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The knowledge that taxpayers do not have to pay the disputed tax until their appeal has been determined by the First-tier Tribunal (assuming that the FTT finds against them) has, in HMRC's mind, long served to fuel the demand for tax avoidance schemes which HMRC considers abusive. The fact that general interest rates have been at such a low level for a long time has arguably served as an incentive for taxpayers to enter into what HMRC perceive to be "tax avoidance arrangements" because it gave taxpayers the ability to hang onto the disputed tax for potentially very long periods whilst their dispute was resolved. As we are aware, some of the schemes HMRC is targeting were implemented ten years or more ago - and in some cases enquiries into such schemes have not even been closed, let alone litigated. If interest rates had been higher, taxpayers might have focused more on the interest required to be paid (in addition to the tax) in circumstances where a Tribunal found against them and in favour of HMRC. Instead, taxpayers have had the ability to invest the money - in some cases in property, which in London in particular has soared in value in that period - and have thus done very well, almost certainly better than they would have done if they had not embarked on the tax scheme in the first place. HMRC therefore perceives the use of the money by taxpayers as constituting a tax advantage of itself, irrespective of the merits of the "avoidance" arrangements that are the subject of the dispute. However, a long wait for a tribunal case to be heard is not as much of a problem for HMRC as it is for a taxpayer, who will now have had to pay up front the tax which is in dispute. And now as regards interest, the shoe is on the other foot: if the taxpayer wins, any interest HMRC pays is unlikely to be enough to compensate the taxpayer for what they could have earned if they had had the full use of the money throughout, even in relatively low-risk products with guaranteed yields. 

One can have some sympathy with HMRC's desire to make the entering into of "abusive" arrangements less attractive and closing down the cashflow advantage referred to above is arguably "fair game", having regard to the Government's deficit reduction programme and the public mood against "egregious" tax schemes available only to the very wealthy. However, there would have been considerably more sympathy - and indeed support - for the APN and "Follower Notices" regime had HMRC applied these prospectively, as opposed to applying them retrospectively, to taxpayers who had complied with HMRC's DOTAS regime. That the APN approach is retrospective has undoubtedly galvanised the determination of many taxpayers who consider that their tax planning was lawful. This can only make the process of reducing the backlog of cases more complex.

The fundamental problem, however, is that there is no solution - or apparent attempt at a solution - to clear the backlog of cases. The staggering number is perhaps not the number of appeals being listed before the Tax Tribunals but the number of taxpayers with avoidance arrangements that are under enquiry but which have not yet been listed - estimated at between 65,000 and 100,000 and thus in the region of the current size of the British Army. On the basis of 6-7,000 new cases being listed before the FTT each year, and 2,500-3,000 appeals being actually heard, it would take a generation for all of these cases to be heard on appeal - at a time when Tribunal budgets (unlike HMRC's enforcement budget) have been subject to drastic cuts. The Ministry of Justice is actively seeking to recruit up to four salaried judges and up to 35 fee-paid judges and deputy judges for the Tax Tribunals - but nowhere near enough to clear such a vast number of cases. One also has to bear in mind the infrastructure (e.g. Tribunal administration and facilities) required to process such cases, and also the fact that many cases are technically complex and therefore the fact that there is a finite number of legally qualified people with the relevant experience in Tax who would be suitable for a judicial appointment of this nature.

HMRC had a "once in a lifetime" opportunity to "clear the decks" and collect a very considerable amount of tax to help reduce the deficit in the course of the current Parliament by introducing a comprehensive settlement arrangement applying to all historic cases. It did not take this opportunity - and worse still shows no sign of any movement in relation to its Litigation & Settlement Strategy ("LSS"), which actively precludes any form of settlement except in terms so favourable to HMRC that would amount to the taxpayer's simply conceding. 

Without doubt, many - possibly most - of the 65,000 or more taxpayers with open enquiries in the “avoidance” arena will end up "throwing in the towel". But a significant minority are being encouraged to fight on and can be expected to do so. Meanwhile, there are many other extant appeals wholly unrelated to tax avoidance (for example in relation to VAT reclaim arrangements) which are also sitting in the "Tribunal queue" and taxpayers with genuine grounds for disputing the position being taken by HMRC, who are quite properly executing their right to have their appeal determined at law by the FTT will have to wait longer and longer to have their issues resolved, promoting uncertainty and yet more cash "tied up" for longer and longer, pending resolution of tax disputes which could be much better employed either by being paid (where appropriate) as tax properly due to HMRC - and thus reducing the deficit - or (where the taxpayer is successful) being employed to help fuel growth in the economy - in turn generating greater tax receipts in due course.

 

The current situation serves only to promote greater uncertainty, which is good for nobody.