Exclusive: Litigation and Settlement Strategy relaunched

HMRC and their customers often find themselves on different sides of an argument.

And when it comes to a particular dispute, the taxpayer is unlikely to share HMRC’s goal of maximising the revenue flows which are due.

But HMRC, agents and taxpayers can still benefit from working professionally and collaboratively as we each seek to resolve the dispute.

Since its launch in June 2007, the Litigation Settlement Strategy (LSS) has brought consistency to the way we settle disputes with our customers.

The key rules it sets out for HMRC staff – no deals or ‘splitting the difference’ where we believe the law points to a different outcome – have contributed significantly to a reduction in aggressive avoidance activity.

The emphasis on materiality – concentrating our resources on points where our legal and factual arguments are strong, and not taking up, or persisting with, enquiries where our arguments are weak – has supported our risk-based approach.

This in turn has helped to reduce the number of open issues for business as well as releasing valuable resources for tackling more significant tax risks.

Although the substance of the strategy remains unchanged, it is now time to update the 2007 guidance in the light of developments in the Courts and Tribunals.

Updating the LSS also allows us to align the language of the strategy with our Vision, Purpose and Way and Customer-centric Business Strategy and to reflect HMRC's experience in effective and efficient tax dispute resolution, including opportunities for using Alternative Dispute Resolution procedures, such as mediation.

This is also an opportunity to reinforce the core rules and principles of the strategy in the light of some differing understandings of the LSS’s aims and effects.

Refreshed strategy

The refreshed LSS is upfront about its purpose.

It provides a framework within which HMRC can try to resolve tax disputes through civil procedures consistently with the law, whether by agreement with the customer or through litigation.

The LSS is also consistent with HMRC’s customer-centric business strategy objectives of maximising revenue flows, while at the same time reducing costs and improving customer experience.

The LSS strategy applies to all tax disputes resolved through civil procedures and to all decisions taken by HMRC in relation to such disputes, at whatever level.

In recent years, HMRC has reinforced its governance processes for ensuring consistent and even-handed resolution of disputes where the issue in dispute is significant or affects a large number of taxpayers.

The guidance on the refreshed LSS gives details of these processes.

The LSS recognises that a key part of HMRC’s overall customer strategy is to try and avoid situations which may give rise to a dispute.

It also acknowledges that supporting customers to get their tax right without the need for a dispute is the best way of securing revenues at least cost to HMRC and their customers.

Tax disputes should be focused on worthwhile cases which allow HMRC to do thier job of maximising the revenue flows which are due, in a fair and even-handed way.

The LSS is clear that when we look at maximising revenue flows, this involves considering not only the tax at stake in the dispute itself but also the wider implications of the dispute.

These could range from setting a precedent for other taxpayers, to encouraging future compliance and supporting compliance across the tax base.

Maximising the revenue flows which are due is therefore no different from closing the tax gap.

The LSS emphasises the value of handling disputes non-confrontationally and by working collaboratively with the customer wherever possible to get agreement on the tax due.

This builds on our experience with the High Risk Corporates Programme, which since 2006, has successfully recovered additional tax of over £9 billion by resolving often long outstanding issues within an accelerated timescale.

The LSS makes clear that a collaborative approach requires all parties to be open, transparent, and focused on resolving the dispute in accordance with the law.

The guidance provided to our staff gives a lot more detail about what this means, in terms of setting out clearly the key points in dispute, what factual information is needed, what are the respective legal interpretations which will define any dispute on a point of law.

The guidance also explains how collaborative working processes can help us better understand each other’s arguments and accelerate agreement on what is the right tax according to the facts and circumstances of the particular case.

Crucially these benefits rely on our customers also being prepared to work collaboratively: the LSS is clear that if collaboration is not forthcoming, HMRC will not be deterred from pursuing the dispute through other means.

What’s more, where there are good grounds to believe that evasion is involved, HMRC will consider whether a criminal investigation is appropriate.

With the refreshed LSS, HMRC also recognise the potential value of applying Alternative Dispute Resolution (ADR) techniques – such as mediation – to facilitate agreement between the parties or to prepare better for litigation.

More detailed guidance on the circumstances in which we believe ADR can be appropriate for tax disputes is also now available on our website.

Getting to the right answer

The refreshed LSS builds on previous guidance in order to make sure the position HMRC adopt in a dispute is robust.

It does this in two ways: the first is by establishing and understanding the relevant facts as quickly and efficiently as possible.

Tax law does not apply in a vacuum, it applies to specific sets of facts and circumstances.

Before a considered decision can be made on the tax consequences of a given transaction or issue, the relevant facts must first be established.

That said, at the outset of an enquiry it is not always easy to know what facts will be relevant to the particular tax risk being examined.

Without a process for ensuring that requests for information are both well-targeted and framed with a view to the costs both for HMRC and the customer, there are real risks of enquiries becoming protracted and losing their way.

The refreshed LSS sets out the principles of a transparent and targeted approach to fact-finding, and the detailed draft guidance develops these with examples of best practice.

The second way in which the refreshed LSS helps ensure that HMRC’s position in disputes is robust is through the emphasis it places on working with the customer in order to make sure both sides fully understand the relevant facts and law.

This involves sharing and testing the strengths of HMRC’s own arguments, and fully understanding and testing the strengths of the customer’s arguments, before reaching a considered view on the merits of the case.

As part of this, HMRC will always consider whether something which initially appears to be an ‘all or nothing’ issue (where the opening positions adopted by the two parties appear to be the only possible valid approaches in law) is genuinely all or nothing, or is in fact a case where there is a range of possible figures for tax due.

Each of these areas has given rise to some differences in understanding among HMRC staff as to what the LSS requires, and the refreshed LSS aims to clarify the position.

HMRC’s overarching objective in relation to disputes is to establish the right tax due, in a way that is effective and efficient.

This can only be achieved with a good understanding of the facts, in the context of the tax risks of a particular case, and with a good understanding of each party’s arguments.

Reinforcing the rules

The key ‘bright line’ rules of the LSS are unchanged.

Each dispute must be considered on its own merits, and resolved in accordance with the law.

HMRC will not take part in ‘package deals’ which trade unrelated points off against each other.

This rule reduces the incentive for taxpayers to take risky positions on tax returns, including through using avoidance schemes.

Decisions on whether to settle or take the point to litigation in the Tribunal and Higher Courts will be based on which route secures the right tax most efficiently.

This means that HMRC will not compromise on its considered view of the law to secure agreement, so there will be cases where litigation offers the most effective and efficient means of resolving disputes.

Where that applies, HMRC will seek to reach an outcome in the litigation as quickly as possible – with the governance processes described in the LSS guidance, supporting decisions on disputes affecting a large number of taxpayers.

In any event, HMRC will continue to explore opportunities for working collaboratively in order to reduce the costs or uncertainty of the litigation process.

For disputes which are genuinely all or nothing, where HMRC believe it is likely to succeed in litigation and that litigation would be both effective and efficient, they will not reach an out of court settlement for less than 100% of the tax, interest and penalties (where appropriate) at stake.

But where HMRC believe it is unlikely to succeed in litigation, HMRC will, in most cases, concede the issue, and not attempt to settle at an arbitrary midpoint between their own and the customer’s view of the amounts at stake.

Taking a case to litigation when HMRC believe it is unlikely to succeed, would need to be justified by the particular circumstances, such as a very large amount of tax at stake (either in the case itself or where a large number of customers is affected), or where a fundamental point of principle or behaviour is at issue.

For disputes where there is a range of possible figures for tax due (including disputes initially thought to centre on an all or nothing issue but which turn out as a result of further dialogue to involve a range of possible figures for tax due), HMRC’s terms for settlement will also take account of what secures the right tax most efficiently.

The refreshed LSS makes clear that in this context, HMRC will be looking to do its job of maximising the revenue flows due.

This principle applies not only to the tax at stake in the immediate dispute but also to the potential implications for other disputes and the impact which settling the dispute could have in releasing HMRC resources to work on other disputes.

This wider context also includes the impact of settlement terms on customer behaviour generally and in relation to the customer concerned, including any question of avoidance,evasion or a failure to take reasonable care.

Conclusion

In 2007, when I first set out the aims of what was then HMRC’s new Litigation and Settlement Strategy for dealing with disputes with taxpayers, I suggested there were real win-wins to be made by business and HMRC from operating in line with the LSS principles.

That has been borne out by the results in the intervening years, with increases in both the number and tax value of disputes resolved, as well as reductions in the time taken to resolve the most protracted disputes.

HMRC have supported these benefits through improved disputes governance and processes, and through wider access to a collaborative dispute resolution approach for all the customers with whom we are in dispute.

Recent pilots of ADR for both large/complex businesses and for SMEs are part of this.

There is more to be done to ensure we minimise the scope for disputes and handle and resolve those which do arise fairly, even-handedly and at lower cost to ourselves and our customers.

A refreshed statement of our core LSS principles is an opportunity for both HMRC and their customers to improve the way we get to the right answer effectively and efficiently.

Dave Hartnett, Permanent Secretary for Tax, HM Revenue & Customs