DATA DRIVEN FINANCIAL

1. UK & EU TAX DISPUTES DATA DRIVEN FINANCIAL Power Point Presentation Presentation by Ross Harman (UK lawyer) at International Korean Lawyers’ Association 27th Annual Conference, Seoul 2019

2. WHEN HMRC INVESTIGATES CONNECT SOFTWARE • HMRC uses sophisticated software called “Connect”. • Connect cross-references data from a large array of sources, e.g. the Land Registry, Companies House, the electoral roll, bank accounts, credit card data, and even apps such as Amazon, Apple and Air BnB. CRITERIA FOR LAUNCHING INVESTIGATION • HMRC is notoriously secretive about what triggers a tax investigation, but common factors seem to be: • - regular mistakes / frequently late tax filings • - operating in high risk sector • - inconsistent figures / figures outside industry norms • - multiple years without profit • - large fluctuations in figures • - discrepancies from cross-referencing with other taxpayer transactions • - lack of a professional representative.

3. The HMRC Investigation WHAT HAPPENS POSSIBLE OUTCOMES TAX PENALTIES • Full enquiry: HMRC will inspect all business records, including those of Directors • Aspect enquiry: HMRC will only inspect business records relating to a particular subject • Random enquiry: HMRC will select a sample of business records and tax filings at random • No mistake found • Tax overpaid: taxpayer will receive a rebate • Tax underpaid: HMRC will issue an “Assessment”, demanding the underpaid tax within a certain timeframe • Penalties: if careless or deliberate wrongdoing led to error, HMRC will consider issuing penalties • Penalties can be imposed for (amongst other things): • - inaccuracies in tax returns • - late filing of tax returns • - late payment of tax due • - not keeping proper business records • - failing to register for VAT where it is compulsory

4. TAX PENALTIES: HOW MUCH £? LATE FILING LATE PAYMENT INACCURACIES

5. OPTIONS FOR TAX DISPUTES: (1) HMRC INTERNAL REVIEW; (2) LITIGATION; (3) ALTERNATIVE DISPUTE RESOLUTION (“ADR”) Within 30 days LITIGATION No Taxpayer disagrees with HMRC decision Taxpayer requests an internal review Taxpayer lodges appeal at First-tier Tribunal (“FTT”) Dispute is heard at the FTT Parties accept FTT judgment Tax dispute is resolved (about 1 year) Yes Within 30 days No Within 45 days TAX AUTHORITY INTERNAL REVIEW No Taxpayer receives outcome of review and agrees with decision Permission to appeal is granted and Appeal is heard at the Upper Tribunal (“UT”) Dispute is heard at UT Parties accept UT judgment Tax dispute is resolved (about 2 years) Yes Yes No Yes No Tax dispute is resolved (about 3-4 months) Permission to appeal is granted and Appeal is heard at the Court of Appeal (“CA”) Dispute is heard at the CA Parties accept CA judgment Tax dispute is resolved (about 3 years) Yes Yes No Permission to appeal is granted and Appeal is heard at the Supreme Court (“SC”) Dispute is heard at the SC Parties accept SC judgment Tax dispute is resolved (about 4 years) No Yes Yes No ADR No At any stage, subject to time limits Taxpayer applies for ADR (mediation) Case is accepted for mediation Tax dispute is resolved in ADR mediation session Tax dispute is resolved At any point in the Litigation process, a Tribunal or Court can submit questions to the Court of Justice of the European Union (“CJEU”) for guidance on interpretation of EU law. Yes Yes

6. HMRC INTERNAL REVIEW Taxpayer submits letter and supporting evidence within 30 days of disputed decision, setting out detailed arguments. An HMRC officer independent of the original decision reviews the submissions and produces a conclusion within 45 days. The taxpayer can either accept the review conclusion, or appeal the matter to the First-tier Tribunal. Source: HMRC Annual Reports 2018-19, page 109, available at: https://www.gov.uk/government/publications/hmrc-annual-report-and-accounts-2018-to-2019

7. LITIGATION 1. Taxpayer can issue appeal to FTT within 30 days of disputed decision or review conclusion 2. Formal litigation timetable will proceed, with detailed deadlines for filing of documents 3. Specialist tax barrister instructed to advise on procedure and conduct advocacy in hearing 4. Costs generally not available in FTT, unless one side has acted unreasonably 5. Written decision produced normally 3-12 months after hearing 6. After decision, either party can apply for permission to appeal to Upper Tribunal Source: HMRC Annual Reports 2018-19, page 110, available at: https://www.gov.uk/government/publications/hmrc-annual-report-and-accounts-2018-to-2019

8. ADR Taxpayer must apply to HMRC to use ADR. If a case is “binary” (e.g. tax is either due or not), will not normally be accepted. ADR can happen at any stage after a dispute has arisen, and often runs in parallel with litigation. ADR occurs through mediation, using accredited mediators. Source: HMRC Annual Reports 2018-19, page 103, available at: https://www.gov.uk/government/publications/hmrc-annual-report-and-accounts-2018-to-2019

9. COURT OF JUSTICE OF THE EUROPEAN UNION (CJEU) Comprised of 2 courts: (1) Court of Justice; and (2) General Court. Not an appeal court in the straightforward sense; does not directly decide on UK cases. CJEU hears cases from national courts through “preliminary ruling” system. EU Commission can claim that Member States are in breach of EU obligations, in “infraction proceedings”. CJEU oversees these proceedings. CJEU can annul unlawful acts performed by EU institutions.

10. TAX DISPUTES IN CJEU PRELIMINARY RULINGS INFRACTION PROCEEDINGS • If a national court is unsure how EU law applies to the particular circumstances, it can make a reference to the CJEU. • A national court might also make a reference to the CJEU if it is unsure whether domestic law properly implements EU law. • The CJEU hears arguments from both sides to a dispute, and also sometimes from Member States and the EU Commission. • Before the CJEU gives a ruling, the Advocate General provides an “Opinion”, which contains detailed reasoning. • The CJEU then gives the final ruling, which usually (but not always) follows the Advocate General’s Opinion. • The matter is then referred back to the domestic court for application of the CJEU ruling to the facts of the case. • The EU Commission monitors the implementation of EU law by the Member States, and where it believes a Member State has not properly implemented EU law, it issues an Opinion to that Member State. • Where agreement cannot be reached between the Member State and the Commission, the CJEU will rule on the case. • Where the Member State does not take action to remedy the failing, the CJEU can impose financial penalties on it.

11. TOP TIPS FOR THE UNWARY Litigation Tax audit Pre-litigation • Time limits very important, and can rarely be extended. • HMRC has 4 years to raise assessment. • Taxpayer has 30 days to appeal decision. • Legal professional privilege – HMRC cannot inspect/remove privileged documents. These should be identified in advance of audit. • Don’t make basic mistakes (e.g. late tax filings) and don’t make the same mistake twice: HMRC is unforgiving. • Cooperation with HMRC is important and can reduce penalties. • Litigation is very expensive. Conduct a cost/benefit analysis before litigating. • - Even if you win in litigation, unlikely to recover all costs. • Obtain a second opinion before litigating. Cost of the opinion is trivial compared with cost of litigating. • Settling normally preferable to litigating: quicker, cheaper, and private. • Even if you intend to settle, start formal litigation process within time limits. Litigation can be stayed pending settlement discussions, and you don’t want to lose the option. • Consider alternatives to standard litigation, such as judicial review. • Instruct independent tax counsel prior to the hearing. The earlier, the better. • Disclosure (UK uses this term rather than “discovery”) obligations must be taken seriously and can have material impact. • Privileged documents do not need to be disclosed. • If you fail to disclose something, can be difficult to rely on it later. • You are only required to conduct a “reasonable and proportionate” search for documents – so challenge excessively broad HMRC requests. • Try to minimize satellite disputes, e.g. about disclosure, which rapidly increase expense.

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