Tax Disputes and Investigations – May 2026

In this newsletter, we look at some issues which practitioners frequently face when managing disputes with HMRC. What is the right approach to dealing with careless behaviour when professional advice has been taken? What happens if there is a lack of contemporaneous documentary evidence in a dispute, and what level of documentation is needed to support claims? Finally, we look at an important decision which has significant implications for HMRC challenges to Employee Trust arrangements.

Recent client experience – carelessness and professional advice – Jon Preshaw

An issue which we are increasingly facing in our client work is the extent to which a client can rely on advice given to them to either prevent penalties from applying or limit the time period for which HMRC can issue discovery assessments.

It appears to us that HMRC are taking an increasingly hard line in such cases, moving from broadly accepting the proposition that taking advice from competent professionals constitutes reasonable care, to examining more of the detail of advice given to determine whether it was followed. In addition, it appears to us that HMRC are increasingly asserting that taxpayers should undertake their own research as well as relying on advice. By way of example, we have recently had to deal with an assertion that a failure on the part of a taxpayer to review and satisfy themselves on the application of specific Self-Assessment guidance notes in relation to the conditions attaching to an EIS investment was careless. This was notwithstanding that a professional adviser was engaged to advise on both the EIS investment and the filing of the client’s return.

In our view, the positions frequently being taken by HMRC on this issue do not accurately reflect the law as it stands. A helpful recent articulation of the correct approach can be found in the First-tier Tribunal decision in Seghal v Commrs for HMRC [2026] UKFTT 00516 (TC) where the tribunal had no difficulty in finding that the taxpayer was not required to check every step in a complex transaction had been followed. The tribunal also felt that HMRC would face an uphill battle in asserting negligence where the same firm which advised on the transaction also prepared the taxpayers’ returns. Unfortunately, our current experience is that HMRC’s case teams are not approaching these questions in the same way as the tribunal appears willing to.

How important is contemporaneous evidence? – J&F Wilson Plumbing & Heating Ltd & Anor v HMRC [2026] UKFTT 403 (TC) – James Bryans

This case was recently decided at First-tier Tribunal (‘FTT’) and concerned whether cash receipts paid into Mr Wilson’s personal account and cash purchases of vehicles represented undeclared income of Mr Wilson’s company.

In April 2021, HMRC raised concerns on the accounting periods for 2018, 2019 and 2020 regarding a means risk due to Mr Wilson clearing a mortgage and paying a large deposit on another property. Mr Wilson provided a bank analysis which showed that some company card payments had been made to Mr Wilson’s personal accounts, which was accepted should be treated as income for the company, and also some cash payments which were stated to have been the proceeds of gambling. An explanation was given that the mortgage was cleared via a matured investment bond, and the property was refinanced to release an investment bond.

Since Mr Wilson was unable to provide any documentary evidence that the cash amounts were the result of gambling winnings, HMRC contended that the available cash used for the purchase of vehicles and deposited into Mr Wilson’s bank account, which totalled £135,000, should be treated as income of the company. HMRC considered that this amount was earned over a 6-year period of £22,500 per year and issued determinations accordingly.

Mr Wilson appealed on the basis that the amounts were receipts from gambling and explained that his lack of evidence was because he was concealing this from his partner. Further, he submitted that he had serious health issues in 2013, which had impacted his ability to work in earlier periods and made it impossible for Mr Wilson to work outside of normal hours, which was inconsistent with HMRC’s approach to spreading the taxable income over 6 years.

The FTT allowed Mr Wilson’s appeal and did not accept HMRC’s assertion that only documentary evidence could discharge Mr Wilson’s burden of responsibility to displace the assessments. Although the FTT considered that HMRC’s approach was fair and reasonable in the circumstances, it found Mr Wilson to be a credible witness and accepted his evidence that illness and his partner’s postnatal depression limited his ability to work. It was further noted that cash deposits ceased in 2018, which was consistent with Mr Wilson’s assertion that his partner had issued him with an ultimatum to cease gambling. Had the deposits been from undeclared income, it was not reasonable to assume they would have ceased in 2018, before HMRC had any interest in Mr Wilson’s affairs.

This decision, while not binding, is a good reminder that a lack of contemporaneous evidence does not necessarily mean that an explanation in an HMRC enquiry cannot be valid. Across a broad spectrum of enquiries, HMRC will, more often than not, take the view that documentation is the only way to show that an explanation is feasible. However, this decision shows that verbal evidence provided by taxpayers along with other evidence which supports that position also needs to be taken into account when forming a view.

The importance of creating and retaining evidence to support R&D claims – Beer Express Ltd v HMRC [2026] UKFTT 672 (TC) – Ben Proctor

A decision of the First-tier Tribunal (‘FTT’) given on the 6th of May underlines the crucial importance of creating and retaining a sufficient audit trail of evidence to support R&D claims in the event they are challenged by HMRC – as very many continue to be.

The issue being considered was whether Beer Express Ltd (a brewer) was carrying out qualifying R&D activity. The decision went in favour of HMRC because the company was unable to discharge the burden of proof on it to show that the activity satisfied the tax definition of R&D. The company sought to rely on a technical narrative prepared by its R&D advisor. However, it was unable to produce any witness evidence from competent professionals in the relevant areas of science/technology, with no such competent professional even identified for 3 out of the 4 R&D projects included in the claim. The sole witness was the company owner who, although an honest witness and trying his best to help the Tribunal, had no in-depth knowledge of the projects. He could not discuss or explain the documents disclosed on behalf of the company. In addition, the company’s R&D advisor was unavailable and uncontactable.

In the case of Beer Express, the judges concluded that “the reports were no more than bald assertions unsupported by evidence from a competent professional with contemporaneous involvement in the projects or documentary evidence in support to demonstrate what technology was available in the relevant periods and why the projects advanced that knowledge and technology and accordingly we attached no weight to the reports.”

Issues of the availability of suitable evidence, including witnesses or spokespeople and their optimal presentation and explanation to HMRC have been recurring frequently in recent enquiries we have been assisting with. Whilst it is often possible to improve the position significantly with the right approach and strategy in enquiries, companies evaluating potential R&D claims should vet advisors carefully. An additional layer of input and review regarding the potential for HMRC challenge and assurance that appropriate evidence exists and is retained is strongly recommended. R&D claims, much like beer, need to be well maintained.

The limits of the Rangers decision – HMRC v MR Currell Ltd [2026] EWCA Civ 445) – Jon Preshaw

This Court of Appeal decision provides helpful guidance for those dealing with HMRC challenges to Employee Trusts and similar arrangements.

The case involves a relatively simple set of steps under which a company contributed funds to an Employee Benefit Trust (‘EBT’). The trustees subsequently loaned funds to Mr Currell (a shareholder and director of the company). Mr Currell used those funds to buy shares in the company from his wife. His wife subsequently transferred the funds back to the company for use as working capital.

The First-tier Tribunal (‘FTT’) held that the payment made to Mr Currell should be characterised as earnings and not as a loan. This was notwithstanding that Mr Currell recognised the need to repay the loan and had the funds to do so. This was because all of the transactions were viewed as a package (the transactions were “prewired”), the payment made by the company was intended to enable Mr Currell to access the funds, and the reason for the payment was to reward him for his services.

The FTT held that, on those facts, the payment to the EBT was to be treated as Mr Currell’s earnings notwithstanding that there was a real loan and that there was a real obligation to repay it.

On appeal, the Upper Tribunal (‘UT’) held that the loan made to Mr Currell could not be characterised as a payment of earnings. Therefore, they concluded that the payment to the EBT by the company, which the FTT found was made so that the loan could be made to Mr Currell, could not be earnings either.

The key issue for those who are considering this point on behalf of clients is that the UT confirmed that the decision in the Rangers case (RFC 2012 plc v AG for Scotland 2017 UKSC 45) does not simply allow what would otherwise be taxable as a loan to be recategorised as earnings. The UT pointed out that, in Rangers, there was no real debate that the payments made to the trust in that case were earnings. The Supreme Court was not asked to determine that point. Instead, it was asked to consider whether the payments made to the EBT in Rangers could be earnings notwithstanding that they were paid to a third party.

The Court of Appeal agreed with the UT’s decision and went on to provide some very helpful clarification. The Court’s view of HMRC’s position here is worth repeating in detail –

“It is of course right that HMRC should consider whether arrangements implemented before [the Disguised Remuneration changes] fail under the pre-existing law. But, however proper HMRC’s motives are, caution is required to avoid a risk of over-reach, with consequential risks to legal certainty. A close inspection of the trees can risk a failure to distinguish the overall wood……[this approach] has led HMRC to argue, in effect, that the full £800,000 is taxable as earnings simply because it was paid via a third party, even where it would not have been so taxable if it had been lent directly to Mr Currell, and indeed in circumstances where the more obvious analysis might be that, viewed realistically, the “prewired” Loan should be treated as made directly by the Company. It has also led HMRC to argue that a loan can be earnings merely because the borrower has practical control of its repayment. As Mr Elliott fairly pointed out, those propositions are both novel and unsupported by authority.”

These are important points and will provide helpful guidance to those dealing with enquiries in respect of pre-Disguised Remuneration Employee Trusts. In addition, it can be expected that the decision may lead to a change of emphasis on HMRC’s part, with HMRC being more willing to seek charges under the Disguised Remuneration provisions rather than basing their arguments solely on the Rangers decision.

If any of the issues raised in this newsletter are relevant to a matter you are dealing with in your practice, or if you would like to talk with us about any other similar tax dispute, we are always happy to have a no-obligation conversation.