the timing and exact details of implementation of this regime are yet to be announced.

In respect of late filings, under Schedule 55 to the Finance Act 2009, penalties apply to individuals within the self-assessment regime who do not file their tax returns by the deadlines. The default surcharge regime combines late payment and late filing penalties for VAT returns. This regime applies as soon as a VAT return or payment is late. The penalty is based on a percentage of the VAT due, which starts at zero per cent and rises to 15 per cent where there have been more than five defaults in a default period. Penalties also apply to companies that do not file tax returns by the deadline, which is 12 months from the end of their respective accounting period.44

Penalties for a careless (non-deliberate) failure to notify, for late paid tax or for late filing do not apply if there is a reasonable excuse for not complying with the rules.

A tougher penalties regime applies to non-compliance involving an offshore matter especially where arrangements for exchange of information are lacking with that territory. The level of penalty is based on the taxpayer's behaviour that leads to the understatement of tax, and is linked to the tax transparency of the territory in which the income or gain arises. The maximum penalty for offshore tax evasion is set at 200 per cent of the tax due (as opposed to the standard maximum rate of 100 per cent of the tax due).

HMRC may also apply a penalty to a person other than the taxpayer where the taxpayer submits an erroneous document to HMRC that results in an excess reclaim or underpayment. This only applies where HMRC can show that the other person deliberately supplied or withheld information with the intention that the taxpayer's document would contain an error.

Any penalty determination may be appealed to the Tax Tribunal, which may set it aside, confirm, increase or reduce it.45

Tax claims

i Recovering overpaid tax

The most common causes of output VAT overpayments are simple error, or decisions from the courts and tribunals that overturn a previously accepted tax treatment. Claims for overpaid output VAT must be made within four years of the end of the relevant tax return.

Claims for the recovery of under-recovered input VAT must be made within a period of four years from the date on which the return was made.46

The most prominent source of tax overpayments for other taxes has arisen from decisions of the Court of Justice of the European Union (CJEU) that domestic legislation was incompatible with a taxpayer's EU rights, and that a tax levy was therefore not due.47 Similar issues can arise under double tax treaties.48

Taxpayers have a right to adjust returns for direct taxes within 12 months of the date of submission of the return. Where this period has expired,49 there are a number of other remedies that can be considered.

First, the High Court retains an inherent jurisdiction to hear claims in damages and restitution unless implicitly or explicitly excluded by statute.50 While the High Court has such an inherent jurisdiction, access to restitution claims in respect of taxation matters has been significantly curtailed by both legislation and by recent case law. The UK courts have not generally been in favour of allowing taxpayers to avoid statutory deadlines by way of restitution claims. In the past, taxpayers have sought to bring restitution claims for monies paid under a mistake of law because this appeared to give a very generous limitation period. In November 2020 the UK Supreme Court handed down a further decision in the long running case of FII Group Litigation v. HMRC.51 In FII the UK Supreme Court clarified the position on extended limitation periods, finding that time begins to run from the date on which a taxpayer could have reasonably discovered it had a worthwhile claim to bring. Until the FII decision, it was generally understood that time only began to run from the date on which a court issued a final ruling which confirmed the existence of a claim.

A simpler route arises under Paragraph 51A of Schedule 18 to the Finance Act 1998. This allows for the recovery of overpaid corporation tax, subject to a limitation period of four years after the end of the relevant accounting period. There are similar provisions for income tax.52 It is also subject to a defence that the mistake must not have been in accordance with 'practice generally prevailing at the time'. However, as of 14 January 2014, this defence cannot apply where the claim seeks to enforce EU rights.53 HMRC will generally seek to rely on this defence where possible.

HMRC charges interest on underpayments of tax, and pays interest on overpayments of tax. However, the rates paid to HMRC are significantly higher than the rates paid to the taxpayer. Interest is generally paid on a simple basis.

The Supreme Court in Littlewoods54 considered whether simple interest amounted to an adequate remedy in the context of VAT, and concluded that it was.

In Prudential55 the Supreme Court reached a similar conclusion for direct taxes.

ii Challenging administrative decisions

As well as challenging the basis on which HMRC decisions are made, taxpayers may also challenge the way they are made, including their fairness, through judicial review.56 This arises, for example, where HMRC changes its view about the tax implications of a given set of circumstances, but it can also arise where a taxpayer considers HMRC has made a decision that is contrary to their statutory powers, for example, a breach of EU or human rights law. The absolute deadline for a judicial review application is three months from the decision being challenged; however, the application must be made 'promptly', and the courts have no tolerance for delay.57 Judicial review is a remedy of last resort, and is usually only successful in cases of conspicuous unfairness where no other remedy is available.

Applications must be made to the High Court, although the High Court may choose to transfer cases to the Upper Tribunal (although note comments made earlier concerning the Tribunal's jurisdiction).58

iii Claimants and related parties

For both direct and indirect taxes, claims for the recovery of overpaid tax can only be made by the person who paid the tax, although it is possible in some limited circumstances for the right to be assigned (primarily in VAT cases).

There have been attempts to argue that the end payer of a VAT charge bring a claim in restitution against HMRC to recover overpaid VAT. However, the most recent of these was unsuccessful at the level of the Supreme Court.59 It remains theoretically possible for end users to bring claims against HMRC where it has become impossible to recover from a supplier, although such claims would be difficult.

While claims for overpaid VAT can only be made by the taxpayer, it is possible for third parties to appeal the rejection of such a claim where they have an economic interest in the outcome. This can be useful where a supplier is unwilling to challenge HMRC, as it will allow a customer to obtain clarification about a VAT position.


As a general rule, the Tax Tribunal has no power to award costs to the successful party (except in complex cases and VAT cases that began before 1 April 2009). The Tax Tribunal can, however, make an order awarding the costs of (or incidental to) the hearing against any party (including one that has withdrawn its appeal) if it considers that party has 'acted wholly unreasonably' in connection with the proceedings.60 There is a growing body of case law concerning the interpretation of 'unreasonable' conduct.61 For complex cases, the High Court costs regime applies (i.e., the losing party pays the costs of the winning party) but with the caveat that the taxpayer can opt out of that regime within 28 days of the case being classified as complex – in which case there will be no costs whether the taxpayer wins or loses.62 The rationale behind this is that a taxpayer should not be deterred from taking an appeal by the risk of having costs awarded against him or her.

In the Upper Tribunal, the High Court and the higher courts costs are, in principle, recoverable by the winning party. However, the rules governing their recovery are complex.

The Rees Practice

HMRC is willing in appropriate circumstances, and in particular where they are appealing against an adverse decision, to consider waiving any claim to costs in cases before the Upper Tribunal or the appeal courts, or to consider making other arrangements (this may also extend to cases before the Tax Tribunal). This is known as the 'Rees Practice'. Application of the Rees Practice is vanishingly rare. It will only be applied where there is a risk of financial hardship to the taxpayer and the appeal involves a point of law, the clarification of which will benefit taxpayers as a whole. In general it will only be used where HMRC wishes to have a point of law clarified.

Alternative dispute resolution

HMRC has long been open to engaging in settlement discussions with taxpayers; however, in recent years it has increased its use of formal ADR procedures.

ADR is a different method of dealing with tax disputes. It is a confidential process between the taxpayer and HMRC that aims to help resolve disputes or reach an agreement on issues that otherwise need to be decided by the Tax Tribunal and, as necessary, the courts.

The ADR process broadly involves an independent person from HMRC (a facilitator) who has not previously been involved in the dispute mediating between the taxpayer and the HMRC officer dealing with the case to try to broker an agreement between them. Entering into the ADR process does not affect the taxpayer's internal review and appeal rights discussed above.

Cases involving tax avoidance schemes or arrangements are generally unsuitable for ADR. If the taxpayer has participated in a scheme disclosed to HMRC under the Disclosure of Tax Avoidance Schemes (DOTAS) regime, or an arrangement that HMRC considers to be a tax avoidance scheme, it is unlikely that HMRC will consider ADR to be appropriate. HMRC guidance confirms that ADR cannot be used for accelerated payment and follower notices. The accelerated payment and follower notice regime was introduced in 2014 with a view to countering the proliferation of tax avoidance. The regime seeks to reverse what would otherwise be the cash flow advantage to the taxpayer of tax avoidance, given the UK's reliance for the most part on a self-assessment tax system.

Taxpayers are encouraged to ask HMRC to consider using ADR by means of an online form found on their website. HMRC will respond within 30 days with an answer as to whether ADR is appropriate for resolving the dispute. If so, the taxpayer will be bound by the terms agreed to when completing the online form.

On 15 June 2020, the Tax Tribunal published a practice statement63 on the use of ADR in tax disputes once an appeal has been made to the Tax Tribunal. HMRC currently only uses ADR for cases that have been categorised as standard or complex.64 If HMRC accepts an application, the taxpayer must inform the tribunal as soon as possible. The Tax Tribunal will usually stay proceedings for 150 days to facilitate the use of ADR, although the taxpayer may request additional time if required. However, if a hearing date has been set, the Tax Tribunal will usually only stay proceedings if it is satisfied that the hearing can go ahead on that date if ADR does not resolve the dispute. Once the ADR process has been completed, the taxpayer must let the Tax Tribunal know whether the dispute has been resolved as soon as possible.

The practice statement concerns only applications for ADR after an appeal has been made but notes that ADR can be used before; in such cases, taxpayers should discuss ADR with HMRC directly. In addition, the practice statement stresses that using ADR does not affect statutory appeal rights or time limits.

In an update to its guidance on 25 June 2020, HMRC has confirmed that taxpayers may apply for ADR at any stage of an enquiry and at any stage of an appeal before the Tax Tribunal.65


The legislative approach to tax avoidance has involved:

  1. The DOTAS regime first introduced in 2004 with subsequent tightening of the rules aimed at identifying avoidance arrangements at an earlier stage and counteracting the perceived abuse.
  2. The introduction of targeted anti-avoidance provisions within new legislation.
  3. The introduction of principle-based anti-avoidance legislation (e.g., the group mismatch rules).
  4. The introduction of the General Anti-Abuse Rule (GAAR) from July 2013 under Part 5 of the Finance Act 2013.
  5. The introduction of follower notice and accelerated payment regime under Part 4 of the Finance Act 2014. This requires the upfront payment of tax in advance of resolution by HMRC or the courts in respect of a notifiable tax avoidance scheme under the DOTAS provisions, or where a case has been decided in relation to an arrangement the main purpose of which is to secure a tax advantage, and HMRC believes the ruling involves a principle that is applicable to another taxpayer, or is subject to the GAAR. The provisions also provide for tax-geared penalties for failing to make upfront payments. These measures apply from 17 July 2014.
  6. The Promoters of Tax Avoidance Scheme (POTAS) legislation targeting persistent promoters of tax avoidance schemes who are uncooperative, or whose schemes are regularly defeated.
  7. Penalties for taxpayers using schemes counteracted by the GAAR.
  8. A requirement for large businesses to publish their tax strategies.
  9. Proposed sanctions for serial avoiders and promoters.
  10. Significantly enhanced exchange of information with overseas territories including low-tax jurisdictions.
  11. The various G20 and Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) initiatives aimed at countering perceived tax avoidance by multinational companies.

Below, some of the above approaches are briefly considered.

i DOTAS rules

The Finance Act 2004 introduced a set of intricate disclosure requirements that are imposed on promoters and users of certain tax schemes and arrangements. Effectively, the DOTAS rules oblige taxpayers or their advisers to inform HMRC about certain arrangements for avoiding tax. The rules were designed to enable HMRC to identify at a much earlier stage tax-avoidance schemes it was likely to find unacceptable, with a view to introducing swifter and more targeted legislation in response. These DOTAS requirements have gone through extensive amendments to widen and strengthen their effect and scope to better enable HMRC to close down tax-avoidance schemes and cover a much wider range of transactions.

The DOTAS rules apply to arrangements that are expected to produce an advantage in relation to:

  1. income tax;
  2. corporation tax or capital gains tax;
  3. inheritance tax;
  4. national insurance contributions;
  5. stamp duty land tax;
  6. the annual tax on enveloped dwellings (ATED); or
  7. the apprenticeship levy.

The rules vary somewhat depending on which tax is potentially being avoided. A separate regime applies to VAT (DASVOIT), which since January 2018 has been expanded to cover all indirect taxes and align it more closely to the direct tax DOTAS regime.

In both cases, the legislation applies to 'notifiable arrangements' (and 'notifiable proposals') that have as a main expected benefit the obtaining of a UK tax advantage and that fall within any one of certain widely drawn 'hallmarks'.

The regime is now also used as a trigger to apply to following other regimes:

  1. accelerated payments;
  2. higher risk promoters;
  3. serial tax avoidance; and
  4. restriction of reasonable care defence in defeated avoidance cases.

ii General anti-abuse rule

Part 5 of the Finance Act 2013 took the significant step of introducing a GAAR to the UK, with effect from 17 July 2013. HMRC has also published and updated extensive guidance about the scope, objectives and application of the GAAR.66

The GAAR applies to:

  1. corporation tax;
  2. income tax;
  3. capital gains tax;
  4. petroleum revenue tax;
  5. inheritance tax;
  6. stamp duty land tax;
  7. annual tax on enveloped dwellings; and
  8. the diverted profits tax and apprenticeship levy.67

The GAAR can also apply to arrangements where UK tax advantages have been obtained from the benefits and rights derived under any double tax treaty. VAT is excluded from its scope, although VAT is subject to the 'abuse of rights' principle which creates a similar result.

The GAAR is intended to be a free-standing regime that comes into operation when the application of all other tax rules (including targeted anti-avoidance rules – too many to enumerate here) applied purposively may not defeat the tax planning.

The purpose of the GAAR is to counteract tax advantages arising from tax arrangements that are abusive. However, it is not sufficient that the arrangement seeks to secure a tax advantage; it must do so in a way that is considered abusive. Therefore, there is a relatively high threshold for showing that a scheme is abusive.

The objective test for abuse is whether entering into the tax arrangements, or carrying them out, cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances (the double reasonableness test).68 If the GAAR is invoked in an appeal, HMRC must show the tribunal or court that the tax arrangements are abusive and that the adjustments made to counteract the tax advantages arising from the schemes are just and reasonable.

The GAAR's counteraction measures are currently subject to the usual appeals procedure, with normal time limits. HMRC have contended that they have been prevented from taking certain procedural steps within the 12-month limit by taxpayer obstruction and that this has prevented any challenge under the GAAR and in some cases the ability to challenge the arrangements under other enquiry provisions has also been lost. It was therefore announced in the Budget 2018 that the current system of Provisional Counteraction Notices will be replaced by protective GAAR notices that will enable HMRC to continue enquiries beyond the current 12-month limit. Since 22 July 2020, an HMRC officer has been able to give a protective GAAR notice to enable HMRC to make counteracting adjustments before the GAAR procedural requirements have been completed.69 A protective GAAR notice must be given within the ordinary assessing time limit applicable to the proposed adjustments unless a tax enquiry is in progress, in which case the notice can be given at any time until (but no later than when) the enquiry is completed.70 A recipient of such a notice cannot appeal against the notice itself, but can appeal against the making of the adjustments specified in the notice.71

Any appeal against the specified adjustments is stayed until the earlier of when a final GAAR counteraction notice is given after the GAAR procedure has been complied with or 12 months after the protective GAAR notice was given.72

The Finance Act 2016 introduced a new penalty for all cases successfully counteracted under the GAAR – a penalty of 60 per cent of the counteracted tax will be charged in respect of tax arrangements entered into after 15 September 2016. The penalty can also challenge the imposition or amount of the penalty by making an appeal. A GAAR penalty can only be imposed if a number of conditions are satisfied, including that a final GAAR counteraction notice has been given. Although a protective GAAR notice is treated as if it had been given as a final GAAR counteraction notice if the taxpayer does not appeal against the making of the adjustments specified in the notice, the notice is not treated as a final GAAR counteraction notice for the purposes of the GAAR penalty. Consequently, a final GAAR counteraction notice must actually be given to a taxpayer in order for that taxpayer to be liable to pay a GAAR penalty.73

The Finance Act 2021 came into force on 10 June 2021. As expected, it extended the application of the GAAR to partnerships:

  1. HMRC are able to apply the GAAR to partnerships, with counteraction taking place through the partnership statement and then carried through to the partners benefiting from the tax advantage (i.e., the GAAR procedure now works consistently with how HMRC conducts partnership tax enquiries and amends tax returns in respect of partnerships);
  2. any GAAR penalty will be levied on the partners and based on the value of each partner's counteracted advantage; and
  3. the representative member of a partnership benefits from the existing safeguards, such as the right to make representations, the right to appeal (where relevant) and the GAAR panel's role in providing an independent review.

iii Accelerated payment and follower notice regime

The Finance Act 2014 introduced new provisions, which came into force in July 2014, under which HMRC has the power in certain circumstances to require payment of disputed tax in advance of the ultimate resolution of the taxpayer's dispute.74

HMRC may issue an accelerated payment notice (APN) in circumstances where HMRC has opened an enquiry into the taxpayer's return or an appeal is ongoing.75 (Where a notice is issued to a partner and an enquiry is opened into the partnership tax return, the notice is known as a partner payment notice (PPN), although the provisions are otherwise near identical.)76 The return or claim must77 have been made in respect of a tax advantage arising from the arrangements in question. Further to this, one of the following requirements must be met:

  1. HMRC has given the taxpayer a follower notice in relation to the same return, claim or appeal;
  2. HMRC has allocated a DOTAS reference number to the tax arrangements, or the scheme was included on HMRC's list of users who may be required to make an accelerated payment; or
  3. HMRC has issued a counteraction notice under the GAAR and at least two members of the GAAR Advisory Panel consider that entering into the tax arrangements was not a reasonable course of action.78

An APN or PPN must specify the amount of the payment.79 The taxpayer has 90 days to object in writing, following which HMRC will confirm, withdraw or, where the taxpayer objects to the amount specified, amend the APN or PPN. It is not possible to appeal the giving of an APN or PPN to the Tax Tribunal, but, depending on the circumstances, it may be possible to commence judicial review proceedings against the giving of the notice before the High Court.80 If the taxpayer fails to pay the APN or PPN by the relevant date, HMRC may issue penalties, beginning at 5 per cent of the amount in question.81

HMRC may issue a follower notice in circumstances where it considers that there has been a final judicial ruling on the issue relevant to the disputed tax in question. The provisions operate in a similar fashion to those for APNs.82 The notice must be issued within one year of the later of the date of the ruling or the date on which HMRC received the claim or appeal, and cannot be issued to the same taxpayer in relation to the same tax arrangement, tax advantage, ruling or period. The notice must identify the ruling HMRC considers to be relevant, its reasoning for this belief, the effects of the taxpayer objecting to the follower notice and the fact that penalties may apply if the taxpayer does not take corrective action.83 The taxpayer may amend the return (and notify HMRC) or object to the follower notice within 90 days by written representation.84 HMRC will consider any objection and either confirm or withdraw the follower notice; there is no right of appeal from a confirmation of the follower notice to the Tax Tribunal. However, as with APNs and PPNs, it may be possible depending on the circumstances to bring a claim for judicial review in the High Court. Penalties of up to 50 per cent of the disputed tax may apply if the taxpayer refuses to take corrective action, although this is subject to HMRC's discretion.85

Follower notices, since their introduction, have received significant criticism and have been the subject of a number of judicial review claims. Besides cases where the APNs or PPNs were invalidated because of the invalidity of the FNs on which the APNs or PPNs were based, all of these claims have been dismissed and the notices have been found not to be unreasonable, disproportionate, ultra vires or otherwise unfair or in breach of Article 1 of Protocol 1 of the European Convention of Human Rights. One important exception to this is a decision of the Supreme Court in July 202186 which precludes HMRC from issuing follower notices unless it has reasonably taken the view that there is no scope for a reasonable person to disagree that the earlier ruling denies the taxpayer the advantage. It is possible that this decision will give rise to a greater number of successful challenges by taxpayers and changes to the legislative basis for the issue of follower notices.


The OECD's 15-part BEPS Action Plan is designed to combat the shifting of profits from a high-tax jurisdiction to a low-tax one. The UK has taken a very proactive approach to the implementation of the 15 Actions. In March 2016, the UK government confirmed the implementation of hybrid mismatches (Action 2),87 interest deductibility (Action 4),88 intellectual property (Part of Action 5 (Harmful Tax Practices)),89 transfer pricing (Actions 8–10)90 and country-by-country reporting (Action 13).91 The UK considers that its current controlled foreign companies (CFC) rules are compliant with Action 3 (controlled foreign companies), although on 26 October 2017 the EU Commission issued a preliminary decision concluding that the provisions that either fully or partially exempted non-trading finance income of CFCs amount to state aid contrary to the Treaty on the Functioning of the European Union.92 According to the Commission, the UK provisions selectively benefit groups whose non-resident finance income derives from investments that do not produce UK tax deductions or interest income from third parties over those groups who do. On 2 April 2019, the European Commission announced its final decision which confirmed its view that the rules amounted to state aid.93 The UK government brought an annulment application94 before the General Court against this decision on 12 June 2019 and is currently awaiting judgment on its application.

On 7 June 2017, the UK signed the OECD's Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI). The UK then deposited its instrument of ratification and final list of reservations and notifications on 29 June 2018. The MLI entered into force in the UK on 1 October 2018, and came into effect in the UK for UK tax treaties in 2019 (the dates varied depending on the specific UK tax).95 The MLI introduces changes to various articles of UK tax treaties that follow the OECD Model Convention, adds at least one new article (Article 29 (entitlement to benefits)), and inserts a preamble to clarify that the purpose of UK tax treaties is to avoid double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance.

The UK has chosen to apply Part VI (Arbitration) of the MLI. In the absence of resolution by mutual agreement between the tax authorities after two years, taxpayers will be entitled to request that their case be submitted to arbitration. In relation to disclosure of aggressive tax planning (Action 12), the UK has introduced a new disclosure scheme in respect of VAT, DASVOIT (the DOTAS regime has existed since 2004 and GAAR since 2013). This supersedes the previous disclosure regime VAT Disclosure Regime (VADR) which will now only apply to arrangements entered into before 1 January 2018. In an attempt to combat aggressive tax planning arrangements, DASVOIT extends the scope of duty to disclose beyond VAT, to include 17 other indirect taxes. It also broadens the obligation to disclose to include promoters of the schemes. Like its predecessor, DASVOIT runs in conjunction with DOTAS. However, the UK has elected not to adopt most of the provisions targeting abuse involving permanent establishments, other than the anti-fragmentation rule (in Article 5(4.1) of the OECD Model Convention and the revised definition of closely related persons (in Article 5(8) of the OECD Model Convention).

Double taxation treaties

Double taxation treaties are primarily aimed at reducing juridical double taxation. A double taxation treaty is an agreement made between (usually) two jurisdictions, which allocates taxing rights on various items of income or gains between them. Double taxation treaties typically alleviate double taxation by eliminating or limiting taxation in the country in which the income or gain arises (source state taxation), or by requiring the country in which the person subject to taxation is resident to grant relief for source state taxation through a credit or exemption mechanism. A double taxation treaty commonly applies to residents of one or both of the contracting states and deals with specified taxes. These are, typically, the local equivalents of income tax, corporation tax and capital gains tax, but may also cover other taxes, such as petroleum revenue tax.

Another aim of double taxation treaties is to prevent tax avoidance and evasion. The 2017 update to the OECD Model Convention introduced an explicit statement in the preamble of the convention to the effect that, in entering into the double taxation treaty, the contracting states do not intend to create opportunities for avoidance. In the UK, there are also certain anti-avoidance provisions that prevent a double taxation treaty from applying in specified circumstances. For example, Section 858 of the Income Tax (Trading and Other Income) Act 2005 provides that, in certain circumstances, a UK–resident partner of a firm that resides outside the UK or that carries on a trade that is controlled and managed outside the UK is liable to income tax on their share of the income notwithstanding arrangements under a double taxation treaty. The anti-avoidance position so far as double taxation treaties is concerned has changed significantly following publication of the OECD's BEPS Action Plans.

In theory, double taxation treaties, like any international treaties, are not directly enforceable by taxpayers; they are no more than contracts enforceable by the contracting states themselves. Rights granted to individuals under international treaties are only enforceable to the extent they are incorporated in national legislation. It is also permissible under UK law for legislation to be introduced that contradicts the terms of treaties, because the sovereignty of the Crown extends to breaching treaties. However, where a treaty has been introduced into UK law and its terms might conflict with domestic legislation that is capable of more than one meaning, then the meaning that is consistent with the treaty is to be preferred.96

The Vienna Convention on the Law of Treaties was incorporated into UK law on 27 January 1980. Its rules of interpretation are binding and it is frequently relied upon by the Tribunals and Courts in interpreting the terms of double taxation treaties.97 The commentary to the OECD conventions can be relied upon to interpret the terms of treaties that follow the OECD Model Convention.98

Double taxation treaties are incorporated into UK law by statutory instruments, which are secondary legislation that do not require passage through Parliament. The legislative power to do so is provided by Section 2 of the Taxation (International and Other Provisions) Act 2010 (TIOPA). TIOPA Section 6 provides that where the terms of a double taxation treaty have been incorporated into law via a statutory instrument, they take effect 'despite anything in any enactment' but subject to two important restrictions.

There has been considerable litigation in a multinational group context on the meaning and application of non-discrimination articles in double taxation treaties that follow the standard OECD model wording99 and from which the following principles derive.

To establish whether the UK subsidiary of a company resident in the other contracting state is subjected to other or more burdensome taxation or requirements than another similar enterprise in breach of the non-discrimination article, the relevant comparison to make is with the treatment afforded to the UK subsidiary of a UK–resident parent.100

A breach of the non-discrimination article will arise only where that difference in treatment is by reason of the foreign ownership of the UK subsidiary. In circumstances where the domestic legislation passes a tax liability from subsidiary to parent, it is permissible to refuse the same treatment to the cross-border group if the parent is not subject to UK tax. In those circumstances, the difference in treatment is not by reason of the foreign ownership, but by reason of the fact that the tax liability cannot be passed on to the parent, as it would not be liable to UK tax. Conversely, the refusal of group relief between two UK–resident subsidiaries of a common foreign parent or link company (where group relief would be available had the parent been UK–resident) would offend the non-discrimination article, as the liability of the parent company to UK tax is irrelevant to the entitlement to group relief between its resident subsidiaries.101

The UK provisions must be considered as a whole when establishing whether other or more burdensome taxation or requirements arise contrary to the non-discrimination article. In Felixstowe Dock, a UK–resident joint venture company owned by a Luxembourg company was refused the ability to surrender losses to offset the profits of other UK companies within the consortium in circumstances where, had that link company been UK resident, consortium relief would have been available. This was held by the Tax Tribunal to breach the non-discrimination article in the UK–Luxembourg treaty, even though the tax was paid by the other UK companies under ownership unconnected with the Luxembourg treaty.102

Where a UK subsidiary of a UK parent could, by invoking EU rights, override a restriction that otherwise applies under UK legislation, it may breach the non-discrimination article not to extend the same treatment to a UK subsidiary of a foreign parent, whether or not that parent is resident in another Member State.103

In Fowler v. HMRC [2020] UKSC 22, the double taxation treaty between South Africa and the UK was considered in relation to UK deeming provisions as to whether income was from employment or not. The case concerned the taxation of income from diving engagements in the UK's continental shelf waters by a South African resident diver. The Supreme Court ruled that the deeming provision in Section 15 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), which treats the income as being from self-employment rather than employment for UK income tax purposes, does not extend to the question of which article of the South Africa–UK double taxation treaty applies to those activities. The result was that the income was taxable in the UK in accordance with Article 14 (income from employment) and not South Africa in accordance with Article 7 (business profits).

The decision in Fowler effectively highlighted the difficulty in interpreting tax treaties correctly when jurisdictions differ in how they treat taxpayers. Thus, the implications of this case are likely far-reaching, as similar deeming provisions such as Section 15 ITTOIA 2005 are scattered throughout the UK's tax code, and the Supreme Court has set a high bar for how deeming provisions should be approached or interpreted for the purposes of interpreting the terms in double taxation treaties.

The UK courts' approach to the interpretation of European law

The UK courts have long been comfortable applying EU law in the context of domestic tax disputes, and have generally been willing to seek references to the CJEU in appropriate cases.

The future position is less certain now that the UK has left the European Union. A snapshot of EU law as it stands at 31 December 2020 is incorporated into domestic law by the European Union (Withdrawal Agreement) Act. It remains to be seen how the courts will apply potentially competing provisions of domestic law.

Areas of focus

HMRC and the Treasury's areas of focus in the short to medium term are likely to be driven more by events than strategy, including the covid-19 pandemic.

Although HMRC indicated that it will take a light-touch approach in the immediate aftermath of Brexit, cross-border trade issues are also likely to be a significant area of focus over the coming years. HMRC's approach to enforcement may well be driven by political events arising from relations with the European Union.

It is possible to identify likely areas of focus from HMRC's compliance yield reports, which identify the areas in which HMRC compliance activity has generated the most additional tax, as well as the amount of tax under consideration in given areas. For the 2020/21 tax year, HMRC's largest compliance gains came from its large business directorate, where it recovered £3.9 billion of VAT, £916 million of excise duty (down from £4.5 billion in the prior year), and £2.8 billion of corporation tax.

HMRC also gave an indication of the 'tax under consideration' broken down by tax area. It has changed the way it reports some of these figures from previous years, so that the 'international' category now includes general international tax issues, as well as base erosion and transfer pricing. The areas with more than £1 billion of tax under consideration are:

  1. International (£13 billion);
  2. refused repayments (£3 billion);
  3. other issues (£2.5 billion);
  4. trading computations, receipts and deductions (£2.4 billion);
  5. financial (£1.8 billion);
  6. under-declared output tax (£1.7 billion);
  7. employment issues (£1.3 billion);
  8. loss relief (£1.1 billion);
  9. Intangible Asset Regime (£1.1 billion);
  10. partial exemptions (£1.1 billion);
  11. over-claimed input tax (£1.05 billion); and
  12. group litigation orders (£1.02 billion).

HMRC has also reported its provisional fraud and error estimates in relation to covid-19 support schemes. Its central estimates for the three main schemes are:

  1. Coronavirus Job Retention Scheme (8.7 per cent);
  2. Self-Employed Income Support Scheme (2.5 per cent); and
  3. Eat Out to Help Out scheme (8.5 per cent).

There have already been high-profile challenges and arrests linked to alleged fraudulent use of these schemes, and HMRC is expected to push investigations hard during the coming 12 months.

Outlook and conclusions

2022 is likely to be an interesting year for tax practitioners. During the height of the covid-19 pandemic, HMRC's focus changed from compliance and tax collection to the administration of support schemes. Many disputes and investigations were delayed. That focus has now changed. HMRC estimate substantial elements of fraud and error in the support schemes provided during the pandemic, and have already begun investigating claims. Tax deferral schemes have also come to an end, and HMRC has returned to its default stance of a tax collector.

The recent OECD agreement on a minimum international tax rate, combined with HMRC's nudge campaign on undeclared overseas income comes alongside a number of data dumps revealing offshore tax matters. Overseas matters, and undeclared domestic income or gains will be a clear focus for HMRC in the coming years.

The UK's Tax Tribunal system is independent and can be robust, and HMRC generally conducts disputes in a fair and reasonable manner. Timescales may be extended and attitudes may harden, but HMRC's mantra of collecting the right tax at the right time is ingrained. Where it is persuaded by negotiation or by tribunal and court decisions that the taxpayer's position is correct, it will largely respect the outcome and act accordingly. There are, of course, exceptions and the Treasury has in recent years resorted to introducing legislation to counteract the effect of court or tribunal decisions it considers to be unacceptable. The Treasury has also been willing, in limited circumstances, to introduce legislation that has retrospective effect, though this will almost always be restricted measures necessary to address unacceptable tax avoidance or to clarify enforcement powers. Such measures will be subject to detailed scrutiny by Parliament. Examples of more aggressive Treasury legislation in recent years have been seen in the context of employment remuneration tax avoidance (the controversial 'loan charge') and the accelerated payment notice and follower notice legislation described above. It may be that the Treasury, buoyed by a government that has demonstrated a willingness to push previously established boundaries, may seek to introduce more aggressive measures after the transitional period for the UK's departure from the European Union ends on 31 January 2022. Regardless of oversight from the European courts, we would expect the government to abide by principles set out in various parliamentary statements over the years. These have most recently been codified in a 'Protocol on unscheduled announcements of changes in tax law' issued in 2010.104 These restrict the use of retrospective legislation to targeted tax avoidance measures that should be identified in advance. Where such tax avoidance is identified, the UK has a track record of retrospective legislation aimed at making it ineffective. That is likely to continue.


1 David Pickstone, Victor Cramer and Lee Ellis are partners, and Cristiana Bulbuc is an associate at Stewarts Law LLP.

2 The latest version of the commentary on HM Customs and Excise Litigation and Settlement Strategy (October 2017) is available at HMRC's Resolving Tax Disputes – Practical Guidance for HMRC staff on the Use of Alternative Dispute resolution in Large or Complex Cases is available at HMRC's guidance on the use of alternative dispute resolution procedures to settle tax disputes is available at (last update on 25 June 2020).

3 Connect is such other source. It is a computer system that cross-references business and individual tax records with other databases to assist in identifying fraudulent, undisclosed or wrongly disclosed activity.

4 The corporation tax self-assessment rules are set out in Schedule 18, Paragraphs 1–20A of the Finance Act 1998, as variously amended. The self-assessment regime applies to accounting periods ending on or after 1 July 1999.

5 Section 42, Taxes Management Act 1970 and Schedule 39, Paragraphs 37–65, Finance Act 2008 reduced the normal time limit for claims and elections. From 1 April 2010, the time limit is four years from the end of the accounting period to which they relate, unless a different time limit is prescribed within the legislation for that particular claim or election. Previously, the time limit was six years. Claims with regard to group relief, capital allowances, research and development tax credits, film tax relief, land remediation tax credits and vaccine research tax credits must also be made in the company's tax return. If an error or mistake has been made in a claim and subsequently discovered, the claimant may make a supplementary claim within the time allowed for making the original claim.

6 Schedule 18, Paragraph 14, Finance Act 1998, subject to specific exceptions for companies that prepare commercial accounts for a period longer than 18 months. A return must also be filed within three months from the date on which the notice requiring the return was served.

7 Schedule 18, Paragraph 3, Finance Act 1998.

8 HMRC's online corporation tax service is accessible at

9 Schedule 18, Paragraph 15, Finance Act 1998.

10 ibid., Paragraphs 24 and 25.

11 ibid., Paragraph 24.

12 ibid., Paragraph 25.

13 ibid., Paragraph 24(5).

14 ibid., Paragraph 25(2).

15 ibid., Paragraph 74(4).

16 ibid., Paragraph 32(1A).

17 ibid., Paragraph 33.

18 ibid., Paragraph 32.

19 HMRC Enquiry Manual: EM2161.

20 Schedule 18, Paragraph 32(1B), Finance Act 1998.

21 Revenue and Customs Commissioners v. Bristol & West Plc [2016] EWCA Civ 397, [2016] STI 1464.

22 Schedule 18, Paragraph 34(2), Finance Act 1998.

23 HMRC Tax Enquiries: Closure Rules, 5 December 2016 (

24 Schedule 18, Paragraphs 31A–31D, Finance Act 1998.

25 ibid., Paragraph 30.

26 HMRC Enquiry Manual: EM1953.

27 Schedule 18, Paragraph 34(2)(b), Finance Act 1998.

28 ibid., Paragraphs 41–45.

29 ibid., Paragraph 41(2).

30 Charlton [2013] STC 866, Paragraph 28; Tooth [2018] UKUT 38 (TCC); Oriel [2019] UKFTT 503 (TC).

31 Schedule 36, Paragraph 1, Finance Act 2008. Copies of documents can be produced unless the notice stipulates that originals must be submitted. A taxpayer that fails to comply with a notice may be liable to pay penalties.

32 Schedule 36, Paragraph 7, Finance Act 2008.

33 ibid., Paragraph 29.

34 ibid., Paragraph 62(1).

35 ibid., Paragraph 32.

36 ibid., Section 49C.

37 ibid., Section 49H.

38 ibid., Section 49E(6).

39 ibid., Section 49G.

40 ibid., Sections 49C and 49F.

41 Section 15, Tribunals, Courts and Enforcement Act 2007.

42 Harrison (Deceased) v. HMRC 2021 UKUT 273; KSM Henryk Zeman SP Z.o.o. v. HMRC (UT/2019/0075).

43 Section 106A(2) and (3), Taxes Management Act 1970.

44 Schedule 188, Paragraphs 14 and 18, Finance Act 1998.

45 Section 100B, Taxes Management Act 1970.

46 Regulations 29 and 34, VAT Regulations 1995 (SI 1995/2518).

47 See, for example, Joined cases C–397/98 and C–410/98 Metallgesellschaft Ltd v. IRC; Hoechst AG v. IRC ECR I–1727; case C–446/03 Marks & Spencer Plc v. Halsey (Inspector of Taxes) [2005] ECR I–10837; case C–196/04 Cadbury Schweppes [2006] ECR I–07995; case C–35/11 Test Claimants in the FII Group Litigation; case C–362/12 Test Claimants in the FII Group Litigation; case C–80/12 Felixstowe Dock and Railway Company Ltd and Others v. HMRC; Prudential Assurance Co ltd v. Revenue and Customs Commissioners [2018] UKSC 39.

48 See Section IX. See also, for example, Revenue and Customs Commissioners v. UBS AG [2007] EWCA Civ 119, [2007] STC 588; NEC Semi-Conductors Ltd v. Inland Revenue Commissioners [2007] UKHL 25, [2007] STC 1265; Commissioners for Her Majesty's Revenue and Customs v. FCE Bank plc [2012] EWCA Civ 1290, [2012] STC 462; Percival v. Revenue and Customs Commissioners [2013] UKFTT 240 (TC).

49 Schedule 18, Paragraph 15(4), Finance Act 1998 for companies and Section 9ZA (2), Taxes Management Act 1970 for individuals.

50 Autologic Plc v. IRC [2005] UKHL 54, [2006] 1 AC 118; Monro v. Revenue and Customs Comrs [2009] Ch 69; Test Claimants in the FII Group Litigation v. Commissioners of Inland Revenue [2012] UKSC 19, [2012] 2 AC 337; Prudential Assurance Co Ltd v. Revenue and Customs Commissioners [2018] UKSC 39.

51 [2020] UKSC 47.

52 Schedule 1AB, Taxes Management Act 1970.

53 Sections 231 and 232, Finance Act 2013 introducing Paragraph 51(9) and (10) of Schedule 18, Finance Act 1998; Revenue & Customs Brief 22/10; Monro v. Revenue and Customs Comrs [2009] Ch 69.

54 Littlewoods Retail Ltd v. Revenue and Customs Commissioners [2017] UKSC 70.

55 Prudential Assurance Co Ltd v. HMRC [2018] UKSC 39.

56 Simon's Taxes A5.702; R (on the application of Premier Foods (Holdings) Ltd)) v. Revenue and Customs Commissioners [2015] EWHC 1483 (Admin), [2015] STC 2384.

57 CPR 54.5(1).

58 Simon's Taxes, A5.702.

59 See Investment Trust Companies (in liquidation) v. Commissioners for HMRC [2017] UKSC 29.

60 Rule 10(1)(a) The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (SI 2009/273) (FTR) and Section 29, Tribunals, Courts and Enforcement Act 2007; Rule 35 of Tribunal Procedure (Amendment) Rules 2013 (SI 2013/477) inserted into Rule 10(1)(a), FTR that such an order also extends to 'costs incurred in applying for such costs'; 126 Rule 10(1)(b), FTR.

61 See in particular Market & Opinion Research International Limited v. HMRC [2015] UKUT 12 (TCC), Paragraphs 22–28; Gheorge Calin Cantana v. HMRC [2012] STC 2138.

62 Rule 10, FTR.

64 Rule 23(2) FTR.

65 HMRC guidance on the use of alternative dispute resolution procedures to settle tax disputes is available at

67 Section 206, Finance Act 2013.

68 ibid., Section 207(2).

69 Section 209AA Finance Act 2013; Schedule 14, Paragraphs 10 and 15, Finance Act 2020; HMRC's GAAR Guidance, Paragraphs C6.5.5 and E3.7A.2.1–E3.7A.2.3.

70 Finance Act 2013, Sections 209AA(2)-(3); HMRC's GAAR Guidance, Paragraph E3.7A.2.2.

71 Finance Act 2013, Section 209AA(6); HMRC's GAAR Guidance, Paragraphs C6.5.4 and E3.7A.2.5.

72 Finance Act 2013, Sections 209AA(7); HMRC's GAAR Guidance, Paragraph E3.7A.2.6.

73 Finance Act 2013, Sections 212A and 209AA(8); HMRC's GAAR Guidance, Paragraphs E3.7A.2.7 and E3.24.3.

74 Sections 199–233 and Schedules 30–33, Finance Act 2014.

75 ibid., Section 219(2), Finance Act 2014.

76 ibid., Schedule 36.

77 ibid., Section 219(3).

78 Ibid., Section 219(4).

79 ibid., Section 220.

80 ibid., Section 222. If the taxpayer does not make written representations, the payment date will be 90 days from the date that the accelerated payment notice was issued. If they make written representations, the payment date will be the later of 90 days from the date of issue of the accelerated payment notice or 30 days following notification of confirmation of the accelerated payment notice by HMRC (see ibid., Section 223).

81 ibid., Finance Act 2014.

82 ibid., Finance Act 2014.

83 ibid., Finance Act 2014.

84 ibid., Sections 207–208.

85 ibid., Sections 208(2) and 211.

86 R (Haworth) v. HMRC 5 [2021].

87 This was enacted in the Finance Act 2016 with effect for payments from 1 January 2017.

88 This was enacted in the Finance Act 2017.

89 This was enacted in the Finance Act 2017 with effect from 1 July 2016.

90 This was enacted in the Finance Act 2016 and has effect for all accounting periods beginning on or after 1 April 2016 for corporation tax purposes.

91 The Finance Act 2015 gave the UK Treasury authority to introduce regulations implementing country-by-country reporting. The Taxes (Base Erosion and Profit Sharing) (Country-by-Country) Regulations 2016 were subsequently made on 26 February 2016 and came into force on 18 March 2016.

92 See Official Journal of the European Union (OJ C 400, 26.10.2017, p. 10).

93 ibid., (OJ L 216, 20.8.2019, p. 1).

94 ibid., (OJ C 263, 05.08.2019, p. 62).

95 The OECD's Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS entered into force in the UK on 1 January 2019 for taxes withheld at source, on 1 April 2019 for Corporation Tax, and on 6 April 2019 for Income Tax and Capital Gains Tax (see The date of modification for individual UK tax treaties is dependent on treaty partners depositing their own instruments of ratification, acceptance or approval. For the current version of any individual tax treaty see

96 Lord Diplock in Salomon v. Customs & Excise [1967] 2 QB 116 at 143.

97 See Bayfine UK v. Revenue and Customs Commissioners [2011] EWCA Civ 304, [2011] STC 717; Revenue and Customs Commissioners v. Smallwood & Anr [2010] EWCA Civ 778, [2010] STC 2045; Paul Weiser v. The Commissioners for Her Majesty's Revenue & Customs [2012] UKFTT 501 (TC); Anson v. Commissioners for Her Majesty's Revenue and Customs [2015] UKSC 44, [2015] 4 All ER 288.

98 See The Felixstowe Dock and Railway Company Limited v. Commissioners for Her Majesty's Revenue and Customs [2011] UKFTT 838 (TC), [2012] SFTD 366, Paragraph 19.

99 See Revenue and Customs Commissioners v. UBS AG; Test Claimants in the Thin Cap Group Litigation; Commissioners for Her Majesty's Revenue and Customs v. FCE Bank plc; The Felixstowe Dock and Railway Company Limited v. Commissioners for Her Majesty's Revenue and Customs; Percival v. The Commissioners for Her Majesty's Revenue & Customs [2013] UKFTT 240 (TC), [2013] STI 2308.

100 Boake Allen Ltd & Ors v. Revenue and Customs Commissioners [2006] EWCA Civ 25; [2006] STC 606, and [2007] UKHL 25, [2007] 1 WLR 1386.

101 Commissioners for Her Majesty's Revenue and Customs v. FCE Bank plc; The Felixstowe Dock and Railway Company Limited.

102 The Felixstowe Dock and Railway Company Limited v. Commissioners for Her Majesty's Revenue and Customs [2011] UKFTT 838 (TC), [2012] SFTD 366.

103 This argument has in the context of the disallowance of interest deductions for thin capitalisation reasons: Test Claimants in the Thin Cap Group Litigation, where while upholding the argument in principle, the court found it was inapplicable to those circumstances. It has also been litigated in relation to cross-border group relief: Finnforest UK Limited & ors v. Revenue and Customs Commissioners [2011] UKFTT 342 (TC), [2011] SFTD 889.

The Law Reviews content