Robert Hartley is a senior associate in Lovells tax disputes practice.

Most advisers are aware that Revenue & Customs is planning to make many changes to the way in which tax enquiries are handled. The changes cover almost every aspect of the process, from the first enquiries by the Revenue to the way in which disputes are litigated and/or settled. For large businesses though, these reforms are secondary to a much more important shift in policy, which involves the allocation of significantly greater resources to areas of concern to the Revenue. It also involves a new-found determination to get results. This can be inferred from both the evidence given by Dave Hartnett, acting chairman of the Revenue, to the House of Commons Committee of Public Accounts on 28 January 2008, and also from the Organisation for Economic Cooperation and Development (OECD) study of Tax Intermediaries (published on 10 January 2008), which was led by the Revenue.

Stitching these isolated pieces of evidence together, it is clear that the tax affairs of large businesses are a top priority and that the Revenue is resolved to tackle such businesses head-on if necessary. In fact, given the right provocation, something akin to a Terminator mentality is coming where the Revenue will not stop, back down, or compromise until it wins its case.

A rather dramatic overstatement, you may think, but the evidence given by Hartnett makes for sobering reading. Under fire for the number of 'small fry' cases that continue to occupy the Revenue's time, he pointed to one case that had 150 officers working on it, not including outside counsel and 'others'. He also gave the example of a major firm of advisers that had sold a scheme to a dozen or so clients. The Revenue's response was to visit the firm's vice-chairman and relay directly to him their concerns about the scheme's failings. According to the evidence, the result was a letter from the vice-chairman to clients, which stated that the scheme did not work. While these examples may be anecdotal in nature, they clearly show a determination and an ability to fight fire with fire where appropriate.

Hartnett's evidence also makes it clear that greater resources are being allocated to the corporation tax affairs of multinationals. According to the evidence, 140 recently qualified tax inspectors are due to join the Large Business Service alongside 16 new transfer pricing specialists. The total capacity of the LBS apparently stands at 600 staff working on corporation tax, with 350 further specialists in the corporation tax and VAT directorate and another 100 in the tax avoidance department. Lawyers and investigators across the Revenue can also be used by the LBS. This allocation of resources, when viewed against comments in the same evidence such as 'we are beginning to see clever structuring arrangements in big corporates,' strongly suggests that the Revenue is not allocating resource merely for the purposes of understanding what these big fish are doing. It suggests that with big fish comes the possibility of big tax settlements.

Even with its enlarged resources though, the Revenue cannot throw 150 officers at every large business. Risk-profiling is needed to ensure resources are properly targeted, and one of the targets is very obviously tax advantageous structured finance products. The OECD study identifies two clear risk groups that are linked by this activity. The first group consists of investment banks which, according to the study, 'pose particular issues because some of them are involved in aggressive tax planning in the inter-bank finance market and in trading for their own account'. The OECD study also identifies large businesses generally as aggressive tax planning risks. Given that most large businesses use financial instruments and/or investment banks, that means a large group of potential targets for the Revenue to take aim at.

Given that they are firmly within the Revenue's sights, financial services providers engaging in structured finance activities need to develop a strategic approach to identifying potential issues. They also need to 'upscale' the way in which they deal with potential or existing enquiries in this area. This is necessary because the Revenue will already be operating in a number of cases on a litigation footing, and will use a combination of officers, accountants, lawyers and counsel as necessary. Technical responses alone are unlikely to suffice; the Revenue knows that many structures are prone to implementation failures or technical ambiguities and that these warrant further investigation in the form of costly and time-consuming enquiries. Taxpayers in this situation will quickly need to assemble a multi-disciplined team and construct a detailed strategy in order to ensure a reasonable outcome. The presentational and evidential skills of litigation specialists will need to be combined with accounting expertise from an early stage even if a hearing is not held.

Such a strategic approach achieves three key benefits. The first of these is, most importantly, an equality of arms with the Revenue. The second is that the taxpayer has a clear view of the strength of its case throughout the enquiry process. Thirdly, a strategic approach should drive the Revenue towards stating a clear position on the key issues, whether or not the dispute subsequently goes before the special commissioners or (eventually) the new tribunals. A strategic approach also need not give rise to greater costs provided businesses and their advisers maintain tight controls on the work being done to resolve the dispute.

Beyond the Revenue's immediate concerns about structured finance, the challenge for advisers in the future will be to detect the areas where the Revenue will be similarly unyielding. Given the resources that can now be brought to bear on large businesses, a failure to divine the Revenue's attitude may prove to be very costly.

For further analysis on the Revenue's powers, see p30.