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UK: Tax controversy in the UK

12 September 2011

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Revisions of previous guidance is showing signs of a more conciliatory approach by the UK tax authorities. However they are still prepared to litigate, points out Helen Buchanan of Freshfields Bruckhaus Deringer

New tax tribunals

We have seen huge procedural changes in the past few years, including the introduction of a new UK tax tribunal system in 2009 and an overhaul of Her Majesty's Revenue and Customs' (HMRC's) information-gathering powers in 2008.

There is now a two-tier tribunal system: the First-tier Tribunal (FTT) replaced the General and Special Commissioners and other tax specialist tax tribunals; the Upper Tribunal (UT) replaced the High Court for most tax appeals. There is some overlap between the judges who sit at the different levels, as UT judges also sit in the FTT. Most tax appeals are heard first at the FTT. Appeals on points of law from the FTT may be made (with permission) to the UT, then to the Court of Appeal and the Supreme Court. In some cases leapfrogging to a higher tribunal or court is possible.

New procedural rules were introduced at the same time. Key differences between the old and the new regimes include the new HMRC review, new procedures for notifying appeals to the FTT and UT, different costs regimes and a new power for the UT to deal with administrative law (or judicial review) issues. The new rules have generally bedded down well but there remain traps for the unwary and practice continues to develop.

Since 2008, HMRC have broadened and conformed information-gathering and dawn-raid powers across all taxes. These include 'unnamed taxpayer' powers – these allow HMRC to give someone written notice requiring information or documents for checking the tax position of unknown persons or classes of persons (see below).

HMRC approach to litigation

In recent years, HMRC have cracked down on UK tax evasion and tax avoidance, with particular focus on individuals evading UK tax by hiding money offshore or failing to declare their trading income. Their initiative in this area include amnesties and widespread use of information powers to flush out tax evaders. For example, in 2009/2010, HMRC used unnamed taxpayer notices to demand information about offshore bank accounts from more than 300 banks with a presence in the UK. Other HMRC initiatives have targeted under-declared trading profits from plumbers, doctors, dentists, accountants and lawyers.

Another trend is the number of tax avoidance schemes used by high net worth individuals (HNWIs) and corporates that are being litigated. The tax authorities have had some good wins in the tribunals and lower courts, but few cases have made it to the Supreme Court. That appears to be changing – the Supreme Court is now showing some interest in tax avoidance cases, most notably the TowerMCashback decision, decided earlier this year against the taxpayer.

The increased focus on litigation caused something of a backlog within HMRC and, in recent months, there have been signs of a slightly more conciliatory approach. For example, an initiative was announced in 2010 for settling controlled foreign company (CFC) disputes. HMRC have also run an alternative dispute resolution (ADR) pilot, focusing on mediation. Freshfields has worked with HMRC in formulating their ADR strategy, including joining senior HMRC staff on a meditation training course.

In July 2011, HMRC refreshed their Litigation and Settlements Strategy (LSS) (first published in 2007), which encourages consistency in the way HMRC resolve disputes. The emphasis now is on working collaboratively with taxpayers to resolve disputes effectively. Our own experience of this is that some longstanding disputes are now progressing more constructively. However, the key bright line rules of the LSS are unchanged: each dispute must be considered on its own merits, and resolved in accordance with law; HMRC will not take part in package deals which trade unrelated points off against each other; decisions on whether to settle or take a point to litigation will be based on which routes secures the right tax most efficiently; for disputes that are genuinely all or nothing, HMRC will not reach an out of court settlement for less than 100% of the tax, interest and penalties at stake if it believes its arguments are likely to succeed; and HMRC will not hold out for low settlements where its arguments are weak; for disputes where there is a range of possible figures for tax due, the terms for settlement will take account of what secures the right tax most efficiently.

Administrative law

There has been a renewed focus on administrative law, with a number of tax-related judicial review cases progressing through the courts. These include the Gaines-Cooper case on whether HMRC are bound by published guidance (the Supreme Court decision is expected in the autumn). And the Court of Appeal has recently decided against two taxpayers (Huitson and Shiner) who were challenging retrospective anti-avoidance measures based on perceived breaches of human rights and EU fundamental freedoms.

EU claims

Other European law challenges, based on the freedom of establishment or free movement of capital, continue to progress through the courts, but activity in this area is certainly past its peak. The tide appears to have turned somewhat since the early taxpayer successes and HMRC have had some important wins in the Court of Appeal and Supreme Court. Cases continue to be referred to the European Court of Justice: the franked investment income (FII) GLO was referred back to the ECJ by the Supreme Court (five years after the original ECJ decision); and a new GLO is challenging the UK's 1.5% stamp duty and stamp duty reserve tax charges on issues and transfers of shares into depositary and clearance services, after the ECJ's decision in the HSBC case.

Global investigations

Globally, there has been an increase in regulatory and white collar investigations, including dawn raids. These may involve HMRC. For example, an investigation about bribes, money laundering or cartels may spawn a related tax investigation. Correspondingly, a tax investigation which uncovers backdating of documents or other irregularities may spawn wider regulatory or even criminal investigations in the UK or abroad. This is likely to be a growth area after the introduction of tougher anti-bribery rules in many jurisdictions and Freshfields' global investigation practice is working on a number of cross-discipline, cross-border investigations, including contractual disputes involving overseas taxes.

Danny Beeton
 

Freshfields Bruckhaus Deringer
65 Fleet Street
London EC4Y 1HT
UK
Tel: +44 20 7832 7082
Email: danny.beeton@freshfields.com
Website: www.freshfields.com

Danny was previously a partner and global head of transfer pricing in an international accounting firm. He is head of transfer pricing economics and advises on the pricing of all types of transactions, the valuation of intangible assets and the attribution of profit to permanent establishments, with a particular focus on transfer pricing risk management and dispute resolution. He is well known as an international speaker and author on transfer pricing.

Danny's recent experience includes:

  • an expert witness role in a successful HMRC pilot of mediation
  • assistance to a European company in a Chinese national transfer pricing audit
  • assistance to a well known hotel chain in a Caribbean island tax dispute
  • application of concepts accepted in recent international transfer pricing cases to clients' transfer pricing compliance documentation, for example the application to clients' related party interest rate policies of the concept of "implicit parental support" as accepted in the GE Capital Canada decision.

Danny is listed in Legal Media Group's The World's Leading Transfer Pricing Advisers and is a member of HMRC's Transfer Pricing Practitioner and Thin Capitalisation Groups, and the CBI's International Tax Working Group. He is editor-in-chief of the journal Transfer Pricing Forum and chairs the Transfer Pricing panel of the annual IFA/IBA Tax conference. He received his PhD in economics from Queen Mary College, London.


Helen Buchanan
 

Freshfields Bruckhaus Deringer
65 Fleet Street
London EC4Y 1HT
UK
Tel: +44 20 7716 4884
Email: helen.buchanan@freshfields.com
Website: www.freshfields.com

Helen Buchanan is a tax partner and jointly heads Freshfields Bruckhaus Deringer's tax disputes and investigations group. Most of her time is spent advising banks and multinationals on confidential tax disputes involving HM Revenue & Customs. She also advises on contractual disputes involving tax. She has taken a number of cases to the tax tribunals but also has a track record for settling disputes out of court, and she is a strong advocate for alternative dispute resolution techniques in the tax field. Her recent work includes advising on tax disputes relating to:

  • employee benefit arrangements (including those involve lease premiums, securities options, employee benefit trusts, pensions and dual contracts);
  • structured finance (including stock lending, leasing, film financing and other forms of structured finance);
  • EU and treaty based claims (including claims relating to group relief and stamp taxes); and
  • tax settlements and group payment arrangements.

Philip Croall
 

Freshfields Bruckhaus Deringer
65 Fleet Street
London EC4Y 1HT
UK
Tel: +44 20 7832 7172
Email: philip.croall@freshfields.com
Website: www.freshfields.com

Philip Croall is a partner in Freshfields Bruckhaus Deringer's commercial disputes group. He specialises in advising clients on tax and regulatory investigations. Philip recently led the team advising AstraZeneca in proceedings before the First-tier Tax Tribunal concerning among other things complex transfer pricing issues, the case settled shortly before a three month trial; it was one of the most factually complex tax cases to be brought before the English courts. He has also advised Ford, BMW, Soc Gen, NM Rothschild and Thomson Reuters in proceedings in the High Court relating to overpaid VAT dating back, in some cases, to the 1970s.

Philip has extensive experience of large scale litigation in both the tax and commercial sphere. He regularly speaks at conferences in relation to tax disputes and is the co-author of Transfer Pricing and Dispute Resolution: Aligning strategy and execution, which was published in July 2011.


Gillian Eastwood
 

Freshfields Bruckhaus Deringer
65 Fleet Street
London EC4Y 1HT
UK
Tel: +44 20 7832 7284
Email: gillian.eastwood@freshfields.com
Website: www.freshfields.com

Gillian Eastwood is a partner in Freshfields Bruckhaus Deringer's financial institutions disputes group and jointly heads our tax disputes and investigations group. She specialises in international regulatory and litigation issues that affect banks, pension funds, insurers and reinsurers and other professional advisers and intermediaries. Her tax disputes experience includes advising multinational banks on civil and criminal aspects of complex tax investigations and disputes.


Michael McGowan
 

Sullivan & Cromwell
1 New Fetter Lane
London EC4A 1AN
UK
Tel: +44 20 7959 8900
Fax: +44 20 7959 8950
Email: mcgowanm@sullcrom.com
Website: www.sullcrom.com

Leading UK tax lawyer Michael McGowan joined Sullivan & Cromwell as a partner in 2008.

He concentrates on UK corporate taxation and has extensive experience in M&A, corporate restructuring, offshore mutual funds, real estate financings, structured finance, securitisations, project finance and derivatives. He also has significant experience advising on cross-border transactions, including tax controversies involving such transactions.

Michael has also worked extensively on a range of receivables, mortgages and whole-business securitisations, including Canary Wharf and Broadgate securitisations in the late 1990s, the securitisation of the Trafford Shopping Centre; and a large real estate securitisation undertaken by a major high street retailer.

Michael's recent experience includes advising:

  • Sempra Energy (US) on the sale of the global metals/oil and European power/gas businesses of its RBS-Sempra global commodities joint venture;
  • Rio Tinto (UK) on the divestment of its Alcan Global Packaging business;
  • EDF (France) in its $1.85 billion acquisition of a 51% stake in SPE (Belgium);
  • AIG (US) in the $16.2 billion sale of its American Life Insurance division (Alico) to MetLife and the $742 million sale of HSB (US) to Munich Re (Germany);
  • Tata Tea (GB) Investments, as seller together with Tata (UK), in the $4.1 billion sale of Energy Brands (US) to The Coca-Cola Company (US); and
  • Candover Investments as seller, together with Electra Private Equity plc, in the $1.48 billion sale of Dakota, Minnesota and Eastern Railroad (US) to Canadian Pacific Railway (Canada).

He also provided expert witness advice on UK tax and transactional matters, notably in relation to the recent Westpac tax litigation in New Zealand regarding cross-border financial products. He has been repeatedly recognised over the past several years as a leading tax lawyer, including by Chambers UK and Chambers Europe.


Andrew Stanger
 

Mayer Brown
201 Bishopsgate
London EC2M 3AF
UK
Tel: +44 20 3130 3934
Email: astanger@mayerbrown.com
Website: www.mayerbrown.com

Andrew Stanger is an experienced tax and equity incentives lawyer who focuses on UK and international employee share incentives and employment-related securities. In addition, Andrew advises clients regarding the structuring and tax consequences of all types of equity participation in business ventures.

After a 10-year career in the music industry, Andrew joined Mayer Brown in 1995 as a trainee. He was appointed partner in 2002 and is head of the London office's employee share incentives group.

Andrew is valued by clients for his pragmatic approach to share schemes work, notes Chambers UK 2011 which ranks him in Tier 3. He has been recommended for his international expertise (Legal 500, 2010), and according to sources, "he has a thorough knowledge of the UK options landscape, and will deliver on time and to a very high standard" (Chambers UK 2010). Previously, in the 2009 edition, clients praised Andrew for being "highly focused and amenable" and highlighted his "impressive turnaround time even on issues that were technically challenging". They also applaud his "willingness to pick up the phone and clarify any issue we want".

Notable engagements include advising:

  • Scott Wilson Group on the share scheme aspects of its acquisition by URS by scheme of arrangement (and a few years earlier advising that company on the adoption of its share schemes)
  • A major Hong Kong financial institution on the drafting and implementation of an employee stock purchase plan (reputedly the first of its type for a Hong Kong listed company) and implementation of restricted stock unit and share option plans
  • A major European bank on annual amendments to its incentive plans
  • The private equity arm of another major European bank on the insertion of a carried interest limited partnership in a pre-existing infrastructure fund
  • On share scheme aspects of the acquisition of TDG by scheme of arrangement
  • A major private equity house on the equity incentives arrangements for two successive changes of CEO for a high profile public to private acquisition, both under time pressures and media scrutiny

Peter Steiner
 

Mayer Brown
201 Bishopsgate
London EC2M 3AF
UK
Tel: +44 20 3130 3811
Email: psteiner@mayerbrown.com
Website: www.mayerbrown.com

Peter Steiner is an experienced tax adviser who represents clients across a broad range of transactions, including real estate transactions, company and business sales and acquisitions, corporate reorganisations, and joint ventures, as well as international finance transactions involving cross-border tax planning. Peter's practice extends to the tax implications of projects generally, including global funds, and he advises clients on numerous questions regarding value added tax (VAT).

Peter has significant experience in negotiating and litigating tax disputes, including transfer pricing inquiries. He has acted in landmark cases, such as EMI Group Electronics Limited v. Coldicott, concerning the tax treatment of termination payments to employees; and the challenge by major UK electrical retailers, rental companies, and insurance companies concerning the legality of the higher rate of insurance premium tax on domestic electrical appliance (warranty) insurance.

After a successful career as an economist in the pharmaceuticals industry, Peter retrained as a lawyer and joined Mayer Brown International in 1986. He was appointed partner in 1991.

Noted as a key individual and a "talented operator" by Chambers UK 2011, Peter is "well regarded by clients and peers alike" (Legal 500, 2010), he is "always looking for the best and quickest solution to a problem". Described as a "safe pair of hands" he is especially strong on property taxation, notes Chambers UK 2010. Peter has been ranked as a leading individual by Chambers UK 2009; he earns plaudits for providing "excellent advice, thanks to his keen sense of judgement and ability to find the quickest way through difficult deals". He "provides highly relevant advice", is "a great personality, with a great depth of knowledge", remarks Legal 500, 2009. A previous edition noted that he "handled some impressive instructions in 2006, such as acting for AstraZeneca and Cambridge Antibody Technology … Peter Steiner enjoys an excellent reputation" (2007). The directory also observed that "Peter Steiner combines a good eye for detail with the broad view demanded by … clients' cross-border needs" (UK Legal 500 2004).


James Bullock
McGrigors

Steve Camm
PwC

John Cassidy
PKF

Jason Collins
McGrigors

Dorian Drew
Norton Rose

Charles Evans
Norton Rose

Andrew Hitchmough
Pump Court

Gary Rowson
OneE Ltd

Angela Savin
Norton Rose

Jonathan Schwarz
Temple Tax Chambers

Dominic Stuttaford
Norton Rose

Harry Travers
BCL Burton Copeland

Andrew Watt
Alvarez & Marsal Taxand UK






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