It might come as a surprise to learn that the taxman can’t claim costs when
it starts a county court battle to recover debts.
To April 2010, HM Revenue & Customs lodged 10,905 cases against those who
had failed to pay the tax they owed, but now wants an overhaul of the system to
tack on court costs from April 2011.
Advisers and business groups are largely behind the move, but have demanded
that safeguards are included.
The Institute of Directors, the Civil Court Users Association, Chartered
Institute of Taxation, Professional Contractors Group, the ICAEW and the
Federation of Small Businesses are just a handful of those who have contributed
to the debate in consultations.
The primary concern among the bodies is that the changes will not heap court
costs on debts held by people genuinely unable to pay.
“It would not be appropriate for HMRC to be awarded costs where the taxpayer
is in hardship or for tax credit overpayments,” respondents said.
Avenues for redress would need to be established in the case of mistakes.
Business groups and advisers also called for the additional costs HMRC can
claim to be fairly minimal – enough to cover those costs reasonably and
genuinely incurred during the process of lodging the claim, but with the
exclusion of any HMRC wage costs.
A warning was also issued against charging a percentage of the sum being
contested and basing the scale on the amount of work done to secure the victory.
For example, a percentage of the sum claimed, even if the charge were only
0.5%, on a tax claim for £1m would lead to costs of £5,000.
Advisers also flagged up the difficulties in calculating and accounting for
small sums, as this placed an additional administrative burden on all involved.
Some costs are already covered by the state but there is no similar right to
costs for the taxpayer.
All of the issues raised could discourage taxpayers who feel they have a
genuine grievance and wish to defend an HMRC court action, the business groups
The taxman responded that it was not trying to push people further into debt,
but only recover what was due from those with the funds to pay it.
“Court action is a last resort for HMRC,” the taxman said.
“It is in no sense a matter of routine and HMRC does not knowingly take
people to court where it is satisfied that they are unable to pay.”
But the taxman also warned some people prefer to take a gamble and wait to
see if HMRC will take them to court, because they know they won’t have to
shoulder the burden of HMRC’s costs if they lose.
“In practice it is cheaper, for the defaulting taxpayer, to be sued by HMRC
than by other creditors,” the taxman added.
“As a delaying tactic, others deliberately wait to be taken to county court
before paying, knowing they only face the court fees. Some debtors see these as
further reasons to leave tax debts unpaid.”
The taxman also said the imbalance also disadvantages people who paid what
they owed compared to those who hold out.
The move is also being taken to smooth out an uneven playing field.
In England, Wales and Northern Ireland, HMRC cannot claim costs because the
person presenting the case is usually a staffer, not a qualified solicitor.
But in Scotland HMRC employees can claim up to two thirds of the expenses
which a solicitor might claim.
However, their entitlement to two thirds is not mandatory and various
circumstances such as the nature of the case, time, earnings lost and complexity
have to be considered.
HMRC intends to continue discussions with the Ministry of Justice and others
to see how this should be implemented.
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