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Mark McLaughlin CTA (Fellow) ATT TEP provides an overview of the forthcoming Tax Tribunals, and HM Revenue & Customs' internal review process.

All change

A major reform of the tax appeals system is fast approaching. The new Tax Tribunals are expected to ‘go live’ from 1 April 2009, replacing the existing General and Special Commissioners, VAT & Duties and Section 706 Tribunals (the latter dealing with appeals in respect of the income tax anti-avoidance rules in respect of transactions in securities). We will therefore soon be saying goodbye to the General Commissioners (and Clerks), as those official roles will be abolished. Existing Judges, Special Commissioners and members of the VAT & Duties and Section 706 Tribunals will transfer into the new system. The Tax Tribunals will therefore hear appeals in respect of both direct and indirect taxes in the UK.

There will be a ‘First-tier Tribunal’ (Tax Chamber) and a Finance and Tax ‘Upper Tribunal’. Practitioners will probably become familiar with the former Tribunal rather than the latter. This is because most tax cases will initially be dealt with by the First-tier Tribunal. The Upper Tribunal will hear appeals on points of law from the First-tier Tribunal, although a small number of tax appeals will be transferred from the First-tier Tribunal to the Upper Tribunal, as outlined below. Appeal hearings of the First-tier Tribunal will be available locally, via a network of 130 hearing centres across the country.

A period of consultation by a Tribunal Procedure Committee on the rules for the First-tier Tax Chamber and Upper Tribunals rules was scheduled to continue until 12 November 2008, so the regime outlined below is subject to possible change prior to 1 April 2009. 

Internal reviews

HM Revenue & Customs (HMRC) will be implementing a new system of ‘internal reviews’ to coincide with the new Tax Tribunals. Internal reviews broadly provide an alternative means for taxpayers and HMRC to resolve disputes, rather than a tribunal hearing. HMRC’s view is that internal reviews will provide simpler and more consistent appeals handling procedures, and “a less costly and more effective way to resolve disputes without the need for a tribunal hearing.”

HMRC describe internal reviews as “an important safeguard” for customers. However, as the name suggests, internal reviews will be conducted from within HMRC. At a recent ‘Working Together’ meeting in Manchester, some practitioners expressed concern that, by definition, internal reviews could not be impartial, and that the process may therefore be viewed with some skepticism by taxpayers and their advisers. Nevertheless, at present there are review and reconsideration systems in place for indirect tax appeals, and the extension of this process to direct tax appeals is better than no reviews at all on such matters.

Appeal listings

A feature of the new appeals regime is that it is independent of HMRC, who currently control listings and some case management aspects of the General Commissioners appeal system. Under the new Tax Tribunals regime, taxpayers and advisers will generally need to lodge their appeals directly with the Tax Tribunal, and not involve HMRC in the application process.  

Types of appeal cases

The First-tier tribunal will consider both simple and complex cases, on wide ranging issues including Self-Assessment, Petroleum Revenue Tax, Insurance Premium Tax and Climate Change Levy. To deal with such diversity and ranges of complexity, it is proposed in consultation that cases will be allocated between various procedural ‘tracks’:

• Paper – the paper track would deal with quite simple appeals (e.g. Self-Assessment late return fixed filing penalties, income tax surcharges), although any party can request that the case be dealt with at a hearing instead;
• Basic - the basic track would include all standard tax penalty appeals other than those in the paper track;
• Standard – the standard track would cover cases which are not started in the paper or basic tracks;
• Complex – cases may be allocated to the complex track upon application by either party to the appeal, or as directed by the Tribunal.

In certain circumstances, it is proposed that cases may be transferred from the First-tier Tribunal to the Upper Tribunal, if appropriate (e.g., if a case involves an important or complex issue, where the finding of fact is subsidiary to points of law).

Costs

Under the present regime, the General Commissioners (and also the Section 706 Tribunal) have no powers to award costs. However, the Special Commissioners may award costs against a party that has acted wholly unreasonably in connection with a hearing, and the VAT and Duties Tribunal have broad powers to award costs to a successful party. The draft First-tier Tribunal (Tax Chamber) Rules 2009 indicate that costs (or expenses in Scotland) may only be awarded in certain specific circumstances:

• ‘Wasted costs’ may be awarded if the Tribunal considers them justified; or
• If a party to proceedings (or a representative) has acted unreasonably in the Tribunal’s view; or
• f the case falls into the ‘complex’ category above, and the taxpayer did not request prior to a hearing that costs or expenses be excluded (unless it deals solely with directions or case management).

In the latter instance, the proposal is that costs would be available to either party if the case had been classified (or reclassified) into the complex track, subject to the right of taxpayers to ‘opt out’ of the costs regime beforehand. Nevertheless, the First-tier Tax Tribunal can generally be viewed as a ‘no costs’ environment, subject to the exceptions mentioned. Indirect tax practitioners in particular are understood to have expressed concern that taxpayers are at a disadvantage under the proposed regime compared with the existing one. Whilst it is possible for taxpayers to put their case before the First-tier Tax Tribunal at no cost, in practice professional costs will often be incurred, such as in case preparation and representation. It would be unfortunate if taxpayers had to measure those costs against the amount of tax at stake as the deciding factor on whether to take their case forward.

As with most things new, it will take time to become familiar with the new Tax Tribunals regime. However, the proposed unified, independent and expert tax appeals hearing system is intended to provide greater clarity and consistency, and on that basis the changes should generally be welcomed.

The above article was originally published in Busy Practitioner, from Tottel Publishing.