Tax update spring 2025: simplification, administration and reform

The government has announced a package of 39 tax-related measures in its latest tax update on 28 April 2025.

These measures have the stated aim of helping to deliver the government’s “Plan for Change” by:

• simplifying and modernising the tax system;
• tackling non-compliance;
• making the tax system fairer for taxpayers; and
• making the customs system work better for traders.

Two of these are worth noting from a contentious tax perspective:

1. Consultation exploring opportunities to improve HMRC’s approach to dispute resolution.

In February 2024, HMRC published a call for evidence entitled “The Tax Administration Framework Review – enquiry and assessment powers, penalties, safeguards”. Views were sought on aspects of the tax administration framework relating to tax compliance, including dispute resolution. A summary of responses was published in October 2024 as part of the Autumn Budget.

Building on that, a consultation has now been opened to seek views on options for the simplification, modernisation and reform of HMRC’s approach to dispute resolution. It focuses on the ease of access and use of alternative dispute resolution (ADR), and statutory review processes. In particular:

a) HMRC is exploring the scope for streamlining the online process for applying for dispute resolution to make it more accessible. Tied to this, it might then be possible for taxpayers to track progress within existing digital tax accounts.

It seems sensible for HMRC to enable the streamlining of processes where possible and, with the increasing shift to digitalisation, this seems to be a move with the times.

b) There is an acknowledgement that the processes for making an appeal and applying for ADR differ between direct and indirect taxes, and that potential reforms to align processes might enable more consistent access.

At the moment, the procedures differ as follows:

The consultation explores the potential for simplifying and aligning the procedures so that:

• there is a stronger focus on informal engagement;
• the ‘pre-decision letter’ approach is used for direct as well as indirect tax matters;
• applications for ADR can be made at any time (i.e. removing the need to appeal to the tribunal first in the case of indirect tax matters); and
• decisions and offers of statutory reviews are notified at the same time.

An aligned process would certainly be simpler for unrepresented taxpayers; it probably makes minimal difference to those who are represented since the advisers are well aware of the current processes and disparities. The main change will be a slight narrowing of the appeals timetable in respect of direct taxes if the initial appeal to HMRC becomes unnecessary; but this will be balanced out by a lengthening of the process where disputes are referred for ADR.

c) HMRC would like to increase the use of ADR.

HMRC currently has a list of cases which it excludes from the scope of ADR. As a result, in 2023/2024, only 512 applications out of 1,309 for ADR were accepted by HMRC. However, since the majority of cases closed by ADR were resolved by the process, HMRC would like to increase the number of cases accepted into the process going forward. HMRC intends to facilitate this by developing a principles-based approach to considering whether a case is appropriate for ADR, moving away from the current ‘out of scope list’ approach which taxpayers have noted is too restrictive.

Looking at other ways to promote the use of ADR, the consultation considers whether it should be a requirement for taxpayers and HMRC to give ADR due consideration prior to making an appeal to the tribunal.

That seems an unnecessary requirement for any well-advised taxpayer, since it goes without saying that all forms of resolution are already considered in the course of handling complex tax disputes. In our view, the limiting factor is not the failure to consider the use of ADR, but HMRC’s own ‘Litigation and Settlement Strategy’, which HMRC tend to apply in a way that restricts the opportunity for settlement. It will therefore be interesting to see how this proposal develops and whether there is any scope for HMRC to revisit its own strategy as part of its push towards wider adoption of ADR.

This consultation will close on 7 July 2025.

2. Consultation considering reform of behavioural penalties

This consultation seeks views on potential changes to penalties imposed in respect of inaccuracies in tax returns (under Schedule 24 of Finance Act 2007) and failure to notify (under Schedule 41 of the Finance Act 2008).

At the moment, penalties for inaccuracies are imposed by reference to the:

• amount of tax at stake (called the ‘potential lost revenue’);
• categorisation of the taxpayer’s behaviour;
• prompted or unprompted nature of the disclosure; and
• quality of a taxpayer’s disclosure.

Penalty ranges are set out in the legislation with set percentage reductions available for ‘telling, helping, and giving access’ to HMRC. HMRC can also ‘suspend’ penalties in certain circumstances so that the penalty will effectively be cancelled if a taxpayer addresses certain agreed aspects of their compliance for an agreed period (but will be payable if not).

Among other changes, HMRC are considering altering the process to determine the quality of disclosure, by changing how they assess the timing and type of disclosure, and levels of co-operation. The risk here is that HMRC are looking to automate the issuance of penalties, so that less tailored thought will need to be given to taxpayer behaviour.

A more positive suggestion is to remove the minimum 10% inaccuracy penalty for disclosures made after three years, to encourage more taxpayers to come forward at a later date whilst still having the opportunity to mitigate penalties. Given the high levels of statutory interest, this would be a welcome change for taxpayers who wish to correct historic errors.

HMRC are also considering reforming their approach to penalty suspension, either by automatically suspending penalties without conditions, or by replacing penalty suspension with a ‘caution’ (i.e. waiving the first penalty). Given that taxpayers currently self-certify compliance with any agreed suspension conditions, this seems a sensible move that will save time on both sides. The only downside is that taxpayers might be tempted to simply to accept an automatically suspended penalty regardless of whether they consider the penalty to be legitimate or reasonable, given its suspended nature. If automatic suspension is introduced, taxpayers should be cautious about taking such a relaxed approach since if, for whatever reason, the suspension lifts such that the penalty becomes due, the time to appeal against the penalty may have passed. Ideally, we would like to see this timing point addressed by providing taxpayers with a right of appeal from the time any penalties become due (rather than from the time of any automatic suspension).

As an alternative to all of these changes, the consultation invites views on total reform of behavioural penalties, with entirely new penalties brought in to replace the current ones. For example, HMRC have suggested:

• a ‘misdeclaration’ penalty could be introduced to apply in all cases, regardless of taxpayer behaviour, but subject to a taxpayer having a ‘reasonable excuse’ and/or co-operating with HMRC. However, on reading the broad suggestions, HMRC appear to be proposing to write back a lot of the existing principles into the new penalty (e.g. the principle that a reduction is available on making an unprompted disclosure), which begs the question as to how this could be said to be a reform in any real sense; and
• a ‘civil evasion’ penalty could be introduced to target those who deliberately break the rules. It is unclear whether this would be pursued alongside criminal prosecution in the most serious of cases.

This consultation will close on 18 June 2025.

We will work with the Contentious Tax Group to provide responses to HMRC and will continue to monitor developments in this area to bring you the most up-to-date information available.