Tax Assurance Commissioner "flexing muscle" on settlements, says expert

Jason Collins of Pinsent Masons, the law firm behind Out-Law.com, said that the Commissioner's first annual report did not "give much of a vote of confidence on the conclusions reached by the senior negotiating teams in HMRC".

Edward Troup leads a team of three commissioners to oversee settlements reached by HMRC which have more than £100 million of tax under consideration. The team also scrutinises a sample of cases where the tax involved is between £10m and £100m. According to the report, the commissioners rejected or applied additional conditions to 11 of the 22 cases referred to it  (36-page /612KB PDF) in the first six months under the new regime.

"The Tax Commissioners have looked at the recommendations of the senior teams in HMRC tasked with resolving disputes with taxpayers in 22 cases, and have rejected one quarter of them. That seems like a high rejection rate," said Collins.

"The Commissioners have also imposed conditions on a further quarter of the cases – so, taken together, half of the recommendations were considered inadequate. There is a risk that the Tax Assurance Commissioner is unduly feeling the need to flex some muscle as the system beds in," he said.

"What we are probably seeing is the negotiating teams coming to what they think is a fair outcome in the circumstances and the Tax Assurance Commissioners sticking to the strict letter of HMRC's litigation strategy. The rejected cases might now end up in years of litigation - is that really a good outcome for both the businesses concerned and the wider body of taxpayers?" he said.

Troup's appointment was announced in February 2012 following a damning report into alleged 'sweetheart' deals between HMRC and large companies including Goldman Sachs and Vodafone by the House of Commons' Public Accounts Committee. He was appointed to protect taxpayers' interests, specifically in relation to 'sensitive' high value cases, or those which could have a far-reaching impact on HMRC policy, strategy or operations.

The way in which HMRC handles all tax disputes, subject to civil law procedures, is set out within its litigation and settlement strategy (LSS). In a public commentary document (47-page / 214KB PDF), published on its website, HMRC commits to resolve tax disputes in a way that it consistent with its view of the law while considering the most cost-effective solution to disputes. The LSS states that HMRC must settle for the full amount it believes a tax tribunal or court would determine in "strong" cases, and only "concede rather than pursue" in "weak or non-worthwhile" cases. It does not permit "splitting the difference" if the only possible outcome to a dispute is either than a taxpayer owes nothing or it owes the full amount.

According to Troup's report, HMRC's Tax Disputes Resolution Board referred 22 cases to the Commissioners for a decision over the first six months of the new arrangements. Of these, 11 proposals by taxpayers worth £1,386m were accepted and five worth £398m were rejected. The remaining proposals, worth £285m, were accepted with "additional conditions" attached.

The Court of Appeal and Court of Session heard 18 cases to which HMRC was a party in 2012/13, while the Supreme Court heard another four. Of these cases, fourteen confirmed HMRC's arguments and six were rejected. Two judgments have not yet been issued. The courts also issued decisions on 33 avoidance cases, with 27 going in HMRC's favour. HMRC won significant victories in the courts last year, including on the scope of legal professional privilege  and the relief that can be given when trustees make decisions with unforeseen tax consequences.

"It is clear from the case studies that HMRC is willing to concede purely 'technical' disputes – those arising out of normal commercial operations - but not any involving 'avoidance'," said tax expert Jason Collins. "HMRC appears to be leveraging technical disputes to make corporates give in on avoidance cases. This smacks of 'horse trading', and might encourage corporates to think it worthwhile to have a few avoidance-type cases on the stocks as leverage for future technical disputes."

Collins also noted that the report did not mention whether referring disputes to a Tax Commissioners led to additional delays in resolving them.

"HMRC ought to publish stats on how long the process took on average," he said.