HMRC's Annual Report – Observations on Tax Disputes in 2023
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HMRC's Annual Report and Accounts for 2022/23 reveal some interesting trends in contentious tax and possible options for taxpayers facing disputes.
Main tax takes and areas of disputeOn 17 July 2023, HMRC published its Annual Report and Accounts for 2022/23.
The report showed that HMRC's revenues increased by a significant margin last tax year, increasing from £731.1 billion to £814 billion (see p.83).
Tax takes grew across the board, so percentage contributions from different taxes remained pretty much the same year-on-year.
As in the previous tax year, the taxes which are easiest to collect through payroll, or as part of sales processes, formed the backbone of the revenue, in the following proportions:
- Income Tax – 32%;
- National Insurance Contributions (NICS) – 22%;
- Value Added Tax – 21%; and
- Corporation Tax – 10%.
Fieldfisher's contentious tax team has seen an increasing trend in labour supply chain tax disputes in the past tax year, in which HMRC seeks to gather additional income tax and NICs.
Changes to expenses rules, agency rules, self-employed contractors, use of locums and the status test (to determine whether an individual is self-employed or an employee), managed service company rules and IR35 are starting to prompt more HMRC action, and thus more disputes.
Related to labour supply chains cases, there has also been an increase in VAT investigations in connection with umbrella companies.
Alternative Dispute Resolution (ADR)
HMRC's ADR process is not quite mediation in a traditional sense but has served rather as another opportunity to negotiate with HMRC in the presence of a neutral third party (see our previous article on this topic – "ADR now 'business as usual' for HMRC | Fieldfisher").
Even 10 years after its introduction, ADR continues to be an often-overlooked dispute resolution process. This is backed by HMRC's numbers, which show 1,013 referrals for ADR last year (see p.128), a low number considering that HMRC dealt with more than 12,000 disputes in the 2022/23 tax year (see p.124).
This low number is, perhaps, not surprising however, considering 54% of referrals were rejected as out of scope or rejected by the governance panel as unsuitable for ADR.
Of the cases that progressed through the ADR system last year, 326 cases were resolved through ADR and 73 went to litigation. In Fieldfisher's experience, taxpayers and HMRC could expect the disputes to be overseen by robust and impartial HMRC mediators. A success rate of more than 75% for ADR suggests a process that was working well.
Unfortunately, HMRC has now 'fixed' a system that was not broken. We are now finding that HMRC's radically rewritten (as of February 2023) ADR guidance significantly moves the goalposts and is being rigidly interpreted, leading to eminently resolvable disputes being cast out of the process.
The changes to the process have made it a dramatically less attractive option for taxpayers. While meaningful HMRC engagement is still a possibility, it is not a given.
First-tier Tribunal (FTT) Appeals
HMRC was notified of 12,332 appeals in 2022/23, down from 15,613 in 2021/22. Of the appeals that were notified in 2022/23, 14% related to late payment or late filing penalties and surcharges, up from 2% the previous year. There has therefore been a substantial drop in larger appeals.
That said, despite nearly a tripling in FTT decisions since the previous year, HMRC's report showed that the Tribunal had almost 40,000 appeals on hand in 2022/23.
The majority of these have been "stood over" (generally meaning that HMRC have successfully applied to the Tribunal – sometimes with taxpayer consent – to put the appeal on hold while waiting for a decision in a related lead case that is being litigated) – some 34,000 cases, up from 16,000 last year, a staggering increase.
The Tribunal Quarterly Reports point towards a large volume of appeals arising from HMRC's action against umbrella companies employing potentially fraudulent VAT schemes (see MoJ's Tribunal Statistics Quarterly: January to March 2023).
These are conceivably the sort of cases which may be resolved with lead case decisions that can resolve most or all of the issues in cases with near-identical tax arrangements.
But this may also indicate a trend, witnessed at an anecdotal level by Fieldfisher, that HMRC increasingly selects certain cases to go forward, while others are stayed. This is slightly different from the lead case procedure (set out under r. 18 of the FTT Rules).
HMRC of course theoretically has the oversight to effectively cherry-pick lead cases. Taxpayers do not tend to have the benefit of oversight over the FTT's case load.
As a result, the system can be distorted because:
- Selected taxpayers may bear the majority of trouble and expense of taking a case to court, without knowing who else may benefit from it (i.e. other taxpayers facing similar situations can simply sit back and wait for a decision, without paying for their own case, or the lead case);
- HMRC can select those cases which may be evidentially convenient for it; and
- Non-selected taxpayers may save a lot of cost, but potentially lose influence over how their issues are presented, and may not have a guarantee that, even after years of stays, HMRC will feel itself bound by the 'lead' case if it loses it, or that the lead case will provide all the answers.
As a result, it is sometimes useful for taxpayers to engage the same representation to run related litigation for different taxpayers, as this can be a successful and cost effective model.
It is not uncommon for HMRC address sector compliance in several sets of investigations, and as such, taxpayers may find it helpful to keep an eye out for areas of cooperation, when it comes to tax litigation.
Fieldfisher has a leading tax litigation team with vast experience in sector-wide investigations, representative litigation and volume employment tax disputes. If you would like to discuss any of the issues raised in this article please contact George Gillham, Matthew Sharp or Christopher Kientzler.