HMRC is choosing to pursue legal action against taxpayers even when its chances of winning appear less than 50%.

The Chartered Institute of Taxation (CIOT) recently expressed concern to MP's about HMRC’s apparent eagerness to litigate rather than adhere to its own Litigation and Settlement Strategy (LSS). The LSS framework states that where HMRC believes that it is unlikely to succeed in litigation, in most cases, it should concede.

Yet, in a statement to the Treasury Sub-Committee, CIOT said that this hasn’t been the case. “Contrary to the LSS, our members report that HMRC seems to be taking increasing numbers of cases where the prospects of success appear much lower than 50%,” CIOT president Ray McCann explained.

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The tax authority is currently being bombarded by appeals from taxpayers. Earlier this week, we reported that HMRC faced over a third more judicial reviews in 2017 compared to the year before. UK law firm RPC said it’s a direct result of HMRC’s aggressive approach towards taxpayers. This is because of the current pressures HMRC is faced with to hit targets and increase tax revenue.

What is LSS?

LSS is HMRC’s own framework for handling and resolving tax disputes. It exists to ensure that all tax disputes are dealt with fairly and in an even-handed manner.

Importantly, LSS suggests that taking early specialist advice will bring important efficiency savings. However, CIOT has said that HMRC’s solicitors’ office and tax counsel are often engaged too late in the process. This is long after HMRC’s decision is taken and a dispute has arisen.

HMRC ignoring its own guidance

CIOT said its members also report increasing instances of HMRC adopting an interpretation of the law to bring in the greatest tax. This contradicts HMRC’s own mantra of ‘right amount of tax on time’.

Indeed, HMRC often appears to suggest an inappropriate category of behaviour when applying penalties. Examples of this would be categorising genuine errors as carelessness, or carelessness as dishonesty. This leads to decisions which are overturned on appeal. Such litigation is normally a costly exercise for both the taxpayer and HMRC.

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“Many penalties for careless behaviour seem to be issued with no apparent consideration of suspension,” CIOT tax policy director John Cullinane said. “We also told the committee that HMRC often seem unduly reluctant to suspend penalties for ‘one-off’ errors. And that penalty conditions seem often poorly thought through.

“We are concerned at HMRC’s eagerness to litigate despite an already overwhelming number of cases in the tax tribunal system,” he added.

A better approach?

“Alternative Dispute Resolution (ADR) mediation can work well and needs to be promoted more widely as a mechanism for resolving disputes,” McCann said. “ADR is effective when it is used genuinely to seek to resolve disputes. Unfortunately, our members have also experienced cases where the HMRC officers at the ADR meeting did not have the authority to reach a settlement, when the taxpayers had senior personnel attending who were able to take decisions that could have led to settlement. This leads to increased costs, makes subsequent litigation more difficult, and makes ADR less attractive to pursue. HMRC should be prepared to engage with authority in this process.”

CIOT says that HMRC could be required to state in their decisions that the LSS code has been complied with. They could also need to confirm the level of oversight a particular decision has had.

HMRC’s compliance regime could also be improved by simplifying tax legislation, improving the quality of guidance and emphasising the principles in HMRC’s Charter. CIOT has also called for better training for HMRC staff, improving practices, processes and record keeping by HMRC; and reviewing applicable time limits to more closely align the rights of taxpayers and HMRC to make claims and corrections.

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