Ed Saltmarsh explains why ICAEW’s latest paper on how to build a better tax system demonstrates that fixing the courts requires a fundamental rethink of the entire litigation pipeline.
Previously, ICAEW identified five critical pillars to building a better tax system; looked at what is wrong with UK tax policymaking and how to reform it; explained why HMRC must change to succeed; and set out how the tax profession could be improved. In our latest paper, summarised below, we focus on the system for resolving tax disputes and explain how pressure can be reduced on the tax tribunals.
Background
A tax system that cannot settle disagreements quickly, fairly and at proportionate cost undermines certainty, erodes trust between taxpayers and the state and weakens the voluntary compliance on which the whole system depends. This reflects the second of ICAEW's ten tenets for a better tax system: that taxpayers should not normally need to go to court to understand how the rules apply to their affairs.
The tax chamber of the First-tier Tribunal (FTT) has been operating under significant strain: ICAEW members report cases taking up to two years or more to reach resolution. The FTT’s own leadership has recognised the need for change, and a sustained programme of operational reform is underway. However, almost every pressure the FTT faces originates upstream, in how disputes arise and how they are conducted before they reach a courtroom.
Empowering HMRC caseworkers
Failing: Most tax disputes should not need to reach the tribunal. A large proportion of disagreements between HMRC and taxpayers involve questions of fact, valuation, or the application of well-established legal principles to particular circumstances. These are exactly the kinds of disputes that skilled caseworkers, properly empowered and properly supported, should be able to resolve. HMRC’s Litigation and Settlement Strategy (LSS) was designed to address these issues. However, members report that the governance framework surrounding the LSS operates so cautiously that its practical effect is often to inhibit the settlements it was designed to enable.
Recommendation: ICAEW believes that the LSS should be substantially reformed: not in its principles, which remain valid, but in its governance and its reach. Caseworkers need genuine authority to settle cases within defined parameters without multiple layers of sign-off. HMRC also needs to be clearer – internally as well as externally – about why it is pursuing any given case to litigation and what outcome it is seeking.
Statutory review
Failing: Before a case reaches the tribunal at all, most taxpayers have a statutory right to an internal review of the disputed decision by an HMRC officer not previously involved in the case. In principle this is the system’s most important filter: done well, it should catch poor decisions before they harden into litigation. In ICAEW members’ experience, however, reviews too often confirm the original decision without a genuinely fresh examination.
Recommendation: ICAEW recommends that HMRC strengthens the independence of the review function – including separate reporting lines and published data on review outcomes by case type – so that review operates as an impartial check rather than a procedural waypoint.
Interest on tax paid late
Failing: Interest accrues on unpaid amounts from the date of the original liability. For taxpayers facing a substantial assessment, that accruing interest is a daily reminder of the cost of continued dispute. It pressurises taxpayers to stop the clock by capitulating on substantive points that may have been well-founded in law. That pressure is sharpened by the asymmetry of the interest regime: late-payment interest is charged at a materially higher rate than HMRC pays on repayments, so time spent in dispute is systematically more expensive for the taxpayer than for the Exchequer.
Recommendation: ICAEW believes that HMRC should reinstate a mechanism broadly equivalent to the former Certificate of Tax Deposit scheme, closed to new purchases on 23 November 2017. Under such a scheme, taxpayers could pay the disputed amount into a ring-fenced account at an agreed rate of return, stopping interest accruing without conceding the substantive point. Decoupling the financial pressure from the legal dispute allows both parties to assess the merits of the case without the distorting effect of mounting interest charges.
Legal costs
Failing: The right of appeal to an independent tribunal is, in principle, available to all taxpayers. In practice, it is available only to those who can afford it. Members report that initial legal costs for an FTT hearing in a commercially significant dispute can reach £50,000 to £100,000 before a hearing date has even been fixed. For individuals and small and medium-sized enterprises, those figures represent an insurmountable barrier. The practical consequence is that cases which should be tested – cases where the taxpayer has a genuine and reasonable argument – are conceded not on the merits but on cost grounds.
Recommendation: ICAEW supports the Tax Law Review Committee’s 2021 proposal for a pro bono advocacy scheme for litigants in person and considers that it could be developed into a more formal duty advocate model, providing basic representation at the hearing stage. The significant number of unrepresented taxpayers before the FTT – many of them caught up in disputes about HMRC penalties or assessments they do not fully understand – is placing an additional burden on tribunal judges, who must manage proceedings in a way that is fair to parties who lack even a basic understanding of the relevant law. A duty advocate scheme would not solve the access problem in its entirety, but it would materially improve outcomes for the most vulnerable group of tribunal users.
Tribunal procedures
Failing: Even where cases legitimately belong before the tribunal, the procedures for managing them are often poorly matched to the nature of the dispute. For example, many disputes involve a primary legal question and secondary issues that only become live if the primary point is decided in a particular way. Where HMRC abandons or significantly modifies its primary argument during the course of proceedings, the current rules provide no clean mechanism for the parties to step back and resolve the remaining issues without a full hearing. The result is a system that is simultaneously overloaded and inflexible, forcing cases through a linear process regardless of whether that process is the most efficient route to resolution.
Recommendation: ICAEW suggests exploring a formal “case remission” procedure: applicable when HMRC significantly changes its position on a primary legal issue after proceedings have commenced, so that either party should be entitled to apply to remit the case to officer level for a defined period to resolve the remaining issues. If resolution is not achieved within that period, then the case returns to the tribunal with a narrowed and clarified dispute. This mirrors the approach taken in other jurisdictions, where courts routinely remit factual questions rather than resolving everything themselves.
Test cases
Failing: The current approach to test case litigation has a structural flaw. When a large number of cases involving similar arrangements are managed through a single lead case, the outcome of that case is formally binding on the others only if the facts are materially identical. Promoters of tax schemes have become adept at constructing factual variations that allow scheme users to argue that the lead case does not bind them. The effect is a test case in name only: a taxpayer victory resolves very little for the wider population of similar cases, while an HMRC victory is frequently relitigated across scores of essentially identical cases.
Recommendation: ICAEW suggests exploring whether the tribunal rules might be amended to allow “scenario-based” test cases: rather than selecting a single lead case, HMRC and the tribunal should be able to designate a structured set of scenarios covering the factual variations that are known to exist across the affected case population. Judgments in scenario-based test cases would have a defined binding effect across cases falling within each scenario. Such a mechanism would need to respect the principle that taxpayers are entitled to have their own facts determined. The tribunal rules already contain the architecture for this in Rule 18 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (SI 2009/273), under which a lead-case direction binds related cases subject to the right of any party to apply for a direction that the decision does not apply to their case.
Transfer to the Upper Tribunal
Failing: Rule 28 of SI 2009/273 allows cases to be transferred to the Upper Tribunal in appropriate circumstances, but in practice it is rarely used: applications require the consent of both parties, and the criteria for transfer are interpreted narrowly. Cases of genuine precedential significance are routinely decided at FTT level, adding years to the process of achieving a definitive answer.
Recommendation: ICAEW’s view is that Rule 28 should be amended to allow unilateral applications where a case raises a point of law of general importance or involves a sum above a defined threshold. Transfer should not require the agreement of both parties: the party opposing transfer has an obvious interest in delay, and that interest should not be decisive. Safeguards would be needed to ensure that a unilateral application triggers a decision by the president of the tax chamber and the Upper Tribunal's tax and chancery chamber jointly, rather than an automatic transfer, and also to allow for a cost-capping or cost-protection order. Delay does not stop at the Upper Tribunal: cases of genuine national significance can take years to resolve once contested through the Court of Appeal and Supreme Court, and a parallel leapfrog mechanism already exists for skipping the Court of Appeal in cases of general public importance. The priority, however, is to fix the bottleneck closest to where disputes originate.
Monitoring performance
Failing: There is no formal mechanism for monitoring the health of the dispute system as a whole – one that spans HMRC’s litigation conduct, the design of the policy that generates disputes and the capacity of the tribunals together.
Recommendation: ICAEW proposes that a dedicated review function within an existing body, or a new advisory forum, monitors case-flow data, identifies systemic blockages and directs recommendations to the bodies responsible for acting on them. Alongside this, ICAEW recommends that:
- HM Courts & Tribunals Service (HMCTS) publishes tax chamber-specific performance data on a quarterly basis; and
- HMRC publishes data on the outcomes of cases it litigates.
Further, HMRC should publish its interpretation of significant tribunal decisions within a defined timeframe, as it often does for VAT cases following major rulings.
Tax complexity
Failing: Every recommendation in this chapter addresses a symptom of a deeper problem: tax legislation that is too long, too complex and too poorly drafted to be applied with confidence by the people who are required to apply it. The body of tax law is large, has grown substantially over recent decades and is increasingly difficult to navigate. Much of that length reflects not the genuine complexity of the underlying policy but the failure to express policy clearly. Every drafting failure of this kind has the potential to become a dispute, and many eventually become one.
Recommendation: ICAEW’s view is that the work of the Tax Law Rewrite (TLR) project, which was brought to an end in 2010, should be resumed, perhaps by a standing body with an equivalent mandate. The principles established by the TLR for writing quality tax legislation also appear to have been lost since its closure, giving rise to much poor quality legislation in the intervening years. However, the quality of legislation bears directly on the volume of disputes reaching the tribunal. The clearer the law, the fewer disputes it generates. Rewriting the existing stock of legislation is, however, only half the task: restraining the flow of new complexity is a question of how tax policy is made and is addressed in the policymaking pillar of this series.
Ed Saltmarsh, Tax Technical Manager – VAT and Customs Duties
