Tax Disputes: HMRC compliance, key risks, and upcoming changes

Matthew Fleming – What was the question? Should we do that again?

Matthew Fleming – We're here today to talk about HMRC's inquiry and compliance activity.

Matthew Fleming – There's probably not a CFO, head of tax, someone in the finance team or anyone who's got any responsibility for tax within their organisation who wasn't aware of HMRC's announcement when they said they were going to be hiring 5,000 more officers to focus on compliance.

Matthew Fleming – Now, certainly on the VAT side of things, we've seen a real increase in inquiry activity. Similar in your parts of the business, Caroline?

Caroline Laffey – Yeah, absolutely. The most contentious area in employment tax is the taxation of off-payroll workers and that is becoming more and more complex.

Caroline Laffey – So those officers are going to be very busy there and we're seeing a lot of activity. The reason for that is it's a very complex area.

Caroline Laffey – It's very difficult to establish whether a worker, an individual who's providing personal services to an organisation should have tax deducted where they're not on the payroll of that organisation and then identifying who actually is responsible if tax does need to be deducted.

Caroline Laffey – So is it the organisation who actually receives the services? Is it the agency who provides them? Is it the individual worker themselves? It's an absolute minefield.

Matthew Fleming – And what's the approach that HMRC are taking to that? Is it information requests? Is it site visits? Is it a combination?

Caroline Laffey – Yeah, well, it is. It's a combination of everything, but it usually starts with a questionnaire.

Caroline Laffey – And what HMRC look for in that questionnaire is, does the organisation really understand its labour supply chain? Now, that might sound very straightforward.

Caroline Laffey – You know who's providing services, but because those regulations are so complex,

Caroline Laffey – and actually what happens in practise is so complex, involving many stakeholders in an organisation, that it's much more difficult to obtain that information than you'd think.

Caroline Laffey – And it's really important that all of our clients, organisations, think about not just the tax that HMRC are investigating, the questions that they're being asked, but they stay a couple of steps ahead and they understand, well, what implications might this have in other areas?

Caroline Laffey – So, for example, a really clear adjacency on off-payroll workers is employment law, so worker rights, holiday pay, pensions, etc.

Caroline Laffey – If an individual has got the wrong employment status, then that individual might have tax and national insurance that should have been withheld, so there's a financial cost to the organisation.

Caroline Laffey – There's also that cost of employment rights as well and reinstating those rights and providing compensation.

Caroline Laffey – So on these kind of issues, in addition to indirect tax, we work really closely with our employment law colleagues.

Matthew Fleming – So site visits, information requests, cross-tax issues. Please tell me that's the end of the complexity.

Caroline Laffey – Unfortunately not, I'm afraid, Matt. So we've got some changes in legislation coming next year. HMRC are consulting on them at the moment. And these are changes to the umbrella companies.

Caroline Laffey – Organisations will typically engage with an agency for off-payroll workers to fill skills or resource gaps. Those agencies might use an umbrella company.

Caroline Laffey – And where those umbrella companies are supplying the labour,

Caroline Laffey – There are going to be more rules to make other parties in that supply chain, agencies, maybe end users, jointly and separately liable for any liabilities that aren't paid by that umbrella to HMRC for Paisley Wern.

Caroline Laffey – So that is a very scary prospect.

Matthew Fleming – A lot to think about there. Nick, transfer pricing, what are you seeing?

Nick Stevart – Well, some common themes and some differences. I mean, there's consultation going on in transfer pricing at the moment in terms of the transfer pricing legislation.

Nick Stevart – And then there's a lot of guidelines that HMRC are publishing around all kinds of areas. One of those areas is transfer pricing and most recently is filing tax returns or correct filing. So there's a lot going on.

Nick Stevart – And of course, there's lots of inquiries. The guidance is particularly significant because it's putting more expectations on the businesses to actually have processes that actually make sure they are compliant.

Nick Stevart – And when I say processes, that's a bit of a compliance life cycle, so that stuff they're expected to be doing over the whole period.

Nick Stevart – There's not a one-off, it's a kind of constant need to take responsibility.

Matthew Fleming – Is that record keeping? Is that having documented processes? Is that evidence sort of filed away? What does that look like in practise?

Nick Stevart – It's all that kind of things. Data is having policies that are well thought out that actually adhere to UK facts.

Nick Stevart – So one issue you get in terms of pricing quite a lot actually is that multinational businesses might have a tax team in another country that might be doing the policy setting or the documentation.

Nick Stevart – Those people aren't close enough to what's actually happening in the UK.

Nick Stevart – So the one thing about the guidelines of compliance is there's a concept of UK risk lead and that's someone in the UK normally that has really good knowledge of the UK facts and can understand what they are and takes responsibility for monitoring them and then they also would take responsibility for ensuring they're taking appropriate and proportionate advice at the right time.

Nick Stevart – It's a big change for the businesses.

Matthew Fleming – And is that risk lead, is that usually the same person who's also the SAO or are they often different?

Nick Stevart – It could be the same, but more often I think it would be someone different. It's a different type of role. It's more of a responsibility than a role.

Nick Stevart – So they'd have other roles in the business, but it's just about making sure there's a process in place in the business for checking the facts and then getting the right advice.

Matthew Fleming – I know that transfer pricing inquiries can run over multiple years. How important is finding an opportunity to engage with HMRC?

Nick Stevart – I think it's critical. I think if you want an efficient process, you want to speak to people to find out what they want to know, why they want to know it and what would help them to address the risk.

Nick Stevart – And those things are best done in the conversation generally.

Matthew Fleming – That's exactly the same in the context of EAT. So we're seeing inquiries at the moment that might be taking place over

Matthew Fleming – months or years and finding the opportunity to get everyone in the room together makes such a big difference because there's a lot that can be lost or misunderstood if it's just letters back and forth but the nuance that might be the breakthrough between finding resolution or having to go to tribunal it's quite difficult to extract that out in written correspondence so we're certainly seeing a lot more cases go to ADR and finding that a really useful process.

Caroline Laffey – Are you seeing that increasingly occur?

Matthew Fleming – Yeah, we are. So I think we probably have done more ADRs in the last 12 months than we've probably done in the three or four years that preceded that.

Matthew Fleming – It's a really effective means of getting all the key stakeholders in the room

Matthew Fleming – both on the client side and on the HMRC side with good mediators to sort of run and facilitate the day and you're getting some really good results so it forces the parties to explore the possible and I think that mutual interest is to find that common way through and avoid litigation.

Nick Stevart – Everyone wants to make progress, don't they? So that's the goal, isn't it? I can see that. I've said that's the experience I've had.

Matthew Fleming – Last thoughts. What are we thinking? Start with you, Nick.

Nick Stevart – I think it's just about planning. Be proactive. So think about what you're doing. Read the guidance. Be aware of what it says.

Nick Stevart – Be ready for your customer compliance manager to ask you what you've done in response to the guidance.

Nick Stevart – So have a plan what you're doing and why and document your plan so that perhaps when you personally have left, your successor can come in.

Nick Stevart – They understand what's been done and why and what the process was to ensure a correct return.

Caroline Laffey – Mine is make sure that you know the stakeholders in your organisation who are responsible for compliance in all of the different tax areas. It's not always obvious.

Caroline Laffey – So we'll work with HR, payroll, procurement, legal, as well as tax and finance. And I'm sure that cuts across some of the work that you do.

Caroline Laffey – But the international angle is becoming even more important. So you might have colleagues in different jurisdictions. So make sure you engage with all stakeholders would be my top tip.

Caroline Laffey – So from a VAT perspective, my top tip would be use that extra inquiry window, that extra time to get things in order, whether that's your technical arguments, get those absolutely robust, get your evidence in order, get that defence file together, use the time to maybe try and get HMRC around the table to really explore whether there's another way through that dispute that doesn't require you to go to litigation.

Matthew Fleming – Well, thank you very much. It was a great conversation.

Caroline Laffey – Thank you. Thank you.