Tax law specialist Jason Collins of Pinsent Masons, the law firm behind Out-Law.com, said that businesses embroiled in disputes over the VAT they owe to HM Revenue & Customs (HMRC) are often required to pay VAT upfront even though they may end up being refunded that money if successful in their case.
However, delays to those cases being heard can mean businesses may encounter cash flow problems, he warned.
"Paying large amounts of VAT which will sit in limbo for many months is likely to put incredible strain on a company’s cash flow," Collins said. "For many businesses already struggling to cope with the impact of the recession, whether from reduced trade or constrained bank lending or both, this could be life or death."
Even companies that are able to postpone tax payments until their case is heard can face costs associated with delays to their cases being resolve, Collins said. This is because HMRC charges taxpayers as much as 3.5% in interest for underpayments, whilst it pays out 0.5% interest on overpayments.
Collins was commenting after figures obtained by Pinsent Masons under freedom of information legislation revealed that the number of first-tier tax tribunal cases that were outstanding in 2012/13 reached record levels.
There were 26,965 outstanding cases in the period, up from 24,273 in 2011/12. The latest figures represent a more than doubling of the outstanding cases recorded in 2009/10 – 13,456.
"These figures show that there is a huge backlog of tax disputes still building up between HMRC and taxpayers, which is costing businesses and individuals dear – both in terms of time and money – while they remain unresolved," Collins said. "Delays also create huge uncertainty for those who are just trying to get on with the day to day running of their businesses."
The backlog in disputes has caused HMRC to adopt a different approach towards those it believes owes it tax. HMRC revised its Litigation and Settlements Strategy to "encourage HMRC staff to minimise the scope for disputes and seek non-confrontational solutions".
"Until recently HMRC has taken a deliberately aggressive stance against those who it believes are not paying the right amount of tax, and this is reflected in the continuing upward trend we are seeing in Tribunal cases awaiting a hearing," Collins said. "Of course it will take time for the HMRC’s change of attitude to filter through, but nevertheless HMRC could be doing even more to reduce the amount of litigation it embarks on and take a still more flexible approach."
"The fact that HMRC has recently opened up the door to Alternative Dispute Resolution (ADR) is a very positive move, but it’s not going to solve everything. HMRC itself needs to be far more willing than it currently is to instigate constructive negotiations with taxpayers with a view to achieving sensible settlements. It still has a long way to go to establish workable ways to recoup tax without entering into so much costly legal wrangling," he added.
Collins said that taxpayers are sometimes reticent about engaging with HMRC's ADR process because it often involves a member of HMRC acting in the role of adjudicator, rather than someone independent of the organisation.
"So while there is a greater level of detachment which should lead to fewer cases going to Tribunal, some taxpayers may not want to take this route if they don’t feel confident about the fairness of the system," he said.
Collins said, though, that the number of tax disputes could well continue to rise.
"As businesses’ tax affairs become more and more complex in our globalised economy, the potential for tax disputes to arise is likely to increase," the expert said. "Given the intense pressure on HMRC to enforce tax compliance, it’s vital not only that it steps up its efforts to tackle this growing backlog but also does all it can to ensure that disputes are dealt with quickly and fairly in the future."