HMRC enquiries, investigations and disputes are often a trigger for related third-party civil litigation in a wide range of sectors and commercial contexts: M&A disputes, professional negligence claims, tax fraud investigations and tax‑driven investment litigation. In this article, partner James Le Gallais examines the key pressure points where HMRC and civil proceedings intersect and outlines a practical framework for coordinating strategy across both. It is aimed at in‑house counsel and commercial litigators engaging with HMRC investigations, as well as tax controversy specialists navigating the civil litigation dimension.
What makes parallel HMRC and civil disputes particularly demanding is not only their technical complexity, but also the scope for strategic misalignment if they are approached on separate tracks by different advisers with limited visibility of how decisions on one may affect the other.
The areas of sensitivity are well known. Limitation periods may continue to run while HMRC enquiries proceed. Positions taken with HMRC can later have significance in civil litigation. Privilege issues may arise earlier than expected. Much of the challenge lies in careful strategic coordination and recognising, at an early stage, when decisions on one track can have consequences across both processes.
How parallel proceedings arise
First, some examples of common scenarios in which parallel proceedings can arise:
- M&A transactions. A buyer acquires a company on the basis of representations about its tax position. HMRC later investigates a pre‑completion issue and raises an assessment. The buyer then pursues a warranty or tax covenant claim against the seller or a claim under warranty and indemnity insurance. The buyer or seller may also have claims against their advisers on the deal. All these may run alongside the HMRC process.
- Professional negligence. A client implements tax advice that HMRC later challenges. The resulting loss (tax, interest, penalties and associated costs) may give rise to a negligence claim against the adviser, often while the HMRC investigation is still ongoing.
- Corporate tax fraud investigations. Where HMRC investigates suspected fraud, the same facts frequently necessitate internal investigations and underpin civil claims by or against the company. The interaction between criminal or quasi‑criminal tax investigations and civil litigation raises particular issues of privilege, evidence and self‑incrimination.
- Structured tax products, including investment schemes, disguised remuneration and umbrella schemes, and other marketed arrangements intended to achieve a tax advantage. HMRC challenges the scheme, taxpayers pursue claims against promoters and advisers, and the two tracks often proceed in parallel.
- Supply chain disputes. These can arise where HMRC identifies an unpaid tax liability within a commercial supply chain. The assessed party may challenge HMRC’s position while, in parallel, initiating claims against other supply chain participants, and potentially third parties, concerning the proper allocation of any final tax liability ultimately assessed.
While the HMRC and civil tracks in each case are legally and procedurally distinct, they are factually and strategically entwined. Decisions taken on one track will almost inevitably affect the other.
Sequencing and timing
One of the most important strategic questions is when to issue civil proceedings.
Limitation is the first concern. Civil limitation periods run independently of HMRC proceedings. They do not pause simply because an HMRC enquiry is ongoing; nor does time necessarily start running only when the tax losses to HMRC have been determined. Although HMRC must generally open enquiries within defined time limits (typically within 12 months), once opened, they may take many years to conclude, particularly where cases stand behind long-running test litigation (as seen with employee benefit trust arrangements). Clients who focus exclusively on the tax dispute may discover too late that civil claims are time‑barred.
Agreeing an appropriately drafted standstill agreement with the civil counterparty may be preferable, if they are willing. If not, issuing protective proceedings and seeking a stay pending the outcome of the HMRC process is an alternative. Resolving the tax position with HMRC first has clear advantages where it is possible to do so, including reducing the risk of inconsistent positions being taken in the HMRC and civil tracks. It also avoids, so far as possible, the inherent tension that arises when seeking to recover tax losses in a civil claim at the same time as seeking to negate those tax losses in a dispute with HMRC.
However, the time required for the HMRC process to run its course often means it is not in the client’s best interests to put the civil claims fully on hold: memories fade and evidence becomes stale. Other strategic factors may also point towards running civil claims in parallel with the HMRC process. For example, to secure disclosure and other evidence from civil counterparties.
In practice, the right sequencing will be intensely fact-specific. The key is to address limitation and wider strategic considerations early enough to preserve flexibility as the matter develops.
The privilege minefield
Privilege is often central in parallel proceedings, and its implications are usually best considered from the outset rather than later in the process.
Legal advice privilege applies to confidential communications between a lawyer and a client for the dominant purpose of providing legal advice. But much of the day‑to‑day engagement with HMRC is conducted by accountants, and advice from non-lawyers does not attract legal advice privilege under English law. Technical analyses and submissions prepared for HMRC by accountants may therefore be disclosable in subsequent civil proceedings.
Litigation privilege may offer protection where litigation is reasonably in contemplation and the dominant purpose of the document is preparation for that litigation. But routine HMRC enquiries often fall into a grey area. A compliance check may not suffice; an HMRC Code of Practice 9 (COP9) investigation or a clear fraud referral is more likely to do so; in between, it’s a grey area. The boundary is fact‑specific and often contested.
For that reason, it is often sensible to establish a privilege protocol governing how documents are created, by whom and on what basis before substantive engagement with HMRC begins. Doing so can make it easier to preserve optionality if related civil proceedings later come into focus.
Witness and evidence issues
Parallel proceedings create particular difficulties around witnesses, who are often central to both tracks but may have different interests in each.
Internal witnesses, such as finance directors or in‑house tax teams, may support the client’s position in the HMRC proceedings but face scrutiny or exposure in civil litigation. External advisers may be cooperative witnesses in the HMRC process, but become defendants in civil negligence claims.
A useful starting point is early witness mapping: identifying the key individuals, their interests and their potential exposure on each track, so that the evidence strategy is developed in a coordinated way.
Settlement strategy
Resolution of the tax liability with HMRC is often pursued as a priority. Finalising the tax position crystallises quantum and may create leverage in civil negotiations, although the implications for the civil track should be considered as part of that exercise.
Conducting discussions with HMRC aimed at settling or narrowing the liability on a “without prejudice” basis can provide protection from disclosure in parallel civil claims, but it is no panacea. If an agreed payment to HMRC is later claimed as damages in civil proceedings, there may be arguments whether negotiations should be disclosed in order to assess whether the settlement was reasonable and loss has been properly mitigated.
The taxpayer may be tempted to go further and waive privilege over legal advice supporting the settlement with HMRC (though they cannot be compelled to do so). That, however, opens the door to collateral waiver arguments: even if the advice is contained in a standalone KC opinion, the instructions to counsel will likely also be waived, and it may be hard to cauterise further collateral waiver into underlying privileged material.
Coordinating the legal team
The practical lesson is straightforward: where there is a realistic prospect of third-party litigation alongside a significant HMRC investigation, it is often helpful to involve litigation counsel from an early stage. Where both HMRC disputes and civil claims are in play, strategies are generally best developed in an aligned way, with tax specialists and civil litigators properly joined up. Litigation firms with tax disputes capabilities may be well placed to maintain an overall view and identify issues as they emerge. On the client side, general counsel and other decision makers will often want reporting that brings both tracks together, so that decisions can be taken with the broader picture in mind.
Practical takeaways
A concise set of points to keep in view when managing parallel proceedings:
- Involve civil litigation specialists early in significant HMRC investigations, where civil claims are a possibility.
- Put in place a clear coordination framework between HMRC and civil litigation advisers, if separate firms are used.
- Identify all the individuals within your organisation who will be key stakeholders/decision makers in both streams (eg, general counsel, head of tax, board committees, etc.) and establish clear reporting and communication lines with external advisers.
- Establish a privilege protocol before documents are created.
- Analyse civil limitation periods independently and early.
- Map witnesses and their interests across both tracks.
- Consider asset and document preservation remedies early in fraud cases.
- Take a holistic view of settlement strategy.
Conclusion
Parallel HMRC and civil proceedings are best understood not as two separate problems to be dealt with in sequence, but as a single, connected strategic challenge. The considerations run in both directions: the pursuit of civil redress against a third party should not inhibit effective engagement with HMRC, and vice versa. The central task is to identify early those aspects of one track that are likely to influence the other, and to respond in a way that supports the overall position.
Those who tend to navigate these situations most effectively are those who recognise from the outset that the objective is the best overall outcome across both tracks. The advantage lies in treating the HMRC and civil dimensions as parts of a single strategy, pursued with a clear sense of how each informs the other.
