HMRC updated guidance on litigation and settlement strategy

Updated guidance published by HM Revenue & Customs (HMRC) on its litigation and settlement strategy (LSS) contains subtle changes to the previous version.

The LSS sets out the framework within which HMRC will resolve tax disputes. It was first introduced in 2007 and refreshed in 2011 and is designed to ensure consistency in how tax disputes are resolved.

HMRC has now published updated guidance on the LSS as well as a slightly updated version of the LSS itself. At the same time it published a revised version of its Code of Governance which sets out its internal governance arrangements for decisions on resolving tax disputes.

The LSS itself is slightly reworded in places. Changes to terminology include referring to "securing the best practicable return for the Exchequer" rather than "maximising revenue flows" as was used in the previous version.  The revised LSS is also expressed to apply to 'disputes', which now expressly includes "situations where HMRC needs more information to enable it to form a considered opinion on the correct tax treatment of a transaction".

One of the most interesting changes to the commentary on the LSS is some new wording which confirms that in exceptional circumstances, it may be acceptable for HMRC to settle on the basis that the taxpayer has no liability for prior periods.  

"Exceptionally, customer behaviour may factor in the decision about pursuing an individual risk for earlier periods where HMRC’s chances of success are good. Where a customer has:

• readily assisted HMRC in understanding the facts and circumstances surrounding all risks both during the fact-finding and afterwards
• eliminated the chance of any particular risk re-occurring.

Pursing a risk for earlier periods may not be the most cost-effective method of securing current and future adherence to HMRC’s understanding of the law and consequent tax flow." (page 39 of the revised guidance)

The guidance continues: "This is likely to occur in a multi dispute cases, where the customer genuinely agrees to adapt their practices to conform to HMRC’s understanding of the law and is seen to put those changes in place. Where this change in practice on behalf of the customer can be verified and is shown to be sustainable, HMRC not pursuing liability for earlier periods may meet the requirements for HMRC to pursue the maximum revenue at least cost.

Any decision not to litigate but to concede a dispute in order to resolve a multi-dispute case would therefore be rare in practice and should be taken through the relevant formal case governance procedures. A settlement made on this exceptional basis would be in accordance with the law."

The guidance contains a new section on 'finely based outcomes', defined as those where "alternative outcomes are relatively equally likely and there may also be other outcomes which are less likely". The guidance says that in this situation, considerations which come into play in deciding which of the alternatives HMRC should decide on include the absolute amounts determined by each alternative, the past behaviour of the customer and the likely impact on their future behaviour and whether there is the possibility of precedent value in choosing one alternative over another.

Interestingly the guidance now says "If a case has no precedent value and the difference between the alternatives is not too great, HMRC may decide to choose to settle on the basis of the alternative that is most likely to be accepted by the customer - thereby settling most efficiently." This appears to suggest a more pragmatic approach on the part of HMRC.  However, where a finely based case is binary – with an 'all or nothing' outcome, HMRC are still likely to pursue the case to litigation.

There is a new section on legitimate expectation, which discusses how disputes should be dealt with where there is a judicial review angle.  This states that where the judicial review aspect and the technical aspect relate to the same substantive issue they should be treated as one matter.

A new section on double tax agreements and the mutual agreement procedure is less helpful to taxpayers. This states that in working out what decision a tribunal would reach (and therefore what is a reasonable approach to settling a dispute). HMRC can ignore any double taxation and the fact that corresponding adjustments may be available. It is not entirely clear what this is getting at, but settling on a basis that would give double tax and then having to separately claim double tax relief is not an attractive option for the taxpayer.

More subtle changes, perhaps suggesting a slight change in HMRC's emphasis include changes in the commentary stating that HMRC will not settle for less than the full amount it believes a tribunal or court would determine "where HMRC believes it has a good chance of winning in litigation". Previously this was "in strong cases". There are likely to be more 'borderline' issues in non-avoidance cases, and the changes may reflect HMRC's continuing difficulty in deciding how best to resolve these finely based cases.  Unlike a commercial dispute, HMRC will not "split the difference" and so more cases may end up in litigation.  HMRC's oft-quoted statistic that it "wins over 80% of avoidance cases" is unlikely to stay at that level as more non-avoidance cases reach the courts.

References to "relentlessly pursuing those who bend or break the rules" have been removed and replaced with a statement that "The LSS supports HMRC to obtain the best practicable return for the Exchequer and to bear down on avoidance and evasion." This may suggest a more measured approach from HMRC.

The commentary includes new guidance about the value of witness evidence, particularly in relation to ‘unallowable purpose’ tests, when it is necessary to establish the purpose or purposes behind a transaction. It says: "Witness evidence may even be given greater weight than documentary evidence, particularly if a witness is cross-examined and found to be a credible and truthful witness".

In relation to establishing facts and requests for information, the guidance now helpfully states "HMRC should also explain all the legislation it believes may be applicable and why the facts requested are relevant to determining the legislative provisions which apply".

The main changes to the Code of Governance include raising the thresholds above which disputes have to be referred to some of HMRC's governance boards. Disputes over £25m are now considered by the transfer pricing board – the threshold used to be £15m. The reduction in the threshold may reflect an increase in the number of cases as a result of the introduction of diverted profits tax, as in many cases a transfer pricing adjustment will be a more attractive option than a DPT charge, because DPT is charged at the higher rate of 25%.

Figures released by HMRC in September 2017 showed that transfer pricing enquiries were taking longer to settle, with enquiries settling in 2016-17 taking an average of 28.8 months to settle, an increase of over a month from the previous year.(27.6 months).

The Tax Disputes Resolution Board (TDRB) now makes recommendations about the resolution of cases where the tax under consideration is at least £100m (formerly £25m). References to the High Risks Corporate Programme have also reappeared in the code. This deals with "very large high risk businesses and relevant individuals" and references to it were removed from the 2014 version of the Code. This suggests that HMRC are revisiting this programme.

The Code of Governance also now includes details of the Diverted Profits Board which makes decisions about the issue of DPT notices and makes decisions on the resolution of DPT cases which fall outside the TDRB's remit.