Findings from a recent survey on HMRC and its litigation and settlements strategy indicate many positive aspects in the department’s approach to resolving disputes, but comments from some respondents suggest tensions in the operation of the LSS in practice.
An excellent conference organised by the Oxford Business Tax Centre on 15 May asked two key questions:
Judith Freedman and John Vella presented the initial results of a survey of large business tax directors, focusing particularly on the application of the LSS. Their full report will be available on their website in June. Jason Collins, head of tax at Pinsent Masons, gave his reflections on how he sees the LSS operating in practice.
The LSS was introduced in 2007 as part of a move to drive out avoidance, but also to increase consistency. There was a perception that the availability of ‘package deals’ or a willingness to ‘split the difference’ was perversely encouraging companies to implement additional schemes in order to have bargaining tools which could be given away in negotiation. In 2010, Dave Hartnett commented that the strategy had sometimes been misunderstood within HMRC: ‘I think we got it a bit wrong in the way we explained it to our people. They thought it was a great sword of justice’ (Financial Times, 19 August 2010). The LSS was refined in 2011, and a number of respondents said that the 2011 revision had made a difference. HMRC has also clarified that the stated objective of the LSS to ‘maximise revenue flows’ is not what is intended: its aim is to maximise collection of the tax within the confines of what HMRC think is properly due.
Some aspects of the LSS’s current operation are clearly positive. A majority of respondents to the survey said that HMRC is not taking forward disputes which could not be justified in terms of the revenue at stake; are adopting collaborative working practices, and are familiar with the law and facts underlying a dispute. But other responses indicate some tensions in the way the LSS is working in practice, and this was supported by Collins’ experience.
In some cases, the LSS had made it easier to reach a settlement: one respondent commented that the clear framework provides comfort and legitimacy to HMRC in seeking to reach a commercially sensible settlement. On the other hand, some said that the LSS can lead HMRC to ‘box itself into a corner’. There is also some evidence of the ‘Hodge effect’: HMRC is clearly concerned, in some cases, that a settlement might be perceived as a ‘deal’ (even where that is not the case) and this makes it very hard for it to back down in a borderline issue. HMRC’s ‘consensus-driven decision-making process’, often means that decisions on what, self-evidently, are finely balanced points can be almost impossible to achieve.
Further probing by the Oxford team in interviews gave rise to some interesting comments. These may be from a small number of respondents, and are not necessarily the full story, but Collins said that the implication is that HMRC will sometimes work hard to fit settlements within the letter of the LSS. Examples were given of breaking down an issue into smaller issues – so that each smaller issue can be settled on an ‘all or nothing’ basis, but overall the effect is in practical terms equivalent to ‘splitting the difference’ on the total. In another case, HMRC took an ‘alternative’ view of the facts in order to reach an interpretation which could lead to a solution. It is clear that CRMs often understand the issues, and want to reach a solution, but can feel constrained by the LSS: an experienced CRM, in negotiations with an experienced tax director or adviser, will often find a way to a mutually acceptable answer, but this does suggest that the objective of consistency is not being achieved.
Collins highlighted that the general anti-abuse rule and accelerated payment and follower notices are likely to have a dramatic effect on avoidance behaviour and so may take some of the pressure off the LSS. Is it time to treat avoidance and non-avoidance disputes differently, and explicitly make the LSS more flexible in relation to technical issues as long as this does not undermine HMRC’s efforts against avoidance? If no account is to be taken of litigation risk should HMRC set itself a higher bar before embarking on litigation?
These are difficult issues in the current political climate. It was notable that one of the audience felt it was entirely unacceptable that large companies could negotiate with HMRC at all. From his perspective, this was all about avoidance and companies should simply pay up the full amount of tax due. This approach ignores the fact that many cases have nothing to do with avoidance but involve genuine differences of opinion about complex areas of law. However, it illustrates how hard it will be to make any material changes to the LSS – even if to do so would result in better results for taxpayers, HMRC and the economy as a whole. A clearer acceptance that litigation is resource-intensive, and often not the best way to reach a reasonable answer, may help to support efforts in this area.
Finally, the one aspect of the conference which I found disappointing was that HMRC’s presentation simply repeated the LSS guidance, without any acknowledgement that there are tensions in its practical operation. It was clear from the survey that most tax directors are supportive of HMRC: the department should have the confidence to continue to work with business and the profession to make further improvements in the way the LSS works.
The survey findings will be available from the Oxford University Centre for Business Taxation's website in due course. In the meantime you can see a PowerPoint presentation with headline results here.
