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KEY POINTS
- Background to HMRC’s internal review process.
- Ensuring that the reviewer is distanced from the decision maker.
- Safeguarding the taxpayer’s right of appeal.
- Costs and reimbursement.
- Reviews and practical concerns.
All practitioners will be aware of the recent demise of the General and Special Commissioners under the Government’s tribunal reform programme.
From 1 April 2009, all tax appeals are heard by either the first tier tribunal or the upper tier tribunal.
I have always considered taking a case to the commissioners as very much a last resort.
For the average taxpayer, going to the Special Commissioners could be an expensive option and going to the General Commissioners could be something of a lottery where you might win with a bad case, but lose with a good case.
I would expect the new tribunal system to be somewhat less of a lottery, providing a more consistent application and levelling out some of the inequality of arms.
Nevertheless, it will still be an expensive option for many taxpayers.
Consequently, for me, the most important part of the new arrangements is HMRC’s internal review system of dispute resolution.
If this works well then it should be the best way to resolve disputes with the minimum cost and aggravation.
On the other hand, if it does not work well then the new tribunals could find themselves swamped with appeals and potentially be unable to cope.
Background
In 2001 Sir Andrew Leggatt produced a report, Tribunals for Users – One System, One Service, which recommended that departments should review cases internally before appeals reached a tribunal. This subsequently became Government policy.
The process of reforming the tribunals coincided with the merger of the Board of Inland Revenue and HM Customs & Excise.
A great deal of work was subsequently done to align the different powers and approaches that were in operation as well as building a consistent set of taxpayers’ safeguards.
Against this background, HMRC published in October 2007 a consultation document, entitled Tax Appeals Against Decisions Made By HMRC, seeking views on how to implement a more consistent approach to internal review across HMRC.
An HMRC response document was published on 12 March 2008. This confirmed that there would be a statutory entitlement to a review of appealable decisions falling within the jurisdiction of the taxation chamber.
This was to be an optional process which would replace the previous mandatory review in place for some indirect taxes and VAT reconsiderations.
In line with this, FA 2008, s 124 enabled the Treasury to introduce a statutory instrument setting out the detailed provisions for reviews. In June 2008, a technical document containing an overview of the draft order was published.
The main points were as follows.
- If a taxpayer disputes a tax assessment or an amendment of self assessment there will continue to be 30 days within which to appeal.
- n As under the existing system, the taxpayer and the Inspector can settle the appeal between them, but in the absence of a TMA 1970, s 54 agreement the taxpayer can either notify the tribunal of the appeal and initiate the hearing process or, alternatively, he can request a review by HMRC.
- Parallel to the taxpayer’s right, HMRC can notify the taxpayer of their current view of the position and offer a review. Once HMRC offer a review, the taxpayer has 30 days to accept the offer or to notify the appeal to the tribunal.
- If the taxpayer requests a review, or accepts an offer of a review, HMRC will conduct that review within 45 days (unless a different period is agreed). Once a review offer is accepted, or a request for a review is made, the taxpayer can only notify the tribunal of the appeal once the review is finished, or the 45 days, or such longer agreed time, has elapsed.
- The review process is optional, and if the taxpayer does not want a review he can take the matter straight to the tribunal.
- Most appealable matters will be reviewable.
- If the taxpayer asks for a review, HMRC must – within 30 days or such longer period as is reasonable – notify the taxpayer whether or not they have changed their view. Similarly, if HMRC offer a review then the department must notify the taxpayer at the time whether there has been any change in its position. The purpose here is to ensure that the taxpayer knows which points HMRC agree and which are still in dispute in order to provide a clear basis for the next stage.
- There can only be one review in respect of any one appeal.
- HMRC have discretion to accept an out of time review application if the taxpayer has a reasonable excuse. If HMRC does not accept that there is a reasonable excuse then the taxpayer can apply to the tribunal for leave to appeal outside of the time limit.
- The original draft order said that if HMRC did not notify the outcome of the review in 45 days (or such longer agreed time) then their view would be regarded as upheld. That suggestion caused something of a furore and was watered down in the final version.
- The draft instrument made it clear that the nature and extent of the review could vary depending on the nature of the case. In particular, the review should take account of the work already done to resolve a disagreement. For example, the matter may already have been subject to a great deal of internal scrutiny by people other than the decision maker and legal advice might already have been taken.
A question of distance
On 1 December 2008, HMRC produced a summary of responses to the June consultation document and accepted a number of the points raised.
A number of the consultation responses had raised the same basic questions – how would HMRC ensure that:
(i) there was sufficient distance between the reviewer and the originator;
(ii) there was sufficient technical expertise to deal with the points at issue; and (iii) reviewers would have sufficient authority to challenge and overturn decisions?
HMRC accepted that ensuring that the reviewer is sufficiently distanced from the decision maker would be a key factor in achieving effective and credible reviews.
HMRC confirmed that, where possible, reviews will be carried out by someone outside the immediate line management chain who was not involved in the making of the original decision.
For example, local compliance reviews will be carried out in appeals units.
However, in some very specialist areas (such as stamp duty reserve tax or valuation of capital assets) only a handful of staff possess the necessary expertise and so special arrangements will have to be made for those cases.
It was also agreed that:
- there would be further legislative safeguards to protect the taxpayer’s right of appeal where HMRC does not complete the review within the review period;
- taxpayer representations would be considered in the course of the review; and
- HMRC should give reasons for their review decision.
The response document said that HMRC were working on quality assurance arrangements to ensure that appropriate standards were maintained in the review process.
A commitment was made to publish statistics about the number of reviews conducted and the conclusions reached.
A number of respondents felt that the legislation was insufficiently detailed when it came to defining the role of the reviewer.
HMRC accepted that this was an important matter and confirmed that the role would be covered in more detail in the guidance notes.
Reaching an independent decision
Concern was also expressed over the extent to which reviewers would be able to reach their own conclusion and whether they would be able to question internal guidance or policy in doing so.
HMRC’s response was that the review conclusion should be a considered opinion of the case and take account of advice from across HMRC rather than just being the opinion of a single review officer.
Where review officers identify what they consider to be deficiencies in the guidance or the policy, they will be required to feed those points back to head office and HMRC have promised to put procedures in place to enable this to happen.
This will be a fundamentally important building block. I know from my Working Together experience that HMRC are a vast organisation that struggles to capture and resolve coal-face issues from around the network.
As with many large organisations their internal communication system is less than perfect and so building a structure for reporting deficiencies in guidance/policy may not prove simple.
The statutory instrument, the Transfer of Tribunal Functions Revenue & Customs Order SI 2009 No 56, was made on 18 January 2009.
The accompanying explanatory memorandum reiterates the aims of making the review process more transparent and ensuring that as many disputes as possible are settled informally without the expense or anxiety of a hearing.
HMRC have confirmed that the new review provisions will apply where a direct tax appeal is made before 1 April 2009, provided neither side has taken steps to take the appeal to the Commissioners or the new tribunal.
In a case where a direct tax appeal is made before 1 April 2009 and the option for a review is exercised before 1 April 2010, the 45-day period for notifying the review conclusions will be extended to 90 days.
The issue of costs
Each side will bear its own costs in respect of the internal review. This raises the question of what action can be taken if the review indicates that the original decision was unreasonable.
In those cases the taxpayer will only have the existing remedies available as outlined in the HMRC’s complaints leaflet, which states that it will consider refunding reasonable costs directly caused by the department’s mistakes and delays.
In the case of agents’ costs, HMRC’s policy is to reimburse fees only when these have been billed to the client and actually paid – not always easy in a case where the client thinks he has been unfairly treated by HMRC and, rightly or wrongly, considers that the agent should have prevented the dispute in the first place.
Reviews in practice
The internal review procedure has been in existence on the indirect tax side for a number of years.
I have no personal experience of such reviews, but understand from specialist colleagues that the experience has been extremely patchy. Clearly this is anecdotal evidence and of course it may be influenced by whether or not the outcome favoured the client.
A trial of the review process on the direct taxes side has been taking place in Manchester since late April 2008 and was set up in consultation with agents and external bodies.
The objectives of the trial were to assess practical issues such as the skills and experience required, resourcing levels and the development of internal guidance for review teams.
As at 15 October 2008, there had been 71 appealable decisions for which reviews had been requested. Of these, 29 related to income tax and partnership enquiries, four to corporation tax enquiries, four to information notices and 34 related to status decisions within the construction industry.
In 21 out of the 25 enquiry cases that had been completed, the review decision varied HMRC’s original position in favour of the taxpayer – although that does not necessarily mean that the taxpayer was satisfied with the outcome.
While it is good to hear that the reviewers were not uniformly backing their colleagues, I find those figures rather worrying as they suggest that there is still insufficient supervision of inspectors in the compliance centres.
Practical concerns
I believe it is vitally important that the review process works well and I very much want it to succeed.
However, at the moment the jury is still out as far as I am concerned and I have some fundamental concerns.
Past experience of the way the revenue authorities have managed major change – for example the introduction of the tax credit system – means that there is a major concern as to whether HMRC can successfully implement changes which impact significantly on the culture of the organisation.
I suggest that there will need to be some strong checks and balances in place.
Leaving aside the general implementation aspect, I have two specific concerns.
First, for the process to succeed, reviewers will need to be very experienced.
However, it is my observation that HMRC have drastically reduced their headcount over the last few years.
Consequently, many fully-trained staff have been lost as HMRC have moved to a call centre type service.
Second, review officers will need to be independent and it concerns me that it could be ‘career limiting’ for an officer within HMRC to consistently find against his colleagues.
Inevitably, the reviewer will need to go back to the case officer for further information and that contact alone could result in bias against the taxpayer.
Conclusion
I am heartened to note that the new internal review process is to be monitored by both internal and external stakeholders, but I also believe that it will be necessary for others, such as the Adjudicator, the Treasury Select Committee and those responsible for the Tax Chamber, to take a close interest.
I trust that the presidents of the tribunals will take action if they find that too many cases are ending up before the tribunals that should have been sorted out by HMRC’s internal review process.
In my experience, most taxpayers would prefer to avoid the stress of the formal judicial system; therefore, the internal review system is an essential part of the jigsaw.
However, it is surely preferable to reach agreement prior to this stage and internal review should never become a routine part of the process.
Every day, tax agents are handling dozens of HMRC disputes by negotiation (both on the technical issues and on the arithmetic) at all levels within the department – from local compliance, through complex personal return teams, Large Business Office and right up to Special Civil Investigations (SCI).
Currently, the vast majority of cases are settled without recourse to dispute resolution procedures.
I anticipate this will continue to be the case in future and disputes will be resolved in a calm, methodical and professional manner so that only a small minority of cases will require formal review.
Richard Mannion is national tax director at Smith & Williamson.
