Basically the same?

KEY POINTS

• Unified appeal system for direct and indirect taxes.
• Appeals fall under one of four categories.
• Time limits vary according to the nature of the appeal.
• Legally-qualified representation is not compulsory.
• The hearing should not be overly formal.

Taxpayers and their advisers familiar with the General Commissioners may view the new tax appeals system with some apprehension.

The merger of the various tax appeal mechanisms into the Tax Chamber of the First-tier Tribunal and the Tax and Chancery Chamber of the Upper Tribunal was the only logical conclusion of the merger of the Inland Revenue and HM Customs and Excise, but it represented an apparent revolution in the way tax disputes can be resolved.

In practice the new system has, in many respects, meant business as usual but, so far, there have been fewer appeals to the tribunal in smaller cases than had been expected.

This may be because of the new HMRC internal review process rather than any reluctance of would-be appellants to exercise their statutory right of appeal. In case it is not, this article seeks to dispel any mystery surrounding the tribunal procedure for smaller appeals.

The legislation

The First-tier Tribunal was established by the Tribunals, Courts and Enforcement Act 2007 and the practice and procedure of the tribunal are set out in the First Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, SI 2009/273 (FTR).

In addition, there are several statutory instruments, practice statements and practice directions. All these can be found on the tribunal website.

The tax legislation governing most direct tax appeals is in the Taxes Management Act 1970 but there are similar specific provisions for other taxes, such as stamp duty land tax and National Insurance. There are similar provisions to those in the VATA 1994 for other indirect taxes, such as insurance premium tax and landfill tax.

Starting an appeal

Although there is now a unified tax appeal system, the way in which a taxpayer must start an appeal still depends on whether it relates to direct or indirect tax.

An appeal against a direct tax decision still has to be made first to HMRC, but the crucial change is that once the appeal has been made, the taxpayer can then appeal immediately to the First-tier Tribunal.

This puts the taxpayer in control of his own appeal and he can decide whether (and when) he wants to take his appeal to the tribunal so that the judicial process can commence. There is no change for appeals against indirect tax decisions, which must still be made directly to the tribunal.

A taxpayer must appeal a direct tax decision to HMRC within 30 days of the decision or, if HMRC have offered an internal review but the taxpayer has refused, within 30 days of HMRC’s offer.

Any application for an extension of time must still be made first to HMRC and then, if HMRC refuse, to the tribunal. Once a direct tax appeal has been made to HMRC there is no set time limit within which the taxpayer must ‘notify’ the appeal to the tribunal.

By contrast, indirect tax appeals must be made direct to the tribunal within 30 days of the decision and it is only the tribunal which can decide whether or not to grant an extension of time to appeal.

The old rule 4 of the VAT Tribunal Rules 1986, whereby HMRC could grant an extension of time if a request for an informal review (now replaced by the formal internal review process) was made within 30 days of the decision, has not been replaced.

There are, however, special rules for notifying an appeal directly to the tribunal against a decision by HMRC after an internal review under TMA 1970, s 49A to s 49I and VATA 1994, s 83A to s 83I.

The vocabulary is different for direct and indirect taxes but, essentially, an appeal must be made in all cases within 30 days of HMRC’s review decision or, if they have failed to come to a conclusion within the time limits, their deemed decision.

The notice of appeal

The taxpayer must notify or make the appeal to the tribunal by a notice of appeal. There is a standard form which can be downloaded from the tribunal website. It is not necessary to use that form but, if it is not used, FTR, rule 20(2) requires a notice of appeal to include:

• the name and address of the appellant and any representative;
• address where documents can be sent;
• details of the decision appealed against;
• the result the appellant is seeking; and
• the grounds of appeal.

Whether or not the standard form is used, the appellant must also send a copy of the disputed decision, something often overlooked by appellants.

The notice of appeal can be sent electronically or by post to the Tribunal Central Processing Centre at the following address: Tribunal Service Tax, 2nd Floor, 54 Hagley Road, Birmingham B16 8PE.

Postponement of payment

The rules for the postponement of payment of the tax in dispute have not changed in direct tax cases and an application must still be made to HMRC under TMA 1970, s 55.

Indirect tax appeals can only be heard if all the tax (or duty) has been paid, unless the appellant can establish that payment would cause financial hardship. In the latter case, an appellant must now seek first to persuade HMRC that there would be hardship and only if they refuse is there then a right to apply to the tribunal (VATA 1994, s 84(3)).

There are no statutory criteria for hardship and, because a hearing of a hardship application is usually in private, there has not been a great deal of judicial guidance, but there are some useful indications of the approach the tribunal will take in Buyco Limited and Sellco Limited (VAT Decision 19752).

It is important to remember that if there is an appeal against the liability for, or the amount of, a penalty, it does not have to be paid before the appeal.

Allocation of appeals

Once it has received the notice of appeal, the processing centre will allocate it to one of four categories: default paper, basic, standard and complex, in accordance with the practice direction ‘First-tier Tribunal Categorisation of Cases in the Tax Chamber’ of 10 March 2009 (the allocation direction).

Default paper cases are those which will usually be disposed of without a hearing and the allocation direction requires the tribunal to allocate the following cases to the default paper category ‘unless the tribunal considers that there is a reason why it is appropriate to allocate the case to a different category’:

• appeals against fixed penalties for late self-assessment returns for income tax and corporation tax (including penalties under TMA 1970, s 93(2) and s 93(4) and FA 1998, Sch 18 para 17(2), (3)); for late employer end of year returns under TMA 1970, s 98A(2)(a); for late construction industry scheme returns under TMA 1970, s 98A(2)(a); and for late Class 2 National Insurance contribution notifications under TMA 1970, s 98(2)(a) and Social Security Contributions and Benefits Act 1992, Sch 1 para 7;
• appeals against fixed percentage surcharges for late payment of income tax under TMA 1970, s 59C;
• applications by HMRC for penalties under TMA 1970,s 93(3).

Basic cases are those which ‘will usually be disposed of after a hearing, with minimal exchange of documents before the hearing’.

The allocation direction requires the tribunal to allocate the following cases to the basic category unless the case is of a type which must be allocated to the default paper category, or the tribunal considers it appropriate to allocate the case to a different category:

• appeals against penalties for late filing and late payment, including daily penalties, such as penalties imposed under TMA 1970, s 93(5) and s 245(2) to (4A) and VATA 1994, s 59, s 59A;
• appeals against direct (but not indirect) tax penalties under FA 2007, Sch 24, except appeals against penalties for deliberate action (whether concealed or not) and when the assessment of the tax to which the penalty relates is also appealed;
• reasonable excuse appeals against indirect tax penalties;
• appeals against decisions in relation to construction industry scheme payments under Income Tax (Construction Industry Scheme) Regulations 2005, reg 25(5);
• appeals against information notices, including appeals under TMA, s 19A, s 20(8B); Inheritance Tax Act 1984, s 219B; FA 1998, Sch 18 para 28; FA 2003, Sch 10 para 11, and Sch 11A para 9; FA 2004, s 253; and FA 2008, Sch 36 paras 45 and 47;
• applications for permission to make a late appeal for the postponement of the payment of tax pending an appeal (including applications under TMA 1970, s 55(3)(b) and s 55(4); FA 2003, Sch 10 para 39(4) and the Stamp Duty Land Tax (Administration) Regulations 2003, reg 22(1)(b), (3);
• applications for a direction that HMRC close an enquiry, including applications under TMA 1970, s 28A and Sch 1A para 7(5); FA 1998, Sch 18 para 33 and FA 2003, Sch 10 para 23 and Sch 11 para 12.

Standard cases are those which ‘will usually be subject to more detailed case management and be disposed of after a hearing’ and also those which are not allocated to the complex category.

The criteria for complex category are that the appeal:

• will require lengthy or complex evidence or a lengthy hearing;
• involves a complex or important principle or issue; or
• involves a large financial sum.

At the time of publication there has been no official guidance as to how these criteria will be applied. This is regrettable, particularly since the phrase ‘large financial sum’ in FTR, rule 23(4)(c) is uncomfortably vague.

So far, the tribunal has taken different views as to the criteria for allocation to the complex category, but the decision in Capital Air Services Limited [2010] UKFTT 160 (TC) is currently under appeal to the Upper Tribunal, and it will be to everyone’s advantage if the Upper Tribunal sees fit to issue some definitive guidelines.

It is unfortunate that the standard notice of appeal form does not have space for an appellant to indicate to which category the appeal should be allocated, but there is nothing to stop an appellant sending a covering letter with the notice of appeal indicating which category would be the most appropriate.

If an appeal has been allocated to a category, and the appellant disagrees with the allocation, it is possible to apply to the tribunal to have the appeal reallocated. The tribunal can also reallocate an appeal without the appellant having made an application.

Other appeal documents

Once an appeal has been allocated, what happens next will depend on the category of appeal. In default paper cases, HMRC must send a statement of case within 42 days after the tribunal has sent a copy of the notice of appeal.

The statement of case must ‘state the legislative provision under which the appeal was made and set out [HMRC’s] position in relation to the case’ and may also request that the case be dealt with at, or without, a hearing.

If HMRC do not comply with the 42-day time limit they can apply to the tribunal for an extension of time. The statement of case must then include a request for an extension and the reasons for the delay.

Once the appellant has received the statement of case he may, but does not have to, serve a reply, which must be received by the tribunal within 30 days of the receipt of the statement of case.

The appellant must also send a copy to HMRC. Again, if the appellant does not meet this deadline, the reply must contain a request for an extension of time and the reasons for the delay.

The reply should contain the appellant’s response to HMRC’s statement of case and any further relevant information (including, where appropriate, copies of any documents containing that information) which the appellant has not already provided to the tribunal. It may also include a request that the appeal be dealt with at a hearing.

The tribunal must determine the appeal on the papers unless either the appellant or HMRC ask for a hearing.

Even if neither party has asked for a hearing, and the 30-day period for serving a reply has passed, the tribunal can still decide to hold one and, if an appellant serves a reply outside the 30-day time limit which requests a hearing, and the tribunal allows an extension of time, it must hold one.

The effect of these rules is that either party, or the tribunal, can require a hearing, whether or not the other party consents.

In basic category cases HMRC do not have to serve a statement of case and so, unless the tribunal makes a direction to the contrary, the case will go directly to a hearing without any further paperwork.

Nevertheless, if HMRC wish to raise any additional grounds which they have not already communicated for contesting the appeal, they must notify the appellant of these ‘as soon as is reasonably practicable’ after becoming aware of those grounds, in sufficient detail to enable the appellant to respond to those grounds at the hearing.

The words ‘reasonably practicable’ are hardly precise and an appellant faced with additional grounds at the last minute will have to rely on the wide discretion of the tribunal to ensure that the appeal is dealt with ‘fairly and justly’ in accordance with the overriding objective in FTR, rule 2.

In standard and complex cases HMRC must serve their statement of case within 60 days and then each party must serve a list of documents within 42 days.

Representatives

An appellant may formally appoint a representative, who need not be legally qualified. An appellant may also be ‘accompanied at the hearing by a person who, with the permission of the tribunal, may act as a representative or otherwise assist in presenting the party’s case‘.

The question of whether and, if so, by whom an appellant should be represented will depend on the nature of the appeal.

If it is an appeal against a penalty on the grounds of reasonable excuse where the appellant is, essentially, throwing himself on the mercy of the tribunal, he may be best advised to conduct the case himself, provided he understands the limitations placed by the law on what is a reasonable excuse.

If the case is one which involves no point of principle, but relies on detailed figure work, he may wish to ask his accountant to represent him.

If the case involves any points of law, then the appellant should, perhaps, take heed of the old adage, ‘he who acts as his own lawyer has a fool for a client;’ and rely on a trained advocate who also has sufficient knowledge of the relevant law.

This is particularly important if there is any possibility that the case might be appealed because any finding of fact by the tribunal cannot generally be challenged on appeal. It is therefore essential to ensure that all the facts are put to the tribunal in a clear and comprehensible way.

The hearing

The tribunal must give each party ‘reasonable notice’ of the time and place of any hearing. Although there are permanent tribunal centres in London, Manchester and Edinburgh, the tribunal can also convene centres used by other tribunals. The aim is to have the hearing where it is convenient to the appellant.

A basic case will not necessarily be heard by a legally qualified judge. The First-tier and Upper Tribunal (Composition of Tribunal) Order 2008 SI 2008/2835 provides that a basic case can be heard by up to three members, each of whom is either a judge or member.

Standard cases are heard by a judge sitting alone or with one or other judges or members. The tribunal judges are the former full and part-time Special Commissioners and VAT and duties tribunal chairmen, whose ranks have been swollen by three new full-time judges who were selected by open competition.

Members who are not legally qualified are all new recruits, selected for their qualification and expertise in other areas, such as accountancy or business. Some former General Commissioners were appointed members but the transfer was not automatic.

There has been some concern that the proceedings will be more formal than they were before the General Commissioners, thus deterring would-be appellants. This fear is unfounded in basic cases at least.

The FTR make few specific provisions about the conduct of the hearing, instead there is a wide power under rule 5 for the tribunal to ‘regulate its own procedure’.

This power must be exercised in accordance with the overriding objectives in rule 2, which includes ‘avoiding unnecessary formality and seeking flexibility in the proceedings’.

This was reinforced by the president of the First-tier Tribunal, Sir Stephen Oliver, at the inaugural meeting of the First-tier and Upper Tribunal Users Group. He stressed that the ‘turn up and talk’ approach of the General Commissioners was encouraged in basic cases.

The formal rules of evidence do not apply so that hearsay evidence is admissible, but the tribunal will place greater weight on evidence given by a witness who has personal experience of the matters in question, backed up by contemporaneous documents.

The hearing will be in public unless the tribunal exercises its discretion under rule 32(2) to direct that the hearing, or part of it, be held in private in the interests of justice, public order or security, or the ‘general public interest’ or ‘to protect a person’s right to respect for their private and family life’, and ‘to maintain the confidentiality of sensitive information’.

This is not likely to happen very often, since the tribunal has to have regard to the general right under Article 6 of the European Convention on Human Rights that there should be a public hearing.

The decision

The tribunal will normally give its decision in a basic case at the end of a hearing. In all categories of cases the tribunal must send a written decision to each party within 28 days of making the decision, or as soon as practicable after that.

Unless each party agrees that it is unnecessary, the decision must set out the reasons for the decision either as a summary, or with full written findings, of fact.

Although there is no general power to award costs to either party in default paper or basic category cases, the tribunal does have power to make either a wasted costs order, or an order for costs against a party (or a representative) who has ‘acted unreasonably in bringing defending or conducting the proceedings’.

There is a right of appeal to the Upper Tribunal on a point of law, but only with permission. This must be granted either by the First-tier Tribunal or, if it is refused, by the Upper Tribunal.

Conclusion

Although the appeal system has changed, and the rules are different, it may well be that the revolution is more apparent than real and, in practice, things are not so very different.

Many taxpayers may also welcome the introduction of the default paper category, which offers the chance to have a dispute decided by the tribunal without a hearing.

Penny Hamilton is a member of Pump Court Tax Chambers. Her book Hamilton’s Tax Appeals, written with Oliver Conolly also of Pump Court Tax Chambers, will be published in July 2010.

Issue: 4263 / Categories: Comment & Analysis , appeals , Capital Air Services , First-tier Tribunal , TMA 1970 , Upper Tribunal , Admin