We consider how dispute resolution is changing and how taxpayers might benefit from engaging more proactively with HMRC.
Tax disputes, and in particular corporate tax disputes, are increasing in both volume and complexity. This is due to two factors. Firstly, the rapidly changing tax landscape. On an international level, we are experiencing the implementation of the OECD’s base erosion and profit shifting (BEPS) changes, but even for largely domestic groups, there is increasing focus on transparency, compliance and assurance. Secondly, there is increasing pressure on tax authorities to demonstrate they’re collecting the right amount of tax, commensurate with business activities. This is exemplified by the very structured approach HMRC is taking in the way it handles Diverted Profits Tax enquiries in the UK.
HMRC statistics support this: their annual reports show that over the last three years, there has been a steady increase in cases referred to HMRC’s disputes governance boards for resolution. In particular, the amount of tax at risk per decision is increasing, indicating an increasing complexity in cases, many of which cover multiple transaction types. HMRC recently published statistics in relation to transfer pricing enquiries where the yield in 2016-17 was £1.6bn – up 90% from the previous year. This suggests that this trend is only set to continue, both in the UK and globally.
What does this mean for taxpayers? Those who have been subject to HMRC enquiry will have noticed a gradual change in approach. There is a more structured framework and an increased focus on transparency and accountability. In practical terms, taxpayers are facing extensive information and document requests and HMRC is quickly resorting to formal powers to pursue them. When HMRC suspect profits have been under-declared, they will use discovery powers to raise investigations. If inaccuracies are uncovered, they will test whether penalties should be levied.
This means that, on the one hand, there is – or should be – greater clarity for the taxpayer over how the dispute is being dealt with, its progress, and the most likely conclusion. However, there are also downsides. It can be frustrating to experience HMRC’s determination to stick rigidly to the process, obtaining all possible relevant information before committing to decisions, and taking a narrow application of their Litigation & Settlement Strategy. It is evident that there is a need for a clearly defined process but this can lead to protracted disputes where previously a more pragmatic approach might have allowed for a speedier resolution which benefited both parties.
So, what does the future landscape for tax dispute resolution look like? With increasing transparency over the tax affairs of corporates, and the accountability of tax authorities remaining firmly on the agenda, an increase in tax disputes is expected. Changes to transfer pricing approaches and permanent establishment definitions -as well as increased visibility caused by country by country reporting and documentation requirements - may lead to increasing competition between tax authorities over the share of revenues. This would lead to more involved and complex cases. KPMG’s Global Tax Disputes benchmarking survey provides such evidence in the changing tax landscape.
This may all sound rather negative for the taxpayer. But we believe that this environment – and the increasing structure around the dispute resolution process – has its benefits. Increased transparency around the process means taxpayers have more control over the progress of their case. The options open to them if they would like additional intervention or a fresh view on their case are much clearer. In the UK, there are well established links between demonstrating positive and co-operative behaviour with HMRC and the overall risk rating you then receive. HMRC has published an escalation route document, where large businesses can engage assistant directors in situations where they cannot resolve disputes with their customer relationship manager. Outside of the large business arena, Alternative Disputes Resolution is increasingly being used to resolve tax disputes through mediation.
With the tax behaviour of corporates increasingly in the spotlight, tax dispute resolution offers an opportunity for taxpayers to showcase their corporate responsibility credentials. Stakeholders will largely welcome co-operation with tax authorities, and resolving tax disputes in a proactive manner can be positively reflected when reporting tax governance.
Finding yourself facing a tax dispute will never be a welcome situation, especially in the current environment of more complex, involved discussions. However, the highly structured frameworks that tax authorities are placing around tax dispute resolution can be used to your advantage. Working with the process, rather than against it, will increase your credentials when it comes to responsible tax.
For further information please contact Chris Davidson.