News
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HMRC Litigation and Settlement Strategy
HMRC has set out its policy for dealing with taxpayer disputes via its Litigation and Settlement Strategy (LSS).
Since its announcement there have been various comments on the LSS and some have interpretted it as an end of the days of reaching a negotiated settlement with HMRC in Tax Enquiry cases.
Whilst it is true that it will now be unlikely to be able to ‘do a deal’ with HMRC and agree to a reduced settlement in return for avoiding the litigation route, there is still plenty of scope for ensuring that the level of any liability is kept to the minimum.
In fact, the LSS should also result in the end of Tax Inspectors dragging Enquiry cases out by going on ‘fishing expeditions’ until they find something.
The first thing to realise is that the LSS clarifies HMRC’s approach when there is a ‘dispute’ - i.e……. “any situation where HMRC is in disagreement with a taxpayer and the disagreement is not readily resolved” (to quote HMRC’s own words from their LSS).
One of the main themes of the LSS is to seek non-confrontational solutions where possible.
So we are only really talking about those cases where HMRC and the taxpayer are miles apart in their interpretation of tax legislation or opinion of liabilities due and therefore cannot reach an agreement – and in cases such as this HMRC would have always looked to resolve matters via litigation (i.e. General or Special Commisioners, VAT Tribunals or the Courts) in the past anyway.
In Tax Enquiry cases handled at a local level, much of the argument and negotiation required occurs prior to any thoughts of litigation. A good adviser can help his client to reduce any settlement in a Tax Enquiry via good analytical, technical and negotiation skills and therefore reach an agreement with HMRC without the need to even consider the litigation route.
So how will the LSS affect Tax Enquiry work ?
Well HMRC’s main aim is to collect the full amount of liability, hopefully by agreement in a non-confrontational way, but if this is not possible they have indicated that they will resolve disputes via the appropriate method of litigation in those cases where they have a strong chance of winning. This means that the main differences brought about by the LSS only come in at the Litigation and Settlement stages.
Litigation
In Tax Enquiry cases, HMRC will try to resolve matters by agreement but if that is not possible they will consider the merits of their argument and if they believe they have a better than 50% chance of winning the case they will go to litigation – otherwise, they will drop the case.
So the good news is that if you have a well prepared case that casts doubt on HMRC’s argument and therefore their ability to win the case, there is every chance that the case will be dropped.
The LSS confirms that HMRC will also drop a case where there is no material understatement. Thankfully, this should now stop those frustrating cases where an Inspector has lost his or her main argument but then allows a case to drag on in order to try and find some ‘scraps’ and get something out of a case.
Conversely, the bad news is that in cases where agreement can’t be reached, if HMRC are still prepared to take a case to Commissioners etc, you can be pretty sure that they are confident of winning – so expect a hard fight.
Settlement
Having reached a point where the taxpayer and HMRC cannot agree – i.e. a ‘dispute’ the LSS clarifies the settlement terms.
HMRC are keen to ensure that taxpayers pay the right amount of tax and do not enjoy a reduced settlement simply because they have agreed not to go down the route of litigation.
So HMRC have basically stated that when cases get to this stage, there will be no more option of ‘doing a deal’.
They will no longer be prepared to settle a case by taking a range of issues that have arisen and agreeing to settle the case with one ‘global’ payment to cover all aspects of the Enquiry.
Also, if a case involves a point of law, HMRC will adopt an ‘all-or-nothing’ approach – i.e. gone are the days when HMRC would agree to a lower settlement to avoid taking a case to litigation.
Although HMRC state that they will seek to obtain the ‘best estimate’ when quantifying liability, they do acknowledge that there could be a range of such estimates and they can go to the ‘cautious’ end of that range when reaching a settlement.
There still remains scope for a reduction in penalties – see our News item on the New Penalty Regime.
Comment
The LSS will result in less scope for 'doing a deal' once a case has got to the stage where litigation is considered.
However, the vast majority of Tax Enquiry cases never get to this stage and there is still plenty of scope for successfully reducing the eventual settlement via sound technical arguments, analytical and negotiation skills.