Tax Disputes and Investigations – July 2026

In this issue, HMRC’s latest Tax Gap figures show the overall gap climbing to £59.2 billion, with small businesses and “failure to take reasonable care” now accounting for a growing share of the shortfall, a trend likely to shape HMRC’s compliance priorities as it targets a £10 billion reduction by 2029/30. We also look at a welcome, low-key change to HMRC’s guidance on contract settlements, removing the anomaly of compounded interest on instalment arrangements.

On the tribunal front, Conor Maguire v HMRC offers a useful reminder that reasonableness in follower notice penalty cases must be judged on the facts and advice available at the time not with hindsight. And the Supreme Court’s dismissal of BlueCrest’s appeal confirms HMRC’s approach to the salaried members rules for LLPs, with significant implications for asset managers and other performance-driven partnership structures.

HMRC’s Tax Gap figures

Jon Preshaw

HMRC published this year’s ‘Tax Gap’ figures in June. The tax gap is HMRC’s measure of the difference between tax which has been paid and tax which they believe ought to be paid. The figures show that the gap in absolute terms has risen to £59.2 billion but has fallen as a proportion of the total theoretical tax take.

This years’ figures reflect a relatively static trend over the past few years. HMRC estimates that by far the largest element of the tax gap (35%) arises as a result of failures to take reasonable care, meaning circumstances where taxpayers don’t take adequate care to either report or record their tax liabilities. Avoidance makes up a relatively small (1%) proportion of the overall gap while evasion makes up 12% of the overall gap.

Although static in recent years, these figures show significant changes from those which HMRC recorded 10 years ago, when failure to take reasonable care accounted for only 15% of the total, avoidance made up 6% and evasion made up 14%.

These figures are clearly estimates, albeit very sophisticated ones, and are sensitive to changes in the methodologies used to collect the figures. However, they are an interesting reflection of HMRC’s likely compliance priorities. For example, it is clearly the case that the focus on tax avoidance has had a dramatic impact of the contribution of avoidance to the overall tax gap.

This years’ figures show a continued increase in the proportion of the tax gap attributable to small businesses (now at 62% from 51% ten years ago) and a significant reduction in the gap attributable to large businesses (now 12% from 26% ten years ago).

The government has set a target of a reduction in the tax gap of £10 billion by 2029/30 so we can expect that HMRC will prioritise areas where the tax gap is largest and where the department’s efforts can have the most impact. The direction of travel can already be seen in developments such as –

• Increased cross-tax scrutiny of owner-managed business and their directors and shareholders,
• A continuing focus on charging penalties for careless errors,
• An increased use of HMRC resources to target smaller businesses for HMRC compliance checks.

Those advising smaller businesses should be aware of an increased likelihood of HMRC enquiry or investigation and, in particular, the scope for enquiries to cover all taxes across a range of different taxpayers.

Changes to Contract Settlement Guidance

Jon Preshaw

Disputes with HMRC in respect of direct taxes are often settled by way of a contract settlement. A contract settlement is a convenient mechanism to wrap up a range of duties for various tax periods, interest and penalties in one agreement which also allows payment terms to be agreed. However, there has always been a significant drawback to the use of contract settlements because of HMRC’s approach to charging interest on instalment arrangements.

Previously, HMRC’s approach was simply to identify all of the tax, interest and penalties due up to the current date and then apply a ‘forward’ rate of interest to the whole sum for the period over which payment was agreed to be due. The result of this was that HMRC charged forward interest on the amount of interest accrued up to the date of the agreement. However, the statutory position is that interest is not compounded, no interest is charged on interest which is unpaid.

HMRC’s changed guidance, reflected in their manuals but which has not been separately announced, means that taxpayers can now enter into contract settlements and agree payment terms over a period of time without interest being compounded. This is a helpful step and removes an otherwise anomalous treatment.

Conor Maguire V HMRC [2026] UKFTT 929 (TC)

James Bryans

This case, recently decided at First Tier Tribunal concerned whether a penalty was applicable as a result of Mr Maguire’s failure to take corrective action on receipt of a follower notice in respect of an avoidance scheme he had entered.

Mr Maguire participated in tax avoidance arrangement marketed by Montpelier that sought to exploit double taxation arrangements between the UK and Isle of Man by routing earnings through Isle of Man partnerships and trusts. Mr Maguire’s Self-Assessment for 2007/08 returned income from an offshore trust and claimed the equivalent in double taxation relief.

HMRC opened an enquiry in January 2010 and subsequently assessed that income tax, and NICs were due as a result of the arrangements, asserting that the amounts routed through the offshore trusts amounted to earnings. Mr Maguire’s appeal against these assessments was struck out in 2021.

Following the FTT in Huitson v HMRC [2015] UKFTT 448 (TC), HMRC issued follower notices to Mr Maguire requiring corrective action. Mr Maguire took advice from Montpelier and informed HMRC that as a result, he would not be taking corrective action by the deadline and would be continuing with his appeal against the assessments HMRC had issued.

HMRC’s response was to issue a penalty notice in February 2018 because of Mr Maguire’s failure to take the corrective action deemed necessary. Mr Maguire appealed on the basis that a penalty should not be applied because he had taken advice from Montpelier and it was reasonable for him not to take corrective action since he had no reason to doubt that advice. HMRC argued that it was not reasonable for Mr Maguire to rely on Montpelier’s advice given that they were the promoter of the avoidance scheme.

The FTT agreed with Mr Maguire and allowed the appeal on the basis that it was reasonable in all circumstances not to take corrective action and that test must be assessed without the benefit of hindsight. The FTT found that it was reasonable to rely on Montpelier’s advice, given that Mr Maguire was not a tax expert, and he understood Montpelier to have the relevant expertise and that Montpelier’s advice did not appear unreasonable on the face of it. HMRC’s contention that the advice should be discounted solely as it was obtained from the promoter of the scheme was not supported by the follower notice regime and it may well be reasonable for the taxpayer to reply on such advice, depending on the circumstances.

HMRC considered that Huitson was determinative in deciding Mr Maguire’s arrangements, however the FTT accepted that it would not be necessarily evident to Mr Maguire that his appeal against the assessments for income tax and NICs was bound to fail at the time of the deadline to take corrective action.

This decision is the latest in a series where HMRC has applied penalties which have been overturned by the tribunal. The decision once again emphasises the need to focus on the specific facts and circumstances rather than relying on inference or hindsight.

Supreme Court dismisses BlueCrest appeal confirming HMRC’s application of the salaried members rules for LLPs

Ben Proctor

In its judgement of 1 July 2026, the Supreme Court has dismissed BlueCrest Capital Management (UK) LLP’s appeal on the issue of whether certain individual members of the LLP should be treated as “salaried members”. The salaried member rules were introduced in 2014 to prevent individuals who are, in substance, employees from obtaining partnership tax treatment as members of an LLP. Given the potential exposure to PAYE and employer’s national insurance contributions (NICs) where these rules apply, the amounts at stake are often material.

An individual will be treated as an employee for tax purposes if Conditions A, B and C are all met:

• Condition A considers whether remuneration constitutes “disguised salary”
• Condition B considers whether the individual has “significant influence” over the affairs of the LLP
• Condition C considers whether the individual’s capital contribution is at least 25% of their disguised salary

The BlueCrest case focused on Conditions A and B. Condition C was not in dispute and was not considered by the Supreme Court. The judgment confirms that the relevant members were receiving disguised salary and underlines that, for Condition B, the key question is whether the relevant influence arises from the mutual rights and duties of members and the LLP, rather than from personal standing or influence alone. Agreeing with the Court of Appeal, the Supreme Court found that the First-Tier Tribunal and Upper Tribunal had been in error in finding that Condition B was not met.

For firms relying on Condition B, the focus will now likely need to be on whether the influence attributed to particular individuals is grounded in legally enforceable rights and obligations within the LLP’s constitutional framework.

The decision is likely to lead to increased HMRC scrutiny of both profit-sharing arrangements under Condition A and “significant influence” positions under Condition B. Asset managers and comparable businesses using an LLP structure with remuneration arrangements driven primarily by individual performance should consider whether those arrangements remain robust following the judgment. This may be particularly relevant where profit allocations are linked to individual portfolio P&L results, even where the amount remains capped by reference to the overall profits of the LLP.

The Supreme Court’s decision emphasises that the relevant influence must arise from the mutual rights and duties of members and the LLP. The question is not simply whether an individual is influential in reality and in practice as a question of fact, but whether that influence is grounded in the LLP’s legal and constitutional arrangements.

This is likely to prompt renewed scrutiny of LLP agreements, governance arrangements and committee structures. Firms relying on Condition B will need to understand whether the influence attributed to particular individuals is formally reflected in those arrangements.

HMRC guidance had suggested that individuals holding senior FCA controlled functions and/or senior management roles may possess significant influence for salaried member purposes. The judgment confirms that the source of the individual’s influence matters. For Condition B purposes, significant influence must arise from the mutual rights and duties of members and the LLP. Whether HMRC updates its published guidance remains to be seen. At a minimum, firms should now expect HMRC to apply existing guidance in light of the BlueCrest decision.

For many firms, it will now be important to consider whether existing remuneration arrangements, partnership agreements, governance structures and consequently their salaried member analysis remain secure following the judgment.

In other news…

We welcomed Craig Elliott to the team at the end of June. Craig is a Chartered Tax Advisor and specialises in Trusts, Estates and Inheritance Tax, alongside High Net Worth Individuals and Personal Tax (UK and International, advisory and compliance). He will strengthen our ability to support clients across a range of issues.

Craig’s contact details are craig@jonpreshawtax.co.uk and +44(0)7889 057787 if you would like to get in touch with him.