UK tax disputes: managing tax risk

In the first article in our series exploring our experience in tax disputes, we examine the drivers behind increased HMRC scrutiny, the most common triggers for enquiries, and the practical steps individuals and trustees can take to manage tax risk.

HMRC is increasingly focusing on the tax reporting of wealthy individuals as part of its broader drive to address the UK’s fiscal shortfall. As a result, we are seeing a marked rise in enquiries, many of which develop into lengthy and complex investigations.

Why are we seeing more investigations?

In the UK, it is the duty of taxpayers to self-assess their tax, usually by submitting annual tax returns. However, it is open to HMRC to raise enquiries in relation to these returns. This can trigger a prolonged period of correspondence and discussion with HMRC (often over several years), which can be time-consuming and expensive to deal with. HMRC now has longer than ever to carry out its investigations, with an increased time limit of 12 years for offshore matters without deliberate behaviour, and up to 20 years for inheritance tax matters (an unlimited time limit will apply to these in certain circumstances).

These are the top five causes of the increase in scrutiny from HMRC:

1. Fiscal pressure

At the root of HMRC’s increased scrutiny of tax returns is the broader economic backdrop. Faced with significant fiscal shortfalls, the Government only has a limited number of options to 'balance the books'. Targeting the 'tax gap' is a relatively uncontroversial – and popular - approach.

2. Technological advancements

HMRC is now using advanced data analytics and AI to target potential non-compliance by identifying patterns and highlighting anomalies. These tools enable HMRC to prioritise investigations far more efficiently.

3. Global cooperation and reporting

Information sharing between tax authorities is now routine. The UK participates in the Common Reporting Standard, the exchange of beneficial ownership information. In addition, there is generally much more information being reported to HMRC. For example, the new 'FIG' regime for people moving to the UK does not apply automatically and requires individuals to declare the sources and amounts of income and gains that they wish the regime to apply to.

4. Tougher judicial attitudes

In recent years, the UK courts have shown less tolerance for aggressive tax planning, particularly in cases involving offshore structures. For example, judicial willingness to infer tax avoidance motives from circumstantial evidence has increased, making disputes harder to win without robust factual support.

5. Complexity and legislative change

The 2025 changes have followed significant reforms to the taxation of non-domiciled individuals and offshore trusts in 2017. Although in many respects the new residence regime is a simplification of the old remittance basis which applied to non-doms, the latter still remains relevant. The layering of new provisions onto existing legislation is likely to create ever more significant complexity in the years ahead. For individuals and trustees, this means that arrangements that were compliant under an earlier regime can now create unexpected tax liabilities. Clients’ personal and financial arrangements are also becoming increasingly complex, with multi-jurisdictional ties and emerging asset classes, such as cryptocurrency, adding further uncertainty. This means that tax is often underpaid inadvertently.

How are clients vulnerable?

These are our top five areas of vulnerability to tax investigations and disputes:

1. Domicile

Although domicile is no longer a connecting factor for ongoing UK tax purposes following the introduction of the FIG regime, historic domicile status remains of significant relevance. For example, certain trusts settled by a foreign domiciliary will benefit from limited grandfathering to prevent an inheritance tax charge on the settlor's death. HMRC continues to raise domicile enquiries, both in relation to past remittance basis claims and inheritance tax exposure. Their recent run of successful court cases is only likely to encourage further enquiries.

2. Residence

Residence status – for individuals, trusts and companies - remains a particular focus of HMRC scrutiny. The UK statutory residence test is complex and highly fact-specific, so small changes in fact patterns can have a significant tax impact. Some areas – such as work – can be difficult for the taxpayer to prove.

For trusts and companies, residence status can be particularly vulnerable where trustees and directors are changing their personal residence. In the case of companies, individual directors can inadvertently shift the central management and control of a company if strict procedures are not followed. Structures with non-UK entities are more frequently being examined to assess whether they are in fact UK resident and subject to UK tax.

3. Remittances

Although the remittance basis which applied to non-doms has been abolished, income and gains arising before 6 April 2025 by non-doms will still be taxable when 'remitted'. This is a very complicated area and it is easy for mistakes to be made, particularly in the future as individuals and advisers become less familiar with the principles around remittances. The Finance Act 2025 broadened the definition of a remittance, signalling the Government’s intention for remittances to continue to be monitored.

4. Motive defence

There are anti-avoidance rules in place to tax UK resident settlors and beneficiaries of trusts (as well as owners of companies) on income and gains arising within the structures. Included in these rules are 'motive defences' which exempt arrangements put in place (and implemented) for motives other than UK tax. In practice, these tests remain uncertain, fact sensitive, and complex. The burden of proof lies with the taxpayer, and HMRC often challenges the availability of the defence. Reform is still expected, but will not be until at least 2027.

5. Reliefs

We are increasingly seeing HMRC challenging claims for reliefs from tax. These include gift aid claims relating to charitable donations and business/ agricultural property relief from inheritance tax.

We also frequently see issues relating to double tax treaty relief claims. These can result from taxpayers failing to properly claim relief, perhaps having inadvertently become dual-resident or believing a treaty provides automatic protection, and also from HMRC challenging a taxpayer's claims. An individual's 'centre of vital interests', usually key to how a double tax treaty will apply, is particularly fact sensitive and can evolve over time.

How can risks be managed?

As well as the reputational risks of failing to comply with tax-reporting obligations, there are also significant financial risks, particularly if penalties are applied. As noted above, dealing with an investigation can also be extremely stressful and time-consuming, even if it is concluded successfully in the taxpayer's favour. To reduce the risk of a protracted enquiry, we recommend taxpayers take the following steps.

1. Review tax affairs

Taxpayers should carry out regular reviews of their tax position, particularly in relation to residence, remittances, and any offshore structures, with a view to ensuring compliance with current rules. This also allows taxpayers to identify and address issues early.

2. Take advice

 If there is uncertainty about a tax position, obtaining specialist advice can identify risks early and provide ways to strengthen the position if possible.  

3. Keep evidence

Contemporaneous records are essential. For residence cases, this means maintaining detailed travel records and evidence of work patterns. For trustees and directors, minutes and board papers should clearly evidence where and how decisions are made. Technology can be very helpful here, but it shouldn't be relied upon completely. In keeping records, taxpayers should be mindful of limitation periods, and also the length of time it can take for an enquiry to be concluded, particularly if it goes to court (as this can take many years).

4. Think about legal privilege

Clients should be aware that legal advice privilege may not extend to communications with accountants or other tax advisers who are not lawyers. Where sensitive issues are being explored - particularly those involving potential irregularities - early engagement with a solicitor can ensure that advice is protected by privilege (although clearly there is much to be gained by the solicitor working in a collaborative way with other professionals).

5. Be proactive

Waiting for HMRC to raise questions is rarely the best approach, particularly as they have up to 12 years to investigate offshore matters where the error is not deliberate. Voluntary disclosures can often help resolve issues more quickly, more cost-efficiently and with less reputational risk than a formal enquiry. Identifying potential red flags and addressing them early demonstrates good faith and will significantly reduce penalties if errors are found.

How we can help

The team at Farrer & Co advises on all aspects of tax disputes, including disclosures, HMRC enquiries, investigations, and related litigation such as professional negligence claims, mistake claims, and rectification.

We handle disputes efficiently and robustly, preventing unnecessary escalation and working closely with clients’ other advisers. Many of our cases involve UK tax issues in an international context, where we coordinate with overseas advisers to deliver a unified strategy.

We also provide second opinions on complex or sensitive matters. Our tailored approach is designed to manage risk, protect reputation, and achieve the best long-term outcomes.

About this series

This briefing forms part of a series on UK tax disputes, drawing on our experience advising individuals, trustees and family offices on HMRC enquiries, investigations and related litigation. The series explores how HMRC’s approach is evolving, where the key risks now lie, and the practical steps that can be taken to manage exposure and protect reputation.
The series includes:

• UK tax disputes: managing tax risk – examining the drivers behind increased HMRC scrutiny and common triggers for enquiries;
• Tax and reputation management: why sound tax affairs are a strategic imperative – considering the growing intersection between tax compliance and reputational risk; and
• Trustees and UK tax disputes: navigating increased HMRC scrutiny – focusing on the particular challenges facing trustees and offshore structures.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, September 2025