HMRC have announced a number of measures in the Pre-Budget Report which are intended to help close the tax gap.  The McGrigors Tax Disputes and Investigations team look at three of these measures in outline

HMRC to force taxpayers to "pay up" when appealing tax cases

HMRC has announced a long-predicted change in its practice in relation to tax litigation. In direct tax cases, when a taxpayer appeals to the Tax Tribunal against an assessment or closure notice, HMRC usually agrees to postpone the payment of the tax in dispute whilst the parties await the outcome of the case.

If the Tax Tribunal decides the case in HMRC's favour, the law entitles HMRC to collect the disputed tax at that point – even if the taxpayer is pursuing an appeal to the Upper Tribunal or the higher Courts. In practice HMRC have tended not to enforce collection of disputed tax until all rights of appeal have been finally exhausted.

Going forward HMRC has said that it will normally require tax to the paid following a HMRC 'win' at the Tribunal or a Higher Court. If it ultimately loses the case, HMRC will refund the tax at that point in time.

It has always been fairly surprising that, despite having had the power to collect tax in direct tax disputes pending the outcome of the case, HMRC has not in practice exercised it. Seeking payment pending resolution of a dispute impacts on cashflow for the taxpayer and can affect the appetite to fight on. Even though interest is payable on the return of the tax in the event of a taxpayer win, it is calculated on a simple basis and is at a statutory rate below bank base rate.

This is a move toward parity with the more aggressive system in VAT, where the general rule is that the VAT has to be paid "upfront".

Nevertheless, the ability to postpone tax pending an appeal to the Tribunal, if not beyond, still puts the taxpayer in a fairly advantageous position in terms of litigating direct tax cases.

HMRC to increase investigations to reduce carelessness – No More Mr. Nice Guy?

HMRC has stated that it intends to "reduce" the incidence of failure to take reasonable care on the part of the taxpayers by increasing the number of investigations that it undertakes. This is a significant change having regard to HMRC's mantra of recent years. HMRC has been focusing on systems and processes and working with businesses to ensure that they are compliant and not careless. Now HMRC says that it will increase the number of checks to identify failure to take reasonable care - and will penalise those who fail to meet their obligations, where appropriate.

This is likely to lead to a significant increase in compliance-based interventions – or investigations as they used to be called.

The statutory penalty for careless behaviour is 30 per cent of the tax loss, so these increased interventions can lead potentially to very significant sums by way of penalty, particularly for large and medium-sized corporates.

Penalties can be mitigated to fifteen per cent - or to zero where disclosure of the carelessness is made by a taxpayer entirely voluntarily and without any prompting by HMRC. However, if the carelessness is discovered as a result of a compliance check or intervention, by definition it cannot be unprompted and so taxpayers who are caught in this way will be looking at a fifteen per cent penalty as an absolute minimum. HMRC probably considers that the increase in penalty-take will more than cover the cost of the resource needed to increase the level of compliance checks.

HMRC to drop cases where marginal or low value sums are involved - Litigation & Settlement Strategy up for grabs?

HMRC has stated that as part of its strategy to reduce the tax gap it will seek to resolve issues of "legal interpretation", in particular by using the Litigation & Settlement Strategy (or LSS) to improve its operational response to technical challenges by taxpayers. In particular, HMRC says that it will "drop" marginal or lower value cases in order to focus on the most significant areas of risk.

The devil will be in the detail here. What do HMRC mean by "marginal or lower value cases"? Up to now, the LSS has meant HMRC focusing on cases where it has been advised that it has good prospects of success and (except where there are wider considerations) dropping cases where it has been advised that it is likely to lose.

The interesting question will be whether LSS is now going to be redrafted. If HMRC is going to drop marginal or low value cases, this could provide an incentive for taxpayers with relatively small amounts of tax at stake simply to hold out in the hope that HMRC will back off.

We cannot believe that this is what HMRC intends. It does not really do anything to address the real concern, which is the increasing log-jam at the Tribunal. In part, this has resulted from the LSS, since more cases are "backing up" as opposed to reaching a monetary settlement. This, combined with a new Tribunal system that is creaking at the seams is leading to unacceptable delay in resolving tax disputes. This is bad for taxpayers and bad for justice.

JASON COLLINS
Partner, Tax, Disputes & Investigations
Tel +44 (0) 207 054 2727
Email jason.collins@mcgrigors.com