The length of time taken to settle HMRC investigations has increased to three years, according to law firm Pinsent Masons.
In 2016-17, the average length of time to settle a tax investigation rose to 34 months, up from 31 months in 2015-16. Pinsent Masons said that the increase in duration was “putting strain on businesses”, as investigations took up senior management time, increased costs and resulted in businesses being exposed to longer periods of financial and legal uncertainty.
The law firm attributed the increase in investigation time to HMRC’s unwillingness to drop cases when technical points were disputed, despite the tax authority sometimes presenting a weak case. Pinsent Masons also said that HMRC was placing more focus on routine transactions as there were now fewer avoidance schemes to challenge.
HMRC follows a Litigation and Settlement Strategy framework when entering tax disputes, which Pinsent Masons said makes it difficult for HMRC teams to settle disputes for less tax that the full amount initially claimed. The tax authority has increased estimates of the amount of tax underpaid by large businesses to £24.8bn in 2016-17, up from £21.8bn in 2015-16.
Ian Hyde, partner at the law firm, said: “HMRC’s and perhaps more importantly, individual officers’, priority seems at times to be to avoid being seen to be ‘doing deals’ with large corporates. This means HMRC is digging its heels in and not backing down, even when there is a sensible settlement to be reached.
“Large corporates are no longer getting involved in avoidance schemes. Many more challenges from HMRC are of ‘routine’ technical tax issues, such as whether the accounting treatment is correct or capital allowance claims. Clients are more willing to defend strongly where the argument isn’t about a ‘windfall’ from tax avoidance but is tax on the core operations of the business.”
Large business tax investigations are carried out by the tax authority’s Large Business Directorate, which reviews the tax operations of 2,100 UK businesses.
Despite a reduction in the number of HMRC cases in progress, the average investigation length has increased. A total of 3,617 cases were open at the end of 2016-17, compared to 3,875 in 2015-16.
Hyde added: “Giving businesses certainty over the legal and tax environment is an important part of a smooth-running economy. Leaving these investigations open for three years at a time does not help that.
“Even if HMRC has a weaker case, the Litigation and Settlement Strategy encourages them to give no quarter. Cases are therefore being fought to the end despite growing costs on both sides.
“HMRC’s focus on transfer pricing and Diverted Profits Tax disputes may have dragged up the overall average recently. These disputes often involve complex businesses operating across multiple jurisdictions and can take many years to resolve.
“Ultimately, businesses need to stand firm where they think HMRC challenges are unmerited and prepare their case to the highest standard – as they may have to litigate if HMRC doesn’t concede.”