Mark McLaughlin

Introduction

There was a time, not so very long ago, when communications between taxpayers (or agents) and HM Revenue & Customs (HMRC) were on a less formal basis than today. HMRC Officers seemingly had more discretion when dealing with tax cases, and also greater scope for negotiating liabilities than is presently the case.

While HMRC are making positive attempts to be as helpful to taxpayers as the law and their resources allows, and also to improve relationships with agents, beyond the public relations there appears to have been a hardening of policies and attitudes by HMRC in certain aspects of dealings with taxpayers and agents in recent times.

Disputes with HMRC

One example where the scope for negotiation with HMRC is relatively restricted is when there is a dispute over tax liabilities or entitlement to tax credits. HMRC recently published their ‘Litigation and Settlements Strategy. See:

http://www.hmrc.gov.uk/practitioners/lss-intro.htm)

This sets out their policy in bringing tax disputes to a conclusion. HMRC state that:

“…where possible, issues should be resolved in non-confrontational and collaborative ways without entering into a dispute.”

Interestingly, HMRC go on to say:

“Where possible, much uncertainty may be resolved through dialogue on a pre-return and perhaps pre-transaction basis.”

Unfortunately, in practice HMRC Officers seem fairly reluctant to give an advance opinion or ruling, except in certain limited circumstances (as set out in their Code of Practice 10 ‘Information and Advice’ (http://www.hmrc.gov.uk/pdfs/cop10.htm)), or where there are already procedures in place (eg. the ‘CG34’ service for agreeing valuations on the disposal of chargeable assets before the taxpayer’s self assessment return is submitted (http://www.hmrc.gov.uk/cgt/cg34.htm)). If HMRC could make a pre-return or pre-transaction clearance service more widely available, this would surely reduce the scope for disputes with taxpayers. Unfortunately, HMRC’s resources are already stretched, and wider advance ruling facilities are very unlikely to happen.

All or nothing

HMRC’s stated principles when dealing with settlement terms includes the following:

“Some disputes have an all-or-nothing character, involving a single point of law that would be decided one way or the other by the courts, with no middle ground. Such disputes should be settled on all-or-nothing terms: do not split the difference or offer any discount for an agreement not to litigate. Similarly do not seek low value settlements in cases where we are not prepared to litigate.”

Bearing in mind the earlier comments on past occasions when it might have been possible to negotiate with HMRC to settle a case, this statement underlines HMRC’s determination to close what it calls the ‘tax gap’. Of course, this approach might always have been the ‘official line’. However, actual and anecdotal experience suggests a different approach in practice in years gone by.

Ability to pay

HMRC might be justified in asking: “Why should the taxpayer pay less tax simply by disputing it?”. This is perhaps a fair question. Taxpayers who ‘try it on’ with HMRC in the hope of reducing their tax bill should surely be deterred from doing so. However, a further HMRC principle is that:

“This guidance assumes that ability to pay will not be an issue in determining settlement terms.”
 
The problem with this policy is that if a tax dispute between HMRC and the taxpayer escalates above a certain level, there will probably be costs involved for the taxpayer to have the dispute resolved. The taxpayer’s right to resolve a tax dispute should not be dictated by his or her resources to pay the costs involved. There are proposals being developed to reform the tax appeals system. However, at present we are stuck with a situation whereby justice in a tax dispute might be subject to the taxpayer’s means. HMRC may say that this is a problem with the legal system rather than a particular concern of theirs, and they would probably be right. However, that does not make the system any fairer or more satisfactory for the taxpayer.

Looking on the bright side…  

The good news for taxpayers is that HMRC’s tax dispute resolution policy contains some positive aspects as well. For example, HMRC Officers are instructed:

“If following initial investigation you do not find good evidence of material understatement of tax, drop the case. Do not pursue minor or questionable points in order to avoid a nil settlement.”

In addition:

“Similarly, in a legal dispute if HMRC’s arguments are not strong and/or the point at issue is not an important one, drop the case.”
 
The first statement above in particular should strike a chord with tax advisers who regularly deal with HMRC enquiries into clients’ tax returns. Some advisers consider that HMRC Officers sometimes undertake ‘fishing expeditions’ to find errors in tax returns if their enquiries have otherwise proved fruitless. Those advisers will no doubt wish to quote the above mandate from HMRC’s policy document in those situations in future.

As mentioned, HMRC’s resources are understood to be fairly limited. Perhaps a positive effect of this limitation lies in cases where agreement cannot be reached in a tax dispute without the need for litigation. HMRC’s policy on litigation decisions is that:

“Litigating where our chances of success are less than 50% would need to be justified by the particular circumstances, such as a very large amount of tax at stake (in the case itself or from immediate precedent value) or a fundamental point of principle at issue.”

This approach of appraising the prospects of success before deciding whether to litigate will hopefully reduce the number of cases reaching the Commissioners and the Courts. This is obviously good news for taxpayers in one respect, but is arguably negative in the sense that it if HMRC decide to litigate, this suggests that their case is potentially a strong one.

Penalties

HMRC Officers are instructed that they should not “undercharge tax, interest or penalties in the interest of quick settlement.”

This represents further bad news for taxpayers and agents in enquiry cases on the face of it. However, there is anecdotal evidence that HMRC were already applying this policy in practice anyway.

The scope for negotiating on the level of penalties in enquiry cases dealing with incprrect tax returns will be restricted in any event, following changes to the law announced earlier this year.

Under existing rules, if the taxpayer (or his or her agent) files an incorrect tax return fraudulently or negligently, HMRC can impose penalties based on the potential lost tax (and National Insurance contributions) as a result of correcting the error. The maximum penalty is broadly 100% of the additional tax resulting from the correction. However, the penalties may be reduced according to the circumstances, as follows:

• Disclosure of the error – up to 20% (exceptionally 30%);
• Co-operation with HMRC – up to 40%; and
• Size and gravity of the offence – up to 40%

In exceptional circumstances, the above abatements can result in no penalty to pay.

However, a new penalty regime will be introduced from a date to be announced, which will not be earlier than 1 April 2009. Under the new system, in broad terms the level of penalty will depend on whether the taxpayer’s (or agent’s) behaviour was either ‘careless’, ‘deliberate but not concealed’ or ‘deliberate and concealed’. However, as with the present system, penalties may be reduced, according to the quality of ‘disclosure’ by the taxpayer, and whether that disclosure is prompted by HMRC, or is unprompted by the taxpayer.

A feature of this new regime is that it not only identifies a maximum level of penalty as before, but also a minimum level, which is irreducible except in special circumstances. This means that penalties will probably be payable in the vast majority of enquiry cases concerning incorrect returns. It also means that HMRC and taxpayers (or agents) will normally be restricted in the scope of their negotiations on the level of penalties, to a minimum amount. 

Harder line?

The HMRC policy on tax disputes, and the forthcoming changes to the penalty system for incorrect tax returns, are perhaps indicative of a more formal, and arguably more confrontational, relationship between HMRC and taxpayers (and agents) than before. Taxpayers in particular need to be aware that the days of ‘doing deals’ with HMRC are well and truly over in most cases. HMRC’s approach seems to be that “the tax is the tax”, and that the tax is payable when it falls due. However, at least it is better to be aware of the rules before playing the game.

Article Added Saturday, 01 December 2007 | 3773 Hits

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