Tax Litigation

Tax Litigation -Winning at the Alamo
Recently Ashurst Morris Crisp announced the retooling of its tax litigation practice. In this article, John Watson MA, solicitor, tells us why.
The recent discovery that the Egyptian tax collectors had soldiers available to help them, may result in some green eyes at Somerset House. Many taxpayers, however, feel that the lads from the Strand have not done too badly themselves in recent years. After all, this year's Finance Act runs to 613 pages of racy entertainment, much of it devoted to anti-avoidance provisions or otherwise slanted in favour of the authorities. Even the new criminal offence of 'fraudulent evasion of income tax' and the new powers to obtain documents are merely the gilt on a gingerbread, whose ingredients include the changing attitude of the courts in tax cases and the increased availability of delegated legislation to put right those decisions which the authorities do not care for.
Changing balance of advantage
Surveying all this, the casual observer might think that the initiative in any tax dispute had moved irredeemably to the authorities and that the taxpayer had better just sue for peace and pay up. In reality, however, the traffic has not been entirely one way and one factor, in particular, has moved the balance of advantage in tax disputes back towards the taxpayer. Relief comes from an unlikely source the sixth cavalry in this case being the somewhat unromantic provisions of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994.
These regulations govern the conduct of disputes in front of the Special Commissioners and, despite being drawn some two years before the Woolf report, foreshadow its recommendations by bringing the concept of case management into tax disputes. One can hear the spirit of Woolf whispering through the pages. For example, paragraph 4 of the Regulations confers powers on a Special Commissioner to give such 'directions as he thinks fit'. The Special Commissioner, of his own volition or on the application of either party, can arrange a preliminary hearing. At that hearing he can lay down the timetable for the action. If a party fails to comply with directions, it can be fined.
The willingness of the Special Commissioners to use these powers allows the taxpayer to place the conduct of a contentious dispute firmly into their hands and to obtain a fixed timetable, including set dates by which written submissions have to be produced. That, of course, wrests the initiatives from the Inland Revenue which quite naturally would much rather control these matters.
Chapter 5, paragraph 5 of the Woolf report (which, of course, focuses on litigation in the High Court and County Court) argues that proper timetables are necessary to prevent financially stronger and more experienced parties from spinning out proceedings:
'to intimidate the weaker party and produce a resolution of the case which is either unfair or is achieved at a grossly disproportionate cost or after unreasonable delay.'
Taking the initiative
No one would claim that the Inland Revenue, which is generally fair minded as litigants, follows tactics of this sort deliberately, but often the effect of its deeper pockets and longer timescales gives it advantages automatically. It is well known that clients faced with Special Office enquiries become worn down with the layers of interrogatories which they receive and become frustrated at the Revenue's unwillingness to focus on the technical issues. Historically, they have often been advised that in view of the drain on management time and the uncertainty to their business, they would do best to run for cover, agree whatever terms they can, and pay up.
Increasingly, however, the well advised taxpayer will now eschew the 'belly-up' approach to negotiation and instead will ask the Revenue to raise an assessment (where applicable applying for a direction that any enquiry be closed), elect for the appeal to be heard by the Special Commissioners and make immediate application for a listing and directions. From that point, the matter is in the hands of the Commissioners and the Revenue has to come up with hard excuses if it is unable to meet the timetable.
Now the weight of advantage has swung, because officers of the Solicitors Office of the Inland Revenue are a scarce resource and their detailed involvement is going to be essential to the production of a written argument to the requisite standard. In any case, there are occasions when the Revenue's argument is perhaps not as technically strong as it would like. The effect of a timetable incorporating a requirement for argument to be produced to a deadline is to bring this out; the fact that any shortcomings in the Revenue's case will be ruthlessly exposed on a particular date wholly alters the negotiating position between parties.
A more aggressive approach
This more aggressive approach by taxpayers is not wholly new. I once knew a very experienced tax manager who, when I asked him why he was taking a particularly poor point to the Commissioners, told me that he always took a point once a year so that the Inspector would remember that he was no pushover. As far as I know, his tactic was a perfectly successful one as indeed it was in the matter in question where we went forward despite my direst warnings and won a resounding victory in the courts. Nonetheless, until recently, that was not a common approach and the usual answer to a Revenue attack was simply to enter into protracted correspondence and negotiation with consequent difficulties for a company with limited management time and provisions to make in its accounts.
A more robust attitude alters the support which a taxpayer needs in relation to its tax disputes. Whereas the belly-up approach often aims at a compromise between advisers with Revenue experience and their counterparts still in the tax-gathering services, the modern taxpayer will in appropriate cases turn to its advisers with a view to litigation. In the case of the solicitors' profession, it is not just tax advice that they want but also tactical advice on how to make the best of procedural initiatives and how to maximise the likelihood of ultimate victory. That in its turn has begun to change the shape of the tax industry.
Whereas in the past it was enough to know the tax rules, now one needs tactical sense as well. It is no surprise, therefore, to see the contentious tax groups of the law firms being supplemented to include litigators as well as tax lawyers. That is a challenge for those who are already tax lawyers. We have all prided ourselves on being tax men able to 'do' litigation. Now our departments are being supplemented by litigators who believe that they can also 'do' tax. When the perfect combination has been created by the genetic engineers, the rest of us will be looking for a job.
John Watson is a partner and head of tax at Ashurst Morris Crisp.

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