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Strategies to Fund Costly Tax Tribunals

By Negotiation

Typically, HMRC Local Compliance tax investigations are “one offs”- the outcome turns on the merits or weaknesses of a particular case and the advocacy of the tax adviser around the table. They tend to be settled by negotiation (or Alternative Dispute Resolution) involving an agreed tax settlement 'Offer' everyone can live with.

However, disputed cases go down the formal appeal route to first instance tribunal (First-tier Tribunal) where a taxpayer considers “he” will be able to reach a more advantageous position at First-tier Tribunal.

It is plainly unfair if the taxpayer denies any tax irregularities and considers that he could achieve a more advantageous outcome at Tribunal, but cannot afford the costs of the case management of the tax litigation.

The Rees Practice

In appropriate circumstances, not just where HMRC are appealing against an adverse Tribunal decision, HMRC may be persuaded to consider waiving any claim to costs in cases before the Upper Tribunal or the appeal courts, or to consider making other arrangements. This may also extend to cases before the First-tier Tribunal).

HMRC guidance says: “In considering the exercise of HMRC’s discretion, influential factors include the risk of financial hardship to the other party, the involvement of a point of law the clarification of which would be of significant benefit to taxpayers as a whole and the efficient collection and management of revenue for which HMRC have responsibility.”

If HMRC are to come to an arrangement of this nature, it is expected that advance notification is sought before the hearing and following an approach by the taxpayer or the tax adviser involved.

It is apparently not so straightforward a matter and if it is suggested that this practise should be applied in any particular case, HMRC say that the matter would be referred to “Central Policy (Tax Administration Advice) for advice”.

Group Funding to litigate an HMRC Anti Avoidance Enquiry

In terms of perceived tax planning strategies gone wrong, there are reports of HMRC having around an estimated 40 years of potential tax litigation time costs.

It appears that HMRC project teams (Policy and Technical) are considering strategies to fight 'Schemes' and participators, which is causing a log jam and considerable delays.

A simplistic example would be HMRC challenging a section 380 loss relief claim v section 703 anti avoidance tax legislation – was the venture bone fide commercial trading and so forth (see HMRC Spotlight 8 summary)?

Where a group of participants in a Scheme have received individual HMRC Enquiries into the shared loss relief, they might be feeling isolated and faced with considerable costs not covered by insurance policies etc. Where there are common features then it would apparently be in everyone’s interests to fight a test case either by applying the Rees principle or through taxpayers and their advisers sharing litigation costs through collective group funding arrangement.

With HMRC anti avoidance Enquiries on the increase, group funding might becoming more popular if the tax litigation fee protection is a concern or HMRC declines using the Rees Principle .