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The number of cases taken to tax tribunal has risen by 20% in the last year and the backlog of cases has soared. Ian Hyde, partner at Pinsent Masons, thinks he knows why.

Freedom of Information

Ian explained that a "Freedom of Information Request" made to HM Revenue & Customs (HMRC) has revealed that the number of tribunal cases heard in 2011 rose to 11,000, up 20% from the 9,000 heard in the previous year. The backlog of cases waiting to be heard has also increased to 22,000 - two years' worth of cases, at the current rate.

"This is bad for the taxpayer and it looks bad for HM Revenue & Customs: an already difficult situation has been made much worse. Taxpayers are forced to wait years for a case to be decided, the outcome of which is often vital to their livelihoods. Even if HMRC can afford to lose some cases, many taxpayers cannot."

According to Ian, the problem stems from HMRC's old Litigation and Settlement Strategy, (LSS), where they were much more predisposed to take a contended case to tribunal. Such cases have continued to stack up and even though the new LSS is far more conciliatory, it may take years before this change of tack starts has a tangible effect on the number of cases heard, because of the extent of the backlog.

"There are a number of other factors which serve to exacerbate the problem:

• HMRC's resources are now extremely limited and they are struggling to meet the demand.
• Whilst HMRC 'head office' has publicised the 'softer' version of the LSS for some time, my perception is that many local tax inspectors are still quite happy to follow the old routine, and list cases that simply shouldn't be heard at tribunal. More needs to be done to ensure that local inspectors adopt the new approach, which is far more open to negotiation.
• HMRC is however concerned as regards the public's perception of negotiated settlements: there has been significant adverse publicity in some high-profile cases and this has left HMRC quite wary in terms of negotiation. But negotiation is simply unavoidable in some cases. In fact, it's frequently preferable."

Indeed, the National Audit Office has broadly endorsed HMRC's approach to negotiating the settlements which caused such public concern. (See HMRC "Big Business" Tax Deals Cleared by National Audit Office but Notes Lack of Tax Expertise) 

Alternative Dispute Resolution Service

HMRC as an entity is keen to negotiate a settlement, where it can see that it's expedient to do so - see, for instance, Dave Hartnett's comments regarding Employee Benefit Trusts and Disguised Remuneration (HMRC Offers Settlement Deal for EBTs - "Disguised Remuneration").

There is now a trial Alternative Dispute Resolution Service (ADR) which HMRC is trying very hard to promote - according to Ian, the ADR team is 'crying out' for decent cases.

"The ADR involves a new, independent and specially trained mediator looking at the arguments on both sides and trying to see if a settlement can be reached, particularly where there is technical uncertainty that affords a range of possible outcomes at hearing.

While some people were initially put off by the fact that the mediator is another HMRC officer, it is our experience so far that they have often been very useful in helping to move 'stalled' cases forwards. ADR isn't suitable for everyone and at the moment it's not available to disputes which have moved as far as assessments being raised but for some taxpayers it offers a practical solution. It is worth bearing in mind that HMRC is very keen for the ADR to be seen as a success, since it is more cost-effective for them too."