The backlog of tax disputes at the First-Tier Tax Chamber hit 28,800* last year, up from 25,520 in 2016/17, fuelled by HMRC’s aggressive approach to curbing tax avoidance, says Pinsent Masons, the international law firm.
Pinsent Masons says the backlog has now increased for three years in a row and has more than doubled from 13,460 in 2009/10 (see graph). These cases include those related to large businesses, SMEs and private individuals.
Pinsent Masons says the scale of the backlog means taxpayers can face uncertainty for years over the outcome of a dispute. This which can be very disruptive for businesses in terms of tying up management time and can be particularly stressful for individuals who may struggle to cover the legal costs involved.
The backlog is proving difficult to clear. This is especially true as HMRC’s Litigation and Settlement Strategy; the framework it keeps to when dealing with disputes, makes it harder for individual teams at HMRC to reach out of court agreements, increasing the likelihood of a dispute going to a hearing.
Although HMRC recently updated the framework to make it easier to settle with taxpayers this appears to have had a limited effect on the backlog so far. In the new framework HMRC has set the aim of reaching an agreement as its “default approach”, which it was not previously.
Pinsent Masons says tribunals are struggling to deal with the high volume of cases. The Tribunal Service announced a recruitment drive in 2018 for new judges, suggesting it is short of resources.
The rise in the backlog may also reflect the growing number of businesses and individuals who are challenging HMRC’s behaviour through Judicial Reviews. The number of Judicial Reviews faced by HMRC increased 36% last year to 122, up from 90 in 2016.Many Judicial Reviews involve taxpayers appealing against the imposition of Accelerated Payment Notices (APNs).
An APN requires a taxpayer to pay the full amount of disputed tax immediately without waiting for a court or tribunal decision on the dispute. The tribunal doesn’t have jurisdiction to consider whether HMRC was correct to issue an APN but does have jurisdiction to consider the penalties issued for non-payment of the APNs which maybe part of the explanation for the backlog before the tribunal.
HMRC has withdrawn over 6,000 APNs so far since 2014; this has doubled from 3,000 in 2016. The high number of withdrawals may indicate that HMRC is overly aggressive in imposing these penalties.
There is also currently a backlog of 154 cases in the Upper Tribunal, which hears appeals from the First-Tier Tax Chamber and cases as a first instance, including many big ticket ones involving international businesses operating across multiple jurisdictions.
Steven Porter, Partner at Pinsent Masons, says: “HMRC’s inflexible approach to dealing with disputes is exacerbating the growing backlog at tax tribunals. It’s generally recognised that this backlog needs to come down but it has hardly shifted at all.”
“Businesses can often wait for years between when an investigation is first launched and when a final judgement in the courts is handed down. This uncertainty can be hugely damaging and may result in a business falling behind its peers as decisions and spending get shelved until the outcome is clearer.”
“The litigation framework HMRC has to keep to forces it to take an unrelenting approach – it will often give no ground and frequently will want to win every point. Recent updates to the framework may not have gone far enough in enabling HMRC to settle with taxpayers.”
Backlog of tax disputes hits 28,800, more than double the level in 2009/10 (first recorded year)
*Year-end 31st March