Litigation and Settlement Strategy (‘LSS’)

At the start of any dispute HMRC must ascertain the facts. They will do this either by seeking to obtain information from taxpayers and/or their agents, but where necessary use their formal information powers. Disputes often arise when those facts are misunderstood.

Disputes between taxpayers and HMRC are not unusual and may also arise whenever the parties have formed a different opinion on the operation of the law, or how the law applies to the relevant facts.

HMRC are charged with securing the best practicable return for the Exchequer and in their view challenging taxpayers is often the only way they can do this. This does not always mean seeking to secure the best immediate financial return, as it could include other factors like creating a helpful precedent or influencing other taxpayer behaviour.

When looking at ‘best practicable return’ from a purely financial perspective though, the LSS means that consideration must also be given to future revenue flows as well as immediate ones.

The LSS applies to all disputes and cuts across all heads of tax to varying degrees. The LSS encourages HMRC caseworkers to –

• Minimise the scope for disputes by supporting customers to get their tax right first time.
• Select cases on the basis of what best closes the tax gap.
• Resolve disputes consistently and in accordance with HMRC’s understanding of the law.
• Where HMRC believe they have a good chance of winning in litigation, they should only settle by agreement for the full amount HMRC believe the Tribunal would determine.
• Where there is ambiguity over a particular outcome, HMRC cannot “split the difference” between amounts HMRC and the taxpayer believe is due.

HMRC must always seek to handle disputes with taxpayers in a non-confrontational way and work collaboratively with taxpayers and, where applicable, their agent.

Not unsurprisingly whenever disputes are resolved it must be accordance with the law. HMRC cannot pursue a dispute outside of a litigation process if it does not believe it would be successful in litigation. And where there are multiple disputes between the taxpayer and HMRC each dispute should be considered on its own merits.

Alternative Dispute Resolution should also be considered as this is an effective way to resolve disputes that avoids the time and costs of litigation for both parties.

It would be too easy to read the LSS too narrowly and identify isolated statements which can then be used to expose the behaviour or approach of an individual HMRC caseworker. But that’s not the point of the LSS. It is also why the LSS makes clear that the document must be read as a whole, and that it describes the holistic approach that should be followed with regards to HMRC compliance work.

The LSS will have its supporters but also its critics. On one hand, the LSS removes the scope for ambiguity within a tax landscape that is complex and riddled with uncertainties. It should be praised as an attempt to allow for more consistent decisions and approaches from HMRC.

On the other hand though it means that the flexibility that HMRC officers had in the past has gone and what has resulted is examples of HMRC not making commercial decisions, not necessarily because they do not want to, but because the LSS does not allow them to.

We find on balance having the LSS is better than not, however there having been only one rewrite since its inception would suggest that it is long overdue a review to ensure it remains fit for purpose. We would like to see the LSS include a little more flexibility for caseworkers, with appropriate safeguards built in to ensure consistency in approach, to allow for more commercial and common-sense decisions around what points to pursue in a dispute and what to let go. That then we would hope would lead to a more efficient HMRC, and a less frustrated agent/taxpayer population.