Record backlog of disputes between HMRC and taxpayers as number of outstanding tribunal cases doubles in four years

The backlog of disputes between HMRC and taxpayers has hit record highs this year, with the number of outstanding tax tribunal cases doubling in four years, says Pinsent Masons, the international law firm.

According to Pinsent Masons, there were 26,965 outstanding first-tier tax tribunal cases in 2012/13, up from 24,273 the previous year. This is compared to 13,456 in 2009/10 (see graph below).

Comments Jason Collins, Head of Tax at Pinsent Masons, “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. Delays also create huge uncertainty for those who are just trying to get on with the day to day running of their businesses.”

Collins says that delays in settling VAT disputes are particularly costly for the businesses involved. This is because while the disputed tax is often “postponed” pending an appeal to the Tribunal in most cases, VAT must normally be paid upfront and then recovered afterwards if successful.

“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,” explains Collins. “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.”

He adds that even those businesses and individuals who are able to postpone their tax payments until the case is heard could incur potentially hefty charges for delays, as HMRC charges taxpayers up to 3.5% on underpayments but pays just 0.5% interest on overpayments.

HMRC forced to soften aggressive approach but more still needs to be done

Pinsent Masons says that that the massive growth in outstanding cases in the last few years has forced HMRC to soften its litigious approach towards those it believes are not paying the right amount of tax. In [2012] it revised its Litigation and Settlements Strategy to “encourage HMRC staff to minimise the scope for disputes and seek non-confrontational solutions.”

Says Jason Collins, “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.”

“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.”

He explains, “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.”

 “In addition, ADR is typically overseen internally by another member of HMRC staff, rather than by an independent adjudicator. 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.”

“As businesses’ tax affairs become more and more complex in our globalised economy, the potential for tax disputes to arise is likely to increase. 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.”

Number of outstanding first-tier tax tribunal cases