HMRC has published a replacement Litigation and Settlement Strategy (“LSS”) as part of a major review of its approach to disputes. The old version of the LSS (published in June 2007) is no longer available on HMRC’s website. A description of the new LSS and the extent of changes from the old version are set out below.
HMRC’s authority to settle an issue in a taxpayer’s affairs is under section 5 of the Commissioners for Revenue and Customs Act 2005. The powers conferred by that section are to manage revenue and not just to collect it. As stated by Lord Diplock in R v IRC ex parte National Federation of Self-Employed and Small Businesses Ltd1, this gives HMRC “a wide managerial discretion as to the best means of obtaining for the national exchequer from the taxes committed to their charge, the highest net return that is practicable having regard to the staff available to them and the cost of collection.” The new LSS closely echoes this principle.
R (on the application of Wilkinson) v Inland Revenue Commissioners2 makes clear that HMRC should not agree to a tax treatment for any taxpayer which goes beyond the scope of the statute (except “in the interstices”). It is also clear that they cannot be compelled to do so.
What HMRC can do, is to adopt and publish a general policy as to how it will exercise its powers of collection and management. Any legitimate expectation as to HMRC’s approach created by that publication will be enforced by the Courts. The new LSS does not and cannot create any expectation of a settlement which is beyond the scope of statute: all settlements are required to have a proper legal basis. But it does set out clear statements of the way HMRC expects its Officers to conduct their business.
The new LSS is generally welcome in its seeking to secure a co-operative approach, proportionate behaviour by HMRC Officers (in terms of information gathering), early assessment and communication of HMRC’s views on the issues in question, and minimised costs of resolving issues, as well as encouraging the use of tools to break deadlock in negotiations (particularly ADR). These issues have always been at the top of the taxpayer’s wish list. It is therefore hoped that this communication will be taken on board quickly by HMRC staff at all levels and that the organisation will support taxpayers seeking to apply the LSS. This will require that the organisation actively monitors the behaviour of officers.
However, one area for continued concern is the statement in the penultimate paragraph that even where HMRC’s considered view is that their prospects of success are weak, HMRC will require taxpayers to pursue litigation to achieve the appropriate tax result not only if their cases involve large sums, but also if they involve fundamental points of principle, or “behavioural issues”. It seems HMRC’s aspiration to be a model regulator and litigant is lowered where the taxpayer has an issue of common application or where HMRC wishes to alter “behaviour”. Behavioural change might legitimately be brought about by public debate, or increased or escalating penalties imposed by Parliament, but not through rough treatment in litigation. In addition, “behaviour” is not defined, which seems to allow a wide discretion and risks a wide range of cases being pushed through this exception; this may cause taxpayer confidence in the strategy to fail.
The new LSS: summary of key points
Substance of restrictions on HMRC powers retained
The core principles regarding settlement required by HMRC’s powers remain unchanged in the new LSS. HMRC will not agree a settlement where the figure does not (on any view) represent the tax technically due. This means in particular that they will not
- “split the difference” between possible outcomes, based on a commercial assessment of prospects of success;
- enter into “package deals”, agreeing a global commercial figure across a number of open disputes between HMRC and the relevant taxpayer.
In addition, HMRC will not agree a settlement where the substance of that settlement would not accord with HMRC’s view of the law. In practice, HMRC do not have an unshakeable view of every aspect of the law. However, senior HMRC Officers have confirmed that in reaching a settlement they will not cross a policy “red line” that they are required to defend in other situations.
Emphasis of approach to “management” changed
However, a close analysis of the revised LSS shows (in some respects) a real shift in emphasis, which is hoped will result in reduced costs and a more commercial approach to “the collection and management of revenue”.
- Disputes will be handled “collaboratively” and “non-confrontationally” at all stages
HMRC make a commitment to continue “taking steps to ensure an efficient and effective resolution to the dispute” even after a Tribunal appeal or judicial review application has been started
- Enquiries will be conducted efficiently and with increased taxpayer dialogue
There will also be an improved approach to factgathering, HMRC also commit to applying the same professional standard of dispute resolution to issues regardless of whether they are expected to require litigation
- Settlements will seek to secure “the right tax most efficiently” (and not just “the right tax”)
In particular, HMRC will work to identify a range of possible figures for tax due (allowing an efficient settlement) even if a dispute initially appears to be an “all or nothing” issue
- ADR will be considered at all stages of a dispute
In the original LSS, published before HMRC’s internal project to investigate and adopt appropriate ADR techniques, there was no encouragement to consider it
Despite the more conciliatory tone of the new LSS, HMRC officers are still encouraged to take:
- unmeritorious cases to trial (in order to influence taxpayer behaviour); and
- “test cases” (without any offer to pay the taxpayer’s costs or any suggestion for pooling of resources between taxpayers).
Collaborative working: conduct during enquiries, and during Tribunal appeals
In the old LSS, HMRC’s guidance to staff was that “where possible, issues should be resolved in non-confrontational ways without entering into a dispute”.
HMRC’s pledge to work collaboratively and nonconfrontationally (where possible) is an attitude that is fully entrenched at Head Office level, and has been experienced already by many large businesses who have engaged with their CRM. The clear statements in the new LSS may therefore be best seen as clear internal guidance to individual HMRC officers (both locally and within Policy) who have not yet taken this on board, and a promise that all taxpayers will be extended the same treatment.
In addition to lack of co-operative working from Policy Officers, experience was that (in many cases) once an enquiry became a “dispute”, and particularly once the conduct of the case moved to Solicitor’s Office, co-operative approaches to resolving the dispute ceased and the case moved inevitably towards litigation and then a Tribunal hearing.
The new LSS encourages collaboration, non-confrontational working, and steps being taken to resolve the dispute at all stages – including after a decision to litigate has been taken.
Co-operation from Solicitor’s Office?
Much of the focus of both versions of the LSS is on managing disputes during enquiries. This covers the vast majority of disputes. It is striking – and welcomed – that the new LSS contains a specific commitment to continue with dispute resolution techniques during the appeal process. Positions on both sides are clarified during litigation, and in commercial disputes this is the time when most settlements are reached.
Experience shows that once conduct of the file has been moved to Solicitor’s Office, it is the Solicitor’s Office rather than other parts of HMRC who have been responsible for resisting collaboration. There are a range of reasons for this. One of those reasons is resource within Solicitor’s Office, with senior lawyers having very heavy Tribunal commitments. This means an impasse – the way to reduce Tribunal commitments is for more time to be spent in ensuring cases settle before reaching court.
Where the relationship with Solicitor’s Office breaks down, and this can be an active breakdown or lack of engagement and deference to Counsel, disputes frequently:
- enter stalemate;
- drift inevitably towards litigation rather than settlement (irrespective of the merits);
- involve frequent, contested applications (which waste costs, could easily be avoided, and create additional Tribunal commitments for the HMRC lawyers); and
- progress slowly.
If HMRC’s stated intention of collaborative and nonconfrontational working after Tribunal proceedings have started is truly to be a success, HMRC will need to take steps here. There is a need to promote a productive relationship between Solicitor’s Office and taxpayers’ legal advisers aimed at avoiding Tribunal wherever possible and appropriate.
Handling enquiries: efficiency and dialogue
Consistent with their pledge to work collaboratively and non-confrontationally, and now that the suggestion (in the old LSS) that cases need to be handled “in a way that prepares for litigation” has been dropped in the new LSS, HMRC have adopted a new approach. The focus is simply on handling the issue professionally: ascertaining the key facts in any dispute, and discussing the issues between the parties, at an early stage.
Early and efficient determination of facts
In an article published in Tax Journal on the same day the new LSS was announced, Mr Dave Hartnett CB (Permanent Secretary for Tax) made clear that HMRC are alive to the problem of seeking too much information too early. HMRC’s policy is now that requests for information should be “well-targeted and framed” in order to avoid enquiries becoming protracted, expensive and “losing their way”. The promise in the new LSS is that “HMRC will seek to establish and understand the relevant facts as quickly and efficiently as possible.” This is a marked improvement of HMRC’s policy since the old LSS. The prevalent approach, endorsed publicly by senior HMRC Officers, was that all facts had to be gathered before any technical engagement could begin.
It goes without saying that a more focused factual enquiry at the beginning of the dispute is to be preferred to a wide-ranging data-gathering exercise since this will save compliance costs (both for the taxpayer and for third parties) and allow much faster progress. This is especially true where – having collated the key factual information – it is clear to HMRC that the matter should not be pursued.
However, it will be important that where HMRC does decide to pursue the matter, subsequent requests for information are made swiftly and at the appropriate time. This must be part of the intended process of reaching key decisions points against set timescales. If further factual enquiries are delayed, this will undermine any attempt for the parties to properly engage over the issues in the case (which engagement might otherwise lead to settlement).
The concerns here become more serious in cases which move to litigation. In extreme cases HMRC have continued to make extensive information requests – well beyond conventional litigation disclosure – during the Tribunal process itself. This has resulted in mismanaged litigation requiring (i) re-pleading; and/or (ii) extensive case management involving re-allocation or transfer. Information requests have also been used as a litigation tactic to delay proceedings and to allow for a strategic re-pleading of HMRC’s case. This is wasteful of both parties (and the Tribunal’s) resources.
It is noted with regret that the new LSS – where it envisages the use of third party information requests – does not stress the need to ensure that HMRC first seeks the requisite documents and information from the taxpayer before approaching a third party (although one hopes this is implicit in circumstances where HMRC are being encouraged to engage constructively with the taxpayer). The compliance costs for (in particular) banks who receive such requests on a regular basis is disproportionately large – especially in the case of poorly framed requests – and in most cases is borne by the bank.
Early identification and testing of the technical issues
The new LSS also places a very strong emphasis on early articulation of the:
- tax risks HMRC perceive; and
- issues in dispute.
There is also more of an emphasis on early testing of the strengths and weaknesses of the parties’ positions at an early stage.
This is to be strongly commended if it is followed in practice since:
- as with early identification of the facts, this could lead to the early disposal of unmeritorious – or unimportant – points and disputes (saving significant costs);
- it could work to reduce the risk of HMRC Officers stubbornly maintaining a technical position (however weak) purely because they only realise its weakness after defending it for a long period of time.
For cases that move to the Tribunal, a commitment to continue with full articulation of HMRC’s technical position would put an end to taxpayers being “ambushed” at the Tribunal by a case formulated (or communicated) late in the day by HMRC.
Collection and management: maximising revenue flows
Per section 5 of the Commissioners for Revenue and Customs Act 2005, HMRC is responsible for “the collection and management of revenue”.
While the old LSS focused squarely on the “collection” of the right tax, the clear emphasis in the new LSS is on “managing” that collection so as to “secure the best practicable return for the Exchequer”, “maximising overall revenue flows”. HMRC are encouraged to have regard to:
- the cost of collection; and
- the impact which settlement could have in releasing HMRC resources to conduct other enquiries.
This accords with Lord Diplock’s statement in National Federation (referred to at footnote 1).
It is hoped that this will translate into HMRC being much more ready to discuss settlement in cases and taking a commercial approach to potential risk and reward.
HMRC are clear that they will not compromise on their view of the law in order to achieve settlement: as noted above, the only practical way to read this statement is a reference to policy “red lines”. However, there is evidence that the newly found commercial approach has encouraged HMRC to be more willing to identify and “buy in” to any other technical analysis which is different from their starting point, but coherent. The Master of the Rolls said in the Court of Appeal in Wilkinson3 “it is open to [HMRC] to be as purposive as the most pro-active judge in attempting to ensure that effect is given to the intention of Parliament”. If paragraph 14 of the new LSS is given full effect, HMRC will be open to looking – not just for the most purposive construction – but for a variety of interpretations which can support a variety of settlements.
In other words, HMRC may be prepared to trade value if legal justifications can be found for a technical analysis underpinning the outcome of the trade. HMRC commit to consider different “possible figures for tax due”.
Although HMRC cannot make global settlements, the new LSS identifies that it may be convenient in process terms to consider a number of disputes together. Of course, the combined effect of multiple outcomes of multiple disputes can lead to far more possible outcomes with a legal justification, and so an improved prospect of a justified outcome which is acceptable to both sides in terms of tax payable.
Alternative dispute resolution
Rule 3 of the Tribunal Procedure Rules provides that the Tribunal should seek to “bring to the attention of the parties the availability of any appropriate alternative procedure for the resolution of the dispute”. However, under the old LSS, there was little scope to engage in mediation – a process in which parties are encouraged to trade values in order to dispose of disputes. Senior Tribunal judges have confirmed that the Tribunal was not willing to encourage ADR until HMRC was willing to and able to engage with it: for right or wrong, their rationale was that until then it was not “available”.
However, the new LSS publicly acknowledges HMRC’s openness to Alternative Dispute Resolution. This follows a trial and training of key HMRC staff. The new LSS actively encourages officers to consider ADR and – as set out above – seemingly allows for value to be traded (where plausible legal grounds for the outcome can be identified). This is encouraging. Senior HMRC Officers have confirmed that they are genuinely committed to this new approach.
However, a somewhat concerning suggestion in the new LSS (repeated in Mr Hartnett’s article in the Tax Journal) is that mediation (a process in which parties are usually actively encouraged to explore the weaknesses in their case, and those weaknesses can sometimes be shared as part of efforts to reach negotiated agreements) might be used as a way of “preparing for litigation” (LSS) or “preparing for trial”. If HMRC intend this to mean that it allows both parties to focus on the key issues between them, and perhaps to drop minor issues which might be a distraction, that is intelligent. Encouraging a taxpayer to lay bare the weak points in their case prior to trial – as part of HMRC’s trial preparation – would be an abuse of the mediation process (which is designed to encourage settlement).
Persisting concerns: abuse of process and unfairness
Despite the more conciliatory tone of the new LSS, officers are still encouraged to consider taking unmeritorious cases to trial where this might have a positive impact on taxpayer behaviour (in other words, where the experience of litigation may dissuade a taxpayer from embarking upon tax planning in the future).
Pursuing proceedings for reasons unconnected with success in litigation is an abuse of process and is not a permissible course for any litigant,4 let alone a Government body (whose decision making should not be motivated by improper or illegitimate concerns).5 Such practices at HMRC should be eliminated, not encouraged by Head Office.
It is difficult to understand the legal advice as to the legitimacy of the policy to pursue unmeritorious cases.
Of course, all taxpayers would expect that those involved in criminal conduct are pursued and tax sought to be evaded recovered. But even in such cases, every right minded citizen would expect the steps taken to be proportionate.
Further, the new LSS continues to encourage officers to take cases (against a single taxpayer) which are concerned with “fundamental point[s] of principle”, “where a precedent may be set”, or where there is “read across” to other taxpayers. In other words, HMRC are encouraged to set up particular taxpayers as “test cases” without offering:
- to pay the unfortunate taxpayer’s costs (which, historically, used to be a possibility); or
- assisting taxpayers in like situations in identifying one another in order to allow them to discuss the possibility of pooling resources. (Although any call for assistance in this regard would likely be resisted by HMRC on grounds of taxpayer confidentiality, it would not be hard to design a system whereby taxpayers could opt to be put in contact with other taxpayers fighting the same issues with HMRC.)
This strike a non-harmonious tone with the rest of the strategy and it is to be hoped HMRC will facilitate collaboration between taxpayers arguing similar issues where a proper test case procedure has not been adopted. This is what we would expect of a Government department.