Q&A: The consultation on tax enquiries and closure rules – an 'inequality of arms'

What is HMRC proposing?

HMRC is consulting on a new power that will enable it to refer a single issue in dispute to the First-tier Tribunal (FTT). At present (see further below) where there are other issues remaining in dispute in an enquiry (and which are not in a position to be closed), HMRC requires the consent of the taxpayer to refer a single open issue to the FTT. The proposals would give HMRC the unilateral power to issue a ‘tribunal referral notice’ (TRN) in respect of a single issue, which would then proceed to hearing before the FTT (and potentially beyond) despite the overriding return remaining under enquiry. The proposals also provide for payment of tax on final determination of the appeal on the single issue, even in circumstances where the enquiry into the overall return is still open and notwithstanding that a closure notice in respect of the overall return has not been issued.

The background

Under both the individual and corporate tax self-assessment regimes, tax returns are submitted to HMRC in respect of which HMRC may, by written notice, commence an enquiry. The enquiry may be into the whole return or (more usually) certain aspects of it. Where areas of dispute arise in relation to such aspects, HMRC and the taxpayer engage to seek to resolve such disputes. However, HMRC’s litigation and settlement strategy (LSS) in practice precludes settlement in many disputes of a complex or binary nature – and a closure notice (giving rise to a decision that is appealable to the FTT) can only be issued once all aspects under enquiry in the return are concluded. Where EU group litigation order issues (for example) are in point in a return, it could potentially be a matter of years before HMRC is in a position to issue a closure notice in respect of the whole return, so other issues, which may be clear cut and quite capable of being heard by the FTT have to remain unresolved. There is a mechanism in such circumstances for referral of a single issue to the FTT, the ‘joint referral procedure’ and this requires the consent both of the taxpayer and of HMRC. HMRC perceives that in some cases taxpayers deliberately withhold their consent from this procedure, thus delaying resolution of the dispute and facilitating further postponement of tax due. It is also the experience of many practitioners that HMRC will withhold consent from a joint referral, possibly because they wish to pursue another case in relation to the same principle, but where the fact pattern is more advantageous to HMRC. It is not in dispute that the current system does not work effectively.

The proposals in more detail

• Sole referral by HMRC with authorisation of a senior officer.
• TRN issued for the aspect to be heard by the FTT
• Taxpayer has right of appeal - first, against the issue of the TRN (i.e. if the appeal is successful, HMRC has to await closure of the full enquiry and issue of a closure notice to bring the aspect before the FTT).
• In the absence of a successful procedural appeal, the FTT hears the substantive appeal of the aspect of the TRN and issues its decision.
• The taxpayer and HMRC have the normal rights of appeal on a point of law to the Upper Tribunal and higher courts.
• On final resolution of the appeal, if HMRC wins, a ‘tribunal referral closure notice’ (TRCN) is issued, requiring payment of the tax due in relation to the TRN aspect, notwithstanding that a full closure notice may not have been issued in respect of the overall enquiry.
• The ‘joint referral’ procedure will be amended to require payment of the tax due (where HMRC wins) in the same way as for a sole referral.

Are there any safeguards?

HMRC says that it would ‘target the power at cases or issues involving significant tax under consideration or involving issues which are novel, complex, or have a wider impact, which can include tax avoidance’.

So, as a matter of practice any significant or complex issue will be ‘fair game’. The requirement for authorisation by a senior officer and the right of appeal against a TRN are unlikely to provide comfort.

Is there any hidden mischief?

The concept was warmly endorsed when announced in the Autumn Statement. Corporates, in particular, have significant open issues, and in many cases would welcome the opportunity to resolve a single contentious issue before the FTT where they believe that they have robust arguments, but the LSS precludes HMRC from settling.

However, the problem is that the detailed proposals are entirely one-sided. The position therefore remains that a taxpayer cannot progress a single open issue in dispute to the FTT without HMRC’s consent under the joint referral mechanism. Experience shows that HMRC maintains a very robust view of the cases that it wishes to litigate and will always seek to select those with the fact pattern most favourable to HMRC, with the consequence that less favourable cases (from HMRC’s perspective) have to wait.

These proposals give HMRC carte blanche to pick whichever case is most advantageous to it and run with it. If one bears in mind that HMRC has an in-built advantage in terms of being able to see all of the fact patterns applicable across a range of taxpayers, this combined with the new power would amount to a staggering ‘inequality of arms’, giving HMRC an overwhelming advantage in terms of being able to control legal precedent.

What action should be taken?

Respond in writing to the consultation and emphasise the need for even-handedness. These proposals would be entirely sensible if they had also enabled taxpayers to apply to the FTT for a TRN. HMRC’s ability to issue a TRN should also be subject to prior approval by the FTT, rather than requiring a taxpayer to appeal against it. The consultation closes at 2pm on 12 March 2015.