Tax Disputes with HMRC
In this article we take a look at how to progress matters when discussions with the inspector appear to have broken down or reached an impasse.
Where agreement just cannot be reached between the taxpayer and HMRC the final outcome is the Tax Tribunal.
However, the risk of a successful outcome, no matter how strong the case appears to be, should not be under estimated ( litigation risk) nor should the potential cost and time involved. Thus, this article looks at how to avoid a Tribunal rather than how to manage a Tribunal case.
The starting point for any dispute with HMRC is to carefully marshal and present the facts and identify and preserve key documents. HMRC will do this as a matter of course, but you can often sense HMRC doing this with more emphasis when the negotiations appear to be stalling. From the taxpayer’s perspective it is perhaps self-evident that the facts upon which HMRC rely in making their arguments must be clearly articulated by the inspector as well as his technical arguments and the contrary facts and arguments clearly presented. It may take some time for the case to progress to Tribunal and a Tribunal judge is likely to be unimpressed if there is confusion as to the facts upon which the taxpayer relies or his memory appears confused or possibly contradictory. It is never too early to start planning for the worst whilst still expecting the best outcome!
Although many “gun ho” inspectors appear to overlook the fact, HMRC have a formal Litigation and Settlement Strategy (LSS). This governs its approach to settling tax disputes whether through negotiation or civil litigation, it was first introduced in 2007 and extensively revised in 2011 with minor updates in 2013.
Interestingly the LSS describes collaborative working or seeking to resolve disputes by agreement as HMRC default approach with departures from this as a rare exception. The writer is unsure if many on this side of the fence see these laudable sentiments in practice in their day to day dealings with HMRC. In addition to the LSS HMRC also have a “Code of governance for resolving tax disputes”. Both should be consulted when things start heating up with HMRC and its sometimes a sensible tactic to ask the inspector to confirm that he is following their guidance in his discussions with you!
To ease the pressure on Tribunals there are two potential further options to be considered, neither is compulsory nor removes the taxpayers right to take the matter in dispute to Tribunal.
The Statutory Review procedure has been in place since 2009. Even within HMRC’s guidance there is confusion as to what a review will cover, and different explanations have been given at different times, let’s be charitable and say that the process is evolving! In practice , what a review will cover, how it will be carried out and indeed the impartiality of the reviewer seems to depend in practice very much upon the inclination and expertise of the officer undertaking the review.
HMRC state that the review will be independent undertaken by a separate review officer not previously involved in the case or the line manager of the person who is actively involved in the case. The objectivity and impartiality of the review officer is not always apparent in their decisions .
The statutory provisions are found in TMA 1970 s49A to S49H. Section 49E provides that – The nature and extent of the review are to be such as appear appropriate to HMRC in the circumstances.
The statutory basis for a review is that once a notice of appeal has been given, the taxpayer can request or HMRC suggest a review. It is at this stage that a number of timescales come into play and it is very important that these time scales are complied with.
Where HMRC offer a review (s49C) they must also set out their view of the matter in question (it is at this stage that the earlier time and effort involved in marshalling the facts and arguments will again be helpful). If the offer of the review is not responded to within 30days, either by acceptance of the offer or referring the matter to Tribunal the taxpayer is regarded as accepting HMRC’s views and his appeal is deemed to be settled under S54 (1) (and the taxpayer does not have the right to repudiate or resile from that agreement under s54 (2)). Where the taxpayer asks for a review HMRC have 45 days (or such further period as may be mutually agreed ) to set out their views. Once they have done so (or have failed to do so within 45 days) the conclusion of the review is again deemed to be a s54 agreement settling the matter unless the taxpayer notifies his appeal to Tribunal within 30 days.
There is a perception that if the matter does ultimately proceed to Tribunal the Tribunal judge will appreciate the taxpayer’s attempts to resolve matters without using up the Tribunal’s scarce resources (or perhaps more significantly colour his view if no attempt has been made to take account of every opportunity to do so).
There is a growing emphasis upon Alternative Disputes Resolution (ADR) as a means of settling disputes in many areas of civil litigation. ADR has been an option in tax disputes since 2013 and provides a form of structured mediation between the parties that is designed to resolve a dispute without the need to proceed to Tribunal. Entering into ADR does not limit the taxpayer’s rights to seek a statutory review or proceed to Tribunal and time scales here must continue to be complied with.
ADR can be requested at any time and HMRC state that it can be applied for – if you’ve stopped making progress in your dealings with HMRC.
And go on to say – ADR gives you the option of having someone who’s not been involved in your dispute, to work with you and the HMRC officer dealing with it. The person leading the ADR will act as a neutral, third party mediator. They don’t take over responsibility for the dispute. They’ll work with you both to explore ways of resolving the dispute through meetings and telephone conversations. They’ll help you focus on the areas that need to be resolved and, if needed, help re-establish communications between both parties.
HMRC have a number of specially trained officers who can act as mediators or it is possible for the parties to agree to appoint a third-party professional mediator and to share the cost.
The focus of ADR is upon what HMRC call business customers although they do acknowledge that it has a role in personal tax disputes. Where progress in resolving matters has ceased it seeks to bring the parties back together by enabling the differences to be identified, articulated and explored in a non-confrontational environment.
The last published statistics are for 2016/2017, these confirm that 80% of cases dealt with through ADR were successfully settled .
Although, interestingly a recent Tribunal case has held that an agreement reached with HMRC under an ADR process was ultra vires as it was contrary to the law and as such unenforceable by the taxpayer against HMRC. Somewhat scathingly the Tribunal judge commented on the VAT agreed under ADR stating that it was wrong in law and inconsistent with HMRC’s published position.
HMRC’s willingness to ignore its own published guidance is unfortunately a matter for another day !