The following comments assume some familiarity with the role of the Tax Tribunals (First Tier Tribunal and Upper Tribunal) in resolving tax disputes which cannot be resolved by agreement with Her Majesty’s Revenue and Customs. (HMRC)
Apart from resolving disputes relating directly to tax, the Tribunal will also consider other areas of contention such as disputes over information notices in tax enquiries and, a growth area over the last few years, penalties for culpability in making incorrect tax returns.
The system pre Tax Tribunal
The Tax Tribunal system was introduced in the early years of this century. Before that, when disputes could not be resolved by agreement, matters were referred to Tax Commissioners, either General Commissioners or Special Commissioners depending on the level of complexity. Most cases were dealt with by the General Commissioners.
Each geographical area had its own set of General Commissioners. These were the tax equivalent of Justices of the Peace; lay people who would apply common sense in how to resolve issues with advice from a qualified clerk (usually a local accountant or solicitor) as required. Hearings were held at a central point, often a town hall or at the offices of a neutral local professional. Proceedings were largely informal. While the losing party would sometimes voice unease about the intellectual powers of the Commissioner in question, the right of appeal was seldom exercised. There was generally a feeling that one had had one’s day in court and the costs of taking it further would be disproportionate.
By contrast in the Tax Tribunal system, Tribunal judges are usually qualified legal professionals. Also, the proceedings are more formal and it is more difficult for lay tax people, or indeed for professionals who are not familiar with the system, to deal with the appeal process.
All this has driven up costs.
The Tax Tribunal – increases in case load and costs
At about the same time as the switch from Tax Commissioners to Tax Tribunal, there was a merger between the Inland Revenue and HM Customs and Excise to form the new HMRC. That change coincided with a more aggressive interpretation of the point at which tax planning constituted tax avoidance and, as a corollary, new legislation which both increased the number of situations where penalties were in point and imposed larger penalties, financial and reputational. There was also an increase in the cases where there was a dispute over the rules of engagement in HMRC enquiries, for example whether the information requested in information notices was reasonable or proportionate.
The problem was further exacerbated by adverse publicity on how Tax Inspectors struck deals in concluding some enquiries which led HMRC to launch its Litigation and Settlement Strategy (LSS). In essence, this said that cases should be settled in accordance with the legislation. While this may seem a statement of the obvious, in practice, it can sometimes be difficult to agree how to interpret complex legislation in a particular situation. Pre LSS, if it was thought that there was, say, a 50/50 chance of winning or losing if the case was litigated, taxpayer and HMRC could agree a settlement of about 50% of the tax at issue. Post LSS, this was not possible. Or at least it was a lot more difficult as one had to find a way of reconciling any settlement with the terms of the LSS.
The combination of the above factors led to a substantial increase in HMRC challenges and less likelihood of such challenges being resolved by an agreed settlement. This meant an increase in cases where taxpayers considered appeals to the Tax Tribunal. As noted above, the costs of taking a case to the Tribunal are substantially more than were the costs of taking a case before the General Commissioners.
For taxpayers arguing about large sums, this had relatively little impact but for some this has meant that there is a substantial financial hurdle to having one’s day in court. Access to justice is limited by the size of one’s wallet.
Covid 19 and the germ of an idea
Covid 19 has resulted in the cancellation of face-to-face hearings. Even before the pandemic, the Tribunal was piloting a system for video hearings. One reason for this was an awareness that the Tribunal system did not have local ‘courts’ and so for some taxpayers there was substantial costs and inconvenience in physically attending hearings. With Covid, large strides were made in a short time in developing remote hearings.
Also, when an appeal is listed for the Tribunal, it will be allocated to a particular ‘track’ according to complexity. The simplest cases and those involving very modest sums, for example some late filing penalties, will be allocated to a Paper hearing. That is the judge will simply review the correspondence together with any arguments from HMRC and the taxpayer. As such, preparation costs and hearing costs can be modest. In Covid, the sums involved for default referral to Paper track went up from £2000 to £20,000.
Going forward, reports from the Tribunal have indicated a generally positive response from judges and litigants on remote hearings. Similarly, some judges used to delving through paper Bundles, often jnvolving thousands of pages of evidence, have been pleasantly surprised at the advantages of having such evidence delivered in ‘e-bundles’ which facilitate moving from one element to another in the Bundle.
It seems very likely that many of the changes to the Tribunal system which have been imposed on it by Covid will be retained since they bring advantages. That said, in many instances litigation will continue to be a very expensive business.
However, for those taxpayers where the costs of an appeal constitute a barrier to exercising their right to appeal, some of the recent changes give some hope. There is no doubt that Tribunal judges take access to justice very seriously. If a taxpayer requests a particular ‘track’ in their appeal, if such a request involves financial considerations that will be a legitimate request which will be seriously considered. The least expensive appeal will involve a Paper hearing. The taxpayer will need advice on whether that adversely impacts their chances of success at appeal. The answer will vary from case to case. Similarly, the approach to costs will vary from taxpayer to taxpayer.
Covid has not provided any one magic bullet which takes away concerns over the costs of litigation. It has thrown up some possible approaches which merit consideration, especially where a taxpayer feels a tension between accepting a perceived injustice and the daunting cost of fighting it.
