Tax Disputes and Investigations – July 2025

HMRC reactivates enquiries into unallowable purpose

Ben Proctor

HMRC has been writing to taxpayers with open enquiries involving the unallowable purpose rule at Section 441 CTA 2009. The letters invite taxpayers to reconsider their position in light of three Court of Appeal decisions in 2024 and to enter discussions with HMRC to explore whether an agreement may now be reached. The judgements in question (BlackRock Holdco 5 LLC, Kwik-Fit Group Ltd and Others and JTI Acquisitions Company (2011) Ltd) all went in HMRC’s favour in relation to Section 441.

The general and the specific

Whilst HMRC is clearly correct to say that principles derived from these cases will have broader application, they also, correctly and crucially, include the caveat that Section 441 applies (or not) on a case-by-case basis according to the particular facts. All of the 2024 cases were decided by close reference to and detailed analysis of the facts and evidence of each specific transaction or set of transactions.

Taxpayers should not therefore feel that these three cases having been decided for HMRC is cause for doom and gloom pointing towards inevitable defeat.

Opportunity to resolve long running and expensive enquiries

Finance directors and heads of tax should instead consider whether HMRC’s letter represents an opportunity. HMRC’s letter makes the offer of a genuine re-examination and discussion of the position, potentially on a without prejudice basis. The opportunity to make significant progress with and hopefully resolve long running and expensive enquiries will be extremely welcome.

In our experience, when such enquiries have been resolved by agreement with HMRC previously this has often been the result of a review of the position by a new advisor yielding a fresh perspective which HMRC has been able to engage with and ultimately embrace, often from a position where an enquiry had been in a stalemate for several years.

Ben would be happy to have an initial no obligation discussion with anyone who has received one of these letters from HMRC.

ADR

Jon Preshaw

HMRC’s Alternative Dispute Resolution (‘ADR’) process is a potentially useful mechanism to resolve a variety of tax disputes.  We would encourage any practitioner dealing with a tax dispute to consider whether ADR might help to unlock a long-running dispute.  Careful thought needs to be given to precisely how and when a request for ADR should be made, but subject to that, our experience is that ADR is usually helpful in progressing disputes either to resolution or at least to ensure that each respective side’s position is properly understood.  It is also clear that HMRC see ADR as a valuable tool in resolving disputes and our understanding is that significant efforts are being made by HMRC both internally and with external bodies to promote the use of ADR.    

The First Tier Tax Tribunal issued a Practice Direction on 9^th May which is consistent with this direction of travel (see here).  The Practice Direction builds on an earlier one which encouraged parties to a dispute to utilise ADR.  However, the new direction goes further and, subject to discussion with the parties, indicates that the tribunal can direct that parties engage in ADR and that costs can be awarded for an unreasonable refusal.  In our view, this is a very welcome step.  

However, our recent experience is that the key issue is not necessarily whether HMRC will engage in the ADR process once a request is made (It is unusual, though not completely unheard of, that HMRC will refuse to enter into ADR) but how the ADR process progresses and the willingness of the HMRC case team to engage in meaningful discussion.  Although the tribunal guidance is therefore helpful in encouraging the use of ADR, it will still be necessary to carefully prepare for the ADR meeting so that the ground can be set to ensure it is as productive as possible.  

Noteworthy cases

Recent decisions which have caught our attention…

Tonkin v HMRC

Jon Preshaw

Many practitioners will have been forced to explain to clients that a contribution to an EBT is regarded by HMRC as both a payment of employment subject to PAYE and NIC and a contribution to a relevant property trust subject to IHT.  This approach has recently been tested in the First Tier Tribunal in Tonkin v HMRC.  HMRC argued that although the transaction was taxable as Mr Tonkin’s earnings, the exemption from IHT which applies to payments which fall to be taken into account in computing the recipients income or gains (s94(2)(a) IHTA 1984) did not apply because the payment was made to the EBT trustees not to Mr Tonkin.  Interestingly, this is another example of a case where HMRC argued that their guidance (in this case in the Shares and Assets Valuation Manual) should not be applied  

The tribunal held as follows –

“As we understand HMRC’s submissions … their position appears to be that there are different realistic views of the transactions depending on which tax is in point. We see no basis for this position and consider that the realistic view applied by HMRC for the purposes of income tax also applies for the purposes of inheritance tax.”

This will be a welcome approach for those currently dealing with IHT issues arising from similar structures.  

Gary Quillan v Commissioners for HMRC

James Bryans  

This is an interesting case which was recently decided at First Tier Tribunal, concerning an income tax charge levied by HMRC in respect of a loan which it claimed had been written off.

Mr Quillan’s company entered voluntary liquidation in 2017, and the liquidator made attempts to recover a loan made him. After recovering some funds, the liquidator stated in their report that no further funds were expected but indicated to HMRC that the loan had not been written off and the company could be reinstated, should any new windfall come to light.

HMRC issued assessments of £145,058.66 under s415(1) ITTOIA 2005, the income tax charge which applies where a loan to a participator is released or written off.  

Mr Quillan appealed this decision and the case at the FTT turned on whether the loan has in fact been ‘written off’. HMRC’s position in these cases as set out in their manual is that a loan should be treated as written off where a liquidator decides not to take any further steps to collect it. The tribunal disagreed and allowed Mr Quillan’s appeal.

As well as being a general illustration that HMRC guidance can sometimes be at odds with the legal position, the case demonstrates a more specific principle around the vital importance of understanding the tax implications of actions taken by liquidators.  A marginally different approach on the part of the liquidator could very conceivably have resulted in a significant tax bill for Mr Quillan.  

Although this case concerns the write-off of a director’s loan by a company in liquidation, it could have implications for other circumstances where the write off of a loan could trigger a tax charge (in particular in Disguised Remuneration cases).  The interaction of insolvency issues and the Disguised Remuneration legislation is a particular area of complexity on which we are advising clients at the moment and the decision here, although not binding, helps clarify some of those issues.  

What we’ve been working on

A few client matters that have been keeping us busy…

Requirement to Correct penalties

We are helping a trustee client to address the application of Requirement to Correct provisions where the failure to correct took place before their appointment.  There are some complex issues around HMRC’s policy in this space, as well as the operation of the provisions themselves.  Counsel has been engaged to assist with the technical issues.  Further complication arises because some of the liabilities fall outside the normal 20 year assessing period but, because HMRC assert there has been a deliberate error, they are pursuing liabilities which fall outside that period as well as the associated RTC penalties.  

Disguised Remuneration issues and insolvency

We have been helping clients to resolve the complicated issues which arise when a company has made contributions to EBT’s and similar structures and enters an insolvency process.  We have identified some helpful strategies which might assist clients here.  

Temporary Repatriation Facility

A number of clients have asked us to help them quantify income and gains pools from which benefits could be provided which may be subject to tax at TRF rates. Calculating income and gains pools in the absence of comprehensive accounting information is a challenging process, particularly in circumstances where it is anticipated that HMRC will scrutinise the approach taken.  We are helping a range of clients to address these issues in a practical and cost-effective manner.

In other news…

We recently welcomed James Bryans to our team as a Senior Manager.

James joined us in March and brings an impressive 20-year career in tax, including:
19 years of service at HMRC, holding key roles in HMRC’s:
– Fraud Investigation Service (FIS)
– Wealthy Team (WMBC)
Most recently, he managed a team of 10 consultants handling R&D claims in the private sector.

James now joins Jon Preshaw, Ben Proctor, and Jon Pitkin, bringing our team of fee earners to four.