Tax Disputes Quarterly: Winter 2023

The future of large business tax enforcement: HMRC is coming under real pressure to raise revenue and we think that large businesses will be perceived as a soft target. This article goes into the data to show why.

Legitimate expectation: Taxpayers seeking to show that they had a 'legitimate expectation' of being treated in a certain way have a difficult job. Three recent cases show some of the pitfalls.

• We see the facts of Realreed quite often: a tax audit might have been carried out without the tax authority raising an issue, but as the case shows, that doesn't amount to any sort of clearance. Read our full analysis here.

• Glint Pay Services shows the danger of trying to rely on clearances not addressed to you. (It's probably not much of a spoiler to say that you can't do that.) Read our full analysis here.

• Murphy shows how legitimate expectation applies to extra-statutory concessions: they aren't legislation and have the meaning they would convey to an "ordinary sophisticated taxpayer"; previous versions are probably not relevant; and HMRC's practice is only relevant insofar as it is publicly known. Our full analysis can be found here.

Unallowable purpose tests: new guidance: The UK's 'unallowable purpose' regime (which prohibits deductions for loan interest to the extent that the main purpose of the loan relationship is tax avoidance) is one of the most active areas of tax enforcement for large corporates. A significant number of cases on this subject are working their way through the courts and tribunals system, and we know that many large corporates are being asked to explain their UK holding structures. We review the most recent decision in JTI Acquisitions, almost certainly destined to go further, here. It's a topic that tax and legal teams should be alert to. HMRC has published new guidance, which we review here.

Tax penalties: The level of penalty a taxpayer must pay for an error in its filing depends primarily on how the error was made: despite taking reasonable care, carelessly, deliberately, or deliberately with concealment. We're seeing a lot of cases at the moment on the border between carelessness and deliberateness (and our experience is that this is an area in which HMRC is really prepared to push the envelope). The question is: when is a taxpayer's conduct so careless that it can be said to be deliberate? In CPR Commercials the Upper Tribunal dealt with one iteration of that problem: the taxpayer that is repeatedly careless in much the same way. HMRC argued that this sort of behaviour was a form of recklessness and should count as deliberate. The Upper Tribunal disagreed: a taxpayer only acts deliberately they know of, or turn a blind eye to, the inaccuracy. (We're breathing a sigh of relief too!) You can read our full review here.

Internationally mobile / 'nomad' employees: Post-pandemic working arrangements have really highlighted issues surrounding 'nomad' employees, who might work one week from a flat in France and the next from a beach in Brazil. This sort of flexibility can be very attractive, but carries the serious tax risk of accidentally creating a permanent establishment. The UK has published new guidance on this, which we review here.

Enforcement in the UK by foreign tax authorities: Courts do not enforce the tax laws of other countries. So a foreign tax authority could not sue a taxpayer for unpaid tax in an English court, directly or indirectly. The same principle applies to public laws of other countries. Skatteforvaltningen v Solo is an important case about the boundaries of that rule: it is limited only to claims for unpaid tax, and did not apply where (as here) the foreign tax authority brought a claim in fraud to recover withholding tax refunds it said it had been induced improperly to pay out. This is a real 'litigator's case', but it's highly relevant to taxpayers with cross-border tax disputes. You can read our full review here.

We'll be back in the spring with another issue. In the meantime, look out for our Top 10 Tax Cases of 2023, to be published later in the month. If you'd like to discuss anything in this email, please contact Heather Rowlands and Craig Kirkham-Wilson.