Travers Smith's Alternative Insights: The dangers of over-zealous enforcement 

The tax authority is charged with ensuring that individuals and businesses pay the right amount of tax, so it is unsurprising – and unobjectionable – that it goes after those it believes are non-compliant.  But these decisions are interesting because, although many expected that the courts would not support the particular tax planning involved, they are illustrative of HMRC's combative approach towards executive pay, and – since the agency was victorious – further encourage it.  This matters to taxpayers. 

Although there has been no specific policy announcement, it seems clear that HMRC is increasing its scrutiny of executive remuneration arrangements.  This increase is reflected in the growing (although still relatively low) number of cases going to court – and a significant jump in the volume of tax investigations and disputes we are working on.

One might wonder why this matters – after all, taxpayers who take a careful and conservative approach to tax compliance should have little to fear.  However, the asymmetrical nature of the relationship between UK taxpayers and HMRC means that the latter, as the enforcing government agency, gets to dictate the terms of the encounter.  

First, HMRC commonly asks businesses to produce voluminous information, which is often both detailed and historic. The decision to provide internal financial and legal information to HMRC is not one which private capital businesses take lightly, so professional advice is typically needed.  This can soak up management time and incur considerable costs.

Secondly, HMRC often argues that different taxing provisions potentially apply, sometimes on tenuous grounds.  Considering and taking professional advice on each of these, again, takes up time and costs.

Thirdly, HMRC sets the pace, and this is often very slow.  Enquiries can drag on for years, during which time it is common for the original inspector(s) to be replaced and the new one(s) to ask for further information or raise new issues.

Fourthly, HMRC is increasingly prepared to argue that taxpayers have been careless, even where professional advice was taken at the time, opening the door to extended time limits and greater penalties.  A related point, easy to overlook but critically important, is privilege.  When a dispute arises, HMRC will often request or compel disclosure of the advice a taxpayer received. Advice from accountants, however expert, is not protected by legal professional privilege. Only advice from lawyers, given in the right circumstances, attracts that protection.  Private capital businesses should bear this in mind when structuring advisory arrangements, both at the planning stage and once a dispute has started.

In addition to difficulties stemming from HMRC's conduct, enquiries can give rise to tricky internal issues for sponsors where the tax at stake relates to different executives.  Sponsors will typically want the business and executives to take a consistent approach.  This can be difficult to organise, especially in relation to individuals who have left the business, and interests may not always be aligned.  Sponsors may also face difficult decisions about funding executives' personal tax liabilities – particularly since any such payment is itself likely to be taxable, requiring a gross-up to make the executive whole.  

The UK's new chancellor could yet prove a stabilising force.  But stability is only part of the picture – the tax authority's approach to disputes matters too.  Private capital structures and the remuneration arrangements relating to them are often complex. It is understandable that HMRC will sometimes want to know more, and occasional disagreements are inevitable. However, with the government looking to enhance Britain's appeal to the industry and globally mobile executives, a more measured approach could be considered an easy win.