Lee Sharpe asks whether HMRC can be trusted to act as a judge in its own cases, and considers the options in enquiry disputes.
HMRC recently published a formal consultation, ‘Improving HMRC’s Approach to Dispute Resolution’, which aims to promote standard routes to resolve any disagreement between HMRC and taxpayer, before a hearing at the tribunal and courts as a costly last resort.
This article briefly considers those alternatives and how independent they are of HMRC’s influence.
Basic process
In the course of a typical self-assessment tax return enquiry, HMRC propose to increase the taxpayer’s liability because of one or more perceived errors (and naturally, penalties may follow). If the taxpayer disagrees, they, or more likely their agent, will argue the case with HMRC.
This may well involve several letters between the parties, often with some concessions on either or both sides. Sometimes, the process results in an increased liability that is acceptable to the taxpayer and HMRC will conclude the enquiry on agreed figures, raising assessments accordingly. Where the taxpayer and HMRC fundamentally cannot agree, the principal remedy is an appeal to the tax tribunal, and potentially the higher courts.
But there are also two main ‘off-ramps’, where the taxpayer and HMRC are at loggerheads, that can help resolve the dispute before the cost, delay and stress of a tribunal hearing:
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Statutory review – where the case is referred for a second opinion from another HMRC officer who has not previously been involved with the case.
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Alternative dispute resolution service – a form of managed mediation where the taxpayer and HMRC are encouraged to ‘sit down together’ and find common ground.
1. Statutory review
These have been around since 2009 (TMA 1970, ss 49A-49I). The taxpayer may either request a review, or the enquiry inspector may offer it; the case is then passed over to a ‘fresh’ officer to consider the merits of HMRC’s case. Broadly, they then have up to 45 days to make a decision as to whether to uphold or to vary HMRC’s position – anything up to agreeing with the taxpayer on all points.
While the review officer is allowed to correspond with the original HMRC officer, to check facts and details, the taxpayer might reasonably hope that the review exercise is independent – note, for example, that HMRC’s Appeals Reviews and Tribunal Guidance Manual states (at ARTG4820): ‘Whatever the outcome of the review, the review officer will write to the [taxpayer] and give their conclusions, sending a copy to [the original inspector]’.
Rubber stamp exercise?
The statutory review process costs the taxpayer only time, so their accountant or adviser will often recommend to a client under enquiry that they take the opportunity. However, the writer’s appreciation is that the process is not held in very high regard by the profession; simply put, it is quite rare for HMRC to disagree with itself.
I have occasionally had a statutory review where assessments were consequently withdrawn entirely; but recently, most result in a long letter from the review officer that copy-pastes tracts of the enquiry inspector’s arguments, stitched together with commentary which basically amounts to little more than “I agree with all this”. In other words, scant evidence of independent consideration (or perhaps even any real appreciation) of the arguments involved. The review officer’s approach might be justified in very simple cases but such cases should not really warrant a review in the first place.
And, with regard to any hope the review might be independent, the notorious tribunal case of McMillan v HMRC [2020] UKFTT 82 (TC) revealed that, far from the enquiry inspector simply being copied in on the review officer’s decision ‘after the fact’, the enquiry inspector had already seen and rejected an advance draft of the initial review decision (that had agreed with the taxpayer) and insisted on a new decision, that went on to agree with their own original arguments and assessments instead.
2. Alternative dispute resolution
Alternative dispute resolution (ADR) was piloted in 2011 and fully implemented in 2013. The process basically comprises a meeting (typically online – Zoom or similar) hosted by a team of HMRC mediators. The mediators are experienced officers who have been specially trained in mediation and are supposed to be impartial. Also:
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The parties (taxpayer and agent versus inspector) are asked each to commence with a prepared statement of one or two pages, summarising their respective cases.
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The meeting is supposed to explore possible common ground, faster than letters back and forth.
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It is held ‘without prejudice’ – which is not the same as ‘off the record’!
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Parties can retire to their own online ‘rooms’ (so that, for example, the taxpayer may confer privately with their agent before moving on with a fresh proposal).
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The mediators will draw up a record of outcomes, that should summarise if and to what extent any agreement has been reached, further steps or evidence required to conclude matters, etc.
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Generally, parties may refuse to accept the outcome of the ADR, but a tribunal may find in some cases that an agreement between the parties in ADR was binding (within limits – see Serpentine Trust Limited v HMRC [2018] UKFTT 535 (TC)).
On the whole, my experience with ADR is more encouraging; they can promote genuine progress on a case and, frequently, a favourable resolution for the taxpayer. It might be difficult to credit that the mediators, who may have worked for HMRC for decades, can nevertheless be impartial but it is all the more gratifying when those mediators end up being almost as exasperated by the enquiry inspector’s stubbornness as the taxpayer is. If nothing else, ADR is an opportunity to ‘road-test’ your technical arguments; a gentle ‘dress rehearsal’ for the tribunal hearing you may yet need.
Even so, the ADR process is much more involved than a statutory review; you have to prepare for the ADR, and the meeting itself will generally take at least a few hours, and potentially longer. Worse, I have heard concerns (which I share) that HMRC officers are becoming less inclined to respect any agreements coming out of the ADR that they dislike. Some HMRC officers seem to think that the ADR is a stepping-stone to (re)launch Enquiry 2.0, which generally should not be possible.
HMRC proposals
Simply put, the tax dispute system is creaking; it can take years for a tribunal hearing. HMRC’s 2023/24 Annual Report and Accounts disclosed that around 8,000 appeals were settled in 2023/24 (1,600 were formally decided; the rest settled prior to hearing). But circa 13,000 new appeals were listed, and combined with similar figures from previous years, there are now nearly 50,000 cases outstanding (although a single hearing can address many cases ‘stood behind’ a test case).
HMRC is re-prioritising statutory reviews and ADRs, the better to act as safety valves, and the consultation speaks of simplifying and streamlining processes – digitally and online, where possible.
For example, HMRC proposes to merge the detailed resolution processes for the different taxes (e.g., so the taxpayer can postpone tax in dispute across all taxes – even VAT). HMRC may also reduce the quite long list of dispute categories that are ineligible for ADR. HMRC has even floated the idea of mandating an attempt at ADR before allowing a dispute to proceed to tribunal.
Conclusion
The Latin phrase nemo iudex in causa sua (‘no one a judge in their own cause’) frames the idea that it is inherently unfair for a party to preside over their own dispute.
The consultation notes taxpayer concern over independence as a key reason why taxpayers do not take up reviews or ADR as often as HMRC would like. The McMillan case suggests those concerns are justified – one might easily infer that HMRC is fine with the idea of independence, so long as it gets the answer it wants (see also TMA 1970 s 49E(8), which could be interpreted as, ‘if we spend more than 45 days reviewing it, we’ll magically find the enquiry inspector was right all along’).
While taxpayers should certainly discuss these ‘off-ramps’ with their professional adviser (the financial, time and emotional cost of a formal hearing can be very substantial), some genuinely independent oversight – particularly of the review process – might go a long way towards making them more… appealing to the taxpayer.
