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Press Release

09 December 2009

 

Tax disputes: HMRC stacks the cards in its favour

 

HMRC to increase investigations to reduce carelessness

 

HMRC have stated that they intend to "reduce" the incidence of failure to take reasonable care on the part of taxpayers by increasing investigations. 

 

James Bullock, Tax Partner at McGrigors, the leading commercial law firm and tax investigation specialists, says: "This is a very significant step having regard to HMRC's mantra of recent years. HMRC have been focusing on systems and processes and working with businesses to ensure that they are compliant and not careless. Now HMRC says that they 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."

 

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

 

"If you bear in mind that the statutory penalty for careless behaviour is 30% of the tax loss, we are talking potentially very significant sums, particularly for large and medium-sized corporates" says James Bullock.

 

"Penalties can be mitigated to 15% - or to zero where a disclosure of carelessness is made by a taxpayer entirely voluntarily without any prompting by HMRC. If carelessness is discovered as a result of a compliance check or an investigation it cannot be unprompted and taxpayers will be looking at a 15% penalty as a minimum."

 

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

 

HMRC has announced a long-predicted change in their practice in relation to tax litigation.  In direct tax cases (though not in the vast majority of indirect tax cases), when a taxpayer appeals to the Tax Tribunal against an assessment to tax HMRC usually agrees to postponement of payment of the tax in order to 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 in pursuing an appeal to the Upper Tribunal or 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 have said tax they will normally require tax to the paid following on HMRC 'win' at the Tribunal or Court.  If they ultimately lose the case, HMRC will refund the tax at that point in time.

 

James Bullock, Tax Partner at McGrigors, the leading commercial law firm and tax investigation specialists, says: "It is perhaps surprising that it has taken so long for HMRC to adopt this approach.  It will not affect cases where the dispute relates to a repayment or refund of tax – such as PAYE.  But it will impact on cash flow in corporation and income tax disputes – even if only once a taxpayer has lost a case before the Tribunal or a Court."

 

"This is a move towards the more aggressive system in VAT, where the general rule is that the VAT has to be paid "upfront" in any event."

 

Overall, 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 drop cases where marginal or low value sums are involved

 

HMRC have stated that as part of their strategy to reduce the tax gap they will seek to resolve issues of legal interpretation – in particular by using the Litigation and Settlement Strategy (or LSS) - to improve the operational response to technical challenges by tax payers.  In particular, they say that they will "drop" marginal or lower value cases in order to focus on the most significant areas of risk.

 

James Bullock, Tax Partner at McGrigors, the leading commercial law firm and tax investigation specialists, says: "The devil is going to 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 they have strong prospects of success and dropping cases where they have been advised that they are 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 a small amount of tax at stake simply to hold out against HMRC in the hope that HMRC will back off.

 

"We cannot believe that this is what HMRC intends" says Bullock. "It doesn't really do anything to address the real concern, which is the increasing log – jam at the Tribunal which has resulted in part from the LSS, combined with a new Tribunal system that is creaking at the seams.  This is bad for taxpayers and bad for justice".

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