3 years to settle tax disputes with large businesses

According to a recent statement released by international law firm, Pinsent Masons, large business tax disputes led by HMRC now take more than three years to settle; this is 15% longer than the 2016-17 timeframe.

In 2016-17, the average tax investigation would take 34 months; however, the average time large businesses can expect to have HMRC involved in an investigation is 39 months. These drawn out tax disputes can cause huge disruptions for UK businesses.

Pinsent Masons’ statement has revealed that HMRC’s litigation strategy may be the main cause behind these lengthier investigations. Nonetheless, concerns such as the financial costs involved when complying with HMRC’s requests and the more practical management of time needed when an investigation is underway also has a long-term impact.

“Additionally, the uncertainty over the outcome of investigations, and the potential penalties that may be incurred, makes it harder for businesses to plan ahead. For example, future investment within a business unit may be put on hold whilst an investigation is still open,” the firm stated.

Steven Porter, partner at Pinsent Masons, added: “Businesses face huge disruptions as HMRC continues to drag out even the most basic of tax disputes.

“Having investigations open for over three years leaves businesses in limbo. It is not just the disruption, [as] this also creates a sense of uncertainty over what the business liabilities might be, and that uncertainty can negatively impact on decision making.”

A longer investigation period is arguably a clear sign that HMRC’s focus has shifted from “low hanging fruit” cases when it comes to the large business tax investigations. Now, HMRC is focusing on the tougher – and thus more complex – cases, in which a resolution is not so quickly obtained.

Many of these long-winded cases involve the likes of Transfer Pricing disputes with international businesses; these businesses operate in multiple tax jurisdictions and so any underpaid tax is harder for HMRC to find.

The firm continued: “In addition to focusing on complex cases, lengthier investigations could be a result of HMRC’s refusal to back down over technical points, regardless of the weakness of their case. This approach means innocent businesses can get drawn into lengthy investigations over simple technical errors.”

HMRC uses the Litigations and Settlement Strategy (LSS) framework, and this has both positive and negative connotations.

LSS ascertains that every case HMRC undertakes is solved using a consistent set of ‘rules’ when resolving these tax disputes.

Furthermore, LSS principles include the fact that HMRC should not enter into ‘package deals’; this is where a range of separate issues can be settled for a single payment. As well as this, LSS makes sure that those disputes with an ‘all-or-nothing’ character – “such as a case involving a single point of law or fact that would be decided one way or the other by the courts with no middle ground” – are settled with ‘all-or-nothing’ terms.

The problem with this, however, is that individual teams at HMRC find it more difficult to find the right resolution in individual cases that might not easily apply to broader LSS rules. For example, a HMRC team will struggle to settle a dispute for less than the full amount of tax initially claimed; this may be contributing to the increased length of time it takes to conclude an investigation. Although this does ascertain that HMRC secures to full amount owed.

Pinsent Masons has reported that one of the problems could be that HMRC have increasingly been focusing on inquiries by sector. For example, retail or financial services. The result of this can be that HMRC inquiries involve multiple businesses at once, which only serves to further complicate the investigation and thus increase the amount of time it takes to settle the dispute.

“Even when a settlement may appear sensible, HMRC will likely refuse to concede,” Porter claimed. “Businesses should be prepared to litigate where they think HMRC’s challenges are unwarranted.”

Although the length of time HMRC takes when investigating complex cases has increased, the number of open cases has fallen over the past 12 months. In 2016-17, 3,617 cases remained open; 2017-18 has seen a fall to 3,302, thus proving that the increasing length of time per investigation is not due to HMRC taking on more cases.