OMG looks like HMRC is getting the message!

Litigation and Settlement Strategy
HMRC admit: we have been too tough

We have trailed for some time that the "log-jam" created by HMRC's tough stance to tax disputes was unsustainable. The Financial Times today (20 August 2010) reports that Dave Hartnett, the Permanent Secretary for Tax has announced a revised interpretation of key policy document the Litigation and Settlement Strategy. It reports that "increasingly, inspectors will be encouraged to reach agreement", but that this fresh approach is "primarily focused on business rather than wealthy individuals".

In practical terms under this new interpretation, taxpayers and HMRC officers in a contentious negotiation will look for a range of "plausible" technical conclusions on the point at stake. HMRC officers are then free to conclude a settlement provided the amount of tax payable is based on one of those "plausible" outcomes. HMRC officers will no longer be hamstrung from reaching agreement in a suitable case simply because they have a credible argument that more tax could be due.

Senior HMRC officers have been suggesting for some time that a reinterpretation of this sort could be expected. This also brings HMRC's published position into line with the on-the-ground approach that officers have increasingly been following in recent months.

HMRC are already increasingly applying an approach of this sort in the High Risk Corporates Programme where HMRC have taken a project-based approach to resolving portfolios of issues for some of the UK's largest corporates. Interestingly, outside HRCP the "plausible outcome" approach has been taken up most visibly by HMRC Officers in negotiations over the affairs of wealthy individuals, which is not the focus of Dave Hartnett's statement today. Having said that, today's reports are unlikely to cause any practical change the approach for HNWIs, but make clear that the HNWI/HRCP approach has been broadened to also apply, across the board, in negotiations on corporation tax and other business taxes.

What has not changed?

HMRC's Litigation and Settlement Strategy, first published in Summer 2007, significantly limits the powers of Officers to reach deals with taxpayers. It was intended to prevent "horse trade" or "package" deals under which taxpayers would - in practice - always be allowed at least a small proportion of the tax benefit claimed to have arisen from tax avoidance schemes, in order to reflect the inevitable risk in litigation. Coupled with the introduction of the DoTAS rules, the abandonment of this approach was a key plank in HMRC's strategy to discourage the development and implementation of tax avoidance schemes.

The LSS set out a rigid approach for HMRC officers to handling contentious enquiries: establishing facts, reaching decisions, actively testing conclusions through debate with a view to establishing relative strengths of case. This approach has caused some concerns in that it seems to require exhaustive data collection before any engagement on technical issues which could narrow the scope of that collection. Many taxpayers have been able to manage this difficulty on a case-by-case basis, but it remains as part of the backdrop. Nothing in today's announcements affects this.

The LSS also states that "early legal or other specialist advice can bring important efficiency savings and is recommended" and "handling cases in a way that prepares for litigation assists in reaching agreed settlements". Nothing in today's announcements affects these either.

In fact, a more open approach to negotiations reinforces the importance of those two issues.

• First, it will creates a newly important need to identify a range of technical conclusions and assess them for "plausibility" as outcomes before the Tribunal.
• Next, it will increase the number of situations in which careful, Tribunal standard disclosure of documentary and witness evidence is needed. Although HMRC have more options to reach settlement, they will only agree to favourable settlements where the taxpayer has demonstrated not only that their technical position is plausible, but also that they can prove on the facts that they fit within that technical analysis. The Tribunal takes decisions based on the specific facts of any case, and it seems very likely that HMRC will do just the same.

What will be the impact?

The practical impact of today's announcement will be to allow many corporates to push forward with negotiations which might have seemed deadlocked, and to close a number of historic open years.

No doubt HMRC hope that this closure process will result in a significant sweeping up of potential corporation tax liabilities, substantially increasing the CT take in 2010 and 2011. For many corporates, though, that may be a price worth paying.

It will of course be crucial to handle this new HMRC approach carefully to get the best possible results. Will "Handling cases in a way that prepares for litigation" continue to "assist in reaching agreed settlements"? The answer is undoubtedly yes.

If you have any queries on this e-bulletin, please contact your usual McGrigors contact or:

RUPERT SHIERS
Partner, Tax Disputes and Investigations
Tel +44 (0)20 7054 2737
Email rupert.shiers@mcgrigors.com

JASON COLLINS
Partner, Tax Disputes and Investigations
Tel +44 (0)20 7054 2727
Email jason.collins@mcgrigors.com

JAMES BULLOCK
Partner, Tax Disputes and Investigations
Tel +44 (0)20 7054 2726
Email james.bullock@mcgrigors.com