THE TAXMAN’S settlement and litigation strategy seems to show HM Revenue & Customs in a softer, less litigious, light. Although there are no substantial changes from the 2007 version, there is a change in emphasis: HMRC will be more collaborative in reaching settlements in future. This was the intention of the original 2007 document, HMRC says. But it was not communicated to the staff involved in settling disputes. The new, detailed version makes clear the Taxman’s position.
HMRC officers are in an unenviable position. On the one hand they have a duty of care to the Exchequer to “maximise revenue flows” but, on the other, they must act to the letter of the law when collecting taxes, giving them little scope for compromise and therefore fewer tools to maximise revenues. This revised strategy is an attempt to square the circle. But does it work?
Not so new strategy?
According to the Revenue itself, this is not a new strategy. This is the same strategy as in the 2007 document. However, the problem came from communicating the collaborative approach to the wider world, including its own staff. Because of this, the fundamental aspects of the strategy remain the same: HMRC will not be able to offer “package” deals under which unrelated points are balanced against one another to reach a compromise settlement; and HMRC will not be able to compromise in cases that are “all or nothing”, based on a point of law that results in either a full payment or no payment at all from the taxpayer.
But HMRC had no choice in this. The Wilkinson case in 2005 clarified the scope of HMRC’s administrative discretion to make concessions that depart from the strict statutory position. The House of Lords said that HMRC must act to the letter of the law, a judgment that has resulted in the Taxman reviewing its Extra Statutory Concessions. Because of this, HMRC is not able to compromise on settlements.
Settlements are a means of maximising revenues. As the document itself points out, “in most cases, resolution by agreement is likely to offer the most effective and efficient outcome”. Litigation is expensive and carries the risk of failures. Indeed, in the commercial world, the potential risks involved in litigation are costed. If HMRC’s only responsibility was to the Exchequer, settlements would be made that would take into account these costings.
So is there any way in which these contradictory HMRC duties – to the letter of the law and to the Exchequer – can be reconciled? Andrew Watters, a director at Berwin Leighton Paisner, suggests that this could be achieved through HMRC officers looking into the individual circumstances surrounding the case. By doing this, HMRC can helpfully point out where the individual’s circumstances differ from the letter of the legislation and therefore give themselves wriggle room to settle.
This seems improbable at first glance. With the HMRC’s target of closing the tax gap by £7bn a year, there has been a perception that the department has been showing its teeth more. In this context, many advisors would baulk at the idea of officers helping the taxpayer with their own case.
Yet a reading of the document suggests that this might be a part of HMRC’s thinking. For example, paragraph 13 states that HMRC will “share and test the strengths of HMRC’s own arguments, and fully understand and test the strengths and weaknesses of the customer’s arguments, before reaching a considered view on the strength of the case”.
The following paragraph supports this idea: “HMRC will always consider whether something which initially appears to be an ‘all or nothing’ issue is genuinely all or nothing or is in fact a case where there is a range of possible figures for taxes due.” These two statements give HMRC the flexibility to actively help the taxpayer’s case. By doing so the parties can settle, with the Taxman pointing to individual circumstances that do not relate directly to the letter of the law.
There is another vital issue for HMRC. “The objective of maximising revenue flows involves considering not only the tax at stake in the dispute itself but also – in circumstances where a precedent might be set, or where HMRC is seeking to influence customer behaviour – potential tax liabilities of the same or other customers.”
This could also support the idea of HMRC actively helping the taxpayer’s case. In a case in which the individual circumstances favour the taxpayer, it would not be in HMRC’s best interests to take this to a tribunal that can be seized upon by taxpayers in similar circumstances. The taxpayer does not necessarily have to go along with a settlement and could take their chances in court. Yet the same litigation risks and legal fees apply to the taxpayer. In this case, a settlement would benefit both parties.
The emphasis on collaboration cannot be sold as a piece of altruism from HMRC but this does not devalue the steps forward that obviously stem from the strategy. The plan does not explicitly state that there will be situations in which HMRC is actively promoting the taxpayer’s case. But, with Exchequer revenue at stake and statutory controls restricting the Taxman, it is not too fanciful to believe that collaboration could go even further than a greater willingness to listen.
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