Contentious tax quarterly review
Rise in alternative dispute resolution
Until relatively recently, HMRC imposed strict conditions on the timing of when an application for alternative dispute resolution (ADR) could be made, refusing to consider any application which was made after it had formally set out its position in its ‘statement of case’.
This gave taxpayers a limited window during which to apply for ADR after HMRC’s enquiries had concluded. This unilaterally imposed restriction on the timing of ADR applications was disappointing, principally because there was no statutory basis for it. It also seemed counter-intuitive to treat the provision of HMRC’s statement of case as a barrier to ADR, when delivery of that document provides both parties with an opportunity to reappraise their respective positions and consider whether there is any scope to explore settlement through ADR.
However, on 15 June 2020, the First-tier Tribunal (FTT) published a practice statement on the use of ADR in tax disputes once an appeal has been made to the FTT. Under rule 3(1) of the Tribunal Procedure (First-tier) (Tax Chamber) Rules, SI 2009/273 (‘the FTT rules’), the FTT should, where appropriate, make the parties aware of, and facilitate the use of, ADR. In pursuance of that obligation, the practice statement provides that all parties should consider the use of ADR where appropriate, at any stage in the proceedings, including after HMRC has provided its statement of case.
Following publication of this practice statement, HMRC updated its guidance on ADR (see bit.ly/2NtRLit). It now accepts that ADR can be used at any stage in the litigation process, even after it has filed its statement of case. Given the high number of cases the FTT has to determine (the number of appeals disposed of in 2019/20 was 7,533), HMRC’s promotion of ADR is to be welcomed. In addition to issuing its practice statement, we would encourage the FTT to consider issuing a standard letter to the parties, once an appeal is registered with the FTT, drawing their attention to the availability of ADR and urging them to consider whether ADR is suitable for their case.
Following the FTT’s practice statement, and perhaps as a consequence of the inevitable delay in listing appeals before the FTT due to the difficulties created by the covid-19 pandemic, HMRC has, in recent months, been more amenable to resolving disputes by way of ADR. Although covid-19 restrictions have meant that ADR meetings have had to be held by video rather than in person (which is not ideal), we have found that the ADR process has adapted well to virtual mediations and successful mediations have been achieved notwithstanding the lack of in person interaction. We expect this trend to continue for some time to come.
Partial closure notices
HMRC continues to focus on domicile status enquiries. Such enquiries frequently involve wide ranging requests from HMRC for information and documentation. Often, HMRC will ask questions pertaining to any remittances made by the taxpayer, so that appropriate calculations can be made as to any underpayment of tax in the event that the remittance basis is not available. Answering such questions can be both time consuming and costly in terms of professional fees.
In HMRC v Embiricos  UKUT 370 (TCC), the taxpayer was in such a position. He filed his tax returns for 2014/15 and 2015/16, and he claimed to be entitled to be taxed on the remittance basis, as he was domiciled outside the UK. After opening enquiries, HMRC eventually concluded that he was UK domiciled and therefore not entitled to be taxed on the remittance basis. The taxpayer asked HMRC to issue a partial closure notice (PCN) in relation to the open enquiries to enable him to appeal the discrete issue of his domicile status. HMRC refused on the basis that it could not issue PCNs until it had quantified the amount of tax that would be due if it was correct about the taxpayer’s domicile status. The taxpayer did not consider it either necessary or appropriate to provide HMRC with details of any overseas income or gains before the question of his domicile had been determined. He therefore applied to the FTT for a direction requiring HMRC to issue PCNs pursuant to TMA 1970 s 28A(4).
Following the taxpayer’s successful appeal to the FTT, HMRC appealed to the Upper Tribunal (UT) which allowed its appeal. In the view of the UT, the PCN regime was introduced to modify the existing closure notice regime and this gave rise to the inference that the existing law regarding closure notices (which indicated that the amount of tax assessable must be included in the closure notice) would continue to apply, unless there was an express contrary indication. This reasoning was consistent with that adopted by the FTT in Levy v HMRC  UKFTT 418 (TC).
The UT also referred to TMA 1970 s 50(6), which requires the tribunal to reduce the amount of an assessment on appeal if it appears to it that the taxpayer is overcharged by any assessment. In the UT’s view, this provision indicates that only closure notices that contain an assessment to tax were contemplated by the legislation. In addition, the UT noted that under TMA 1970 s 28ZA, any question arising in connection with the subject-matter of an enquiry opened under TMA 1970 s 9A or s 12AC may be referred to the tribunal for
determination. Any such referral must be made jointly by both the taxpayer and HMRC, and it could not therefore have been Parliament’s intention to create an alternative mechanism whereby a taxpayer could require HMRC to make an early determination which could then be referred to the tribunal for determination.
With respect to the UT, we consider that premise to be incorrect because the wording of s 28A provides no such words of limitation. The definition of partial closure notice (in s 28A(1A)) makes it clear that it can relate to ‘any matter to which the enquiry relates’ (our emphasis). Section 50(6) is not a provision of universal application; it simply directs the tribunal, in the course of an appeal to it, to act in a particular way if it decides that the taxpayer has been overcharged by an assessment. It is only in cases involving an assessment (including amended self-assessments) where s 50(6) is engaged.
There is no reason why s 28ZA should be relevant to the question that the UT was asked to consider in Embiricos. Section 28ZA is necessarily of broader application than s 28A, and there are questions that can be jointly referred that are incapable of being the subject matter of a closure notice (for example, whether a party’s interpretation of a statutory provision is correct). The FTT does, of course, retain a discretion as to whether to direct HMRC to issue a closure notice within a specified period. If it decides that there are reasonable grounds for not so directing, it need not do so.
It is understood that Embiricos is under appeal to the Court of Appeal. Subject to the outcome of that appeal, we expect HMRC to continue to resist taxpayers’ attempts to swiftly resolve domicile status disputes.
Disclosure and requests for further and better particulars: a trend for greater formality in tax appeals?
Disclosure in tax litigation before the tribunal is fundamentally different to disclosure in civil litigation conducted in accordance with the civil procedure rules (CPR). In tax litigation, a party is only required to disclose to the other party documents which he intends to rely upon (see rule 27(2)(b) of the FTT rules); whereas, in civil litigation conducted in accordance with the CPR, the parties are generally required to disclose documents that are relevant, irrespective of whether the disclosing party intends to rely upon them. As the FTT noted in Royal Bank of Scotland Group Plc v HMRC  UKFTT 321 (TC), the mere fact that a case before the FTT is important or complex is not, of itself, a reason for directing a disclosure regime modelled on that provided for in the CPR.
Notwithstanding the above, we have noticed an increasing tendency on the part of HMRC to adopt an approach to disclosure which is more akin to disclosure under the CPR and which seeks disclosure from the taxpayer of all relevant documents irrespective of whether the taxpayer intends to rely upon those documents. Such requests often take the form of requests for all communications between certain individuals, or all documents created during a certain time period.
On an application to the FTT for specific disclosure (under rule 5(3)(d) of the FTT rules), the FTT must, when exercising its discretion to direct disclosure, have regard to the overriding objective referred to in rule 2 of the FTT rules: it should be proportionate to the importance of the case, the complexity of the issues to be determined, the anticipated costs and the resources of the parties. The question of proportionality should include an assessment of how focused the request for disclosure is, how difficult or expensive it will be to comply, and how relevant the information requested is. The burden is on the party making an application for a direction for disclosure to show that there are sufficient reasons for issuing such a direction. It is not for the respondent party to persuade the FTT that the application should not be granted (Edwards-Moss v HMRC  UKFTT 147 (TC)). As the Court of Appeal made clear in E Buyer UK Ltd v HMRC  EWCA Civ 1416, this form of disclosure is not required in tax appeals.
Moreover, HMRC, unlike private litigants, has extensive powers which enable it to compel the provision of documents and information from taxpayers and third parties before the litigation process begins. HMRC can, and should, obtain all information that it considers necessary and relevant to its enquiries before it issues an assessment or decision. It would be unfair if HMRC was, in effect, permitted to conduct further enquiries during the course of the litigation process by seeking specific disclosure from taxpayers.
In addition to requests from HMRC for specific disclosure from taxpayers, we have also noticed an increased tendency by HMRC to seek further and better particulars of taxpayers’ grounds of appeal. However, in the recent case of Bradford v HMRC  UKFTT 2 (TC), the FTT refused HMRC’s application for the taxpayer to provide further and better particulars of his grounds of appeal. In the FTT’s view, HMRC’s submission that Mr Bradford had failed to set out his ‘factual and legal case’ and his appeal should therefore be struck out did not engage with the relevant case law (including Doncaster Pharmaceuticals Group Ltd v Bolton Pharmaceutical Co 100 Ltd  FSR 63 and Swain v Hillman  1 All ER 91). The FTT concluded that Mr Bradford’s grounds of appeal contained sufficient information to enable HMRC to provide its statement of case, and it was not in the interests of justice for HMRC to seek to identify, before it provided its statement of case, every detailed piece of Mr Bradford’s evidence and ‘all the nuts and bolts of his arguments’. The FTT judge quoted Lord Justice Saville, who delivered the leading Court of Appeal judgment in British Airways Pension Trustees Ltd v Sir Robert McAlpine (1994) 72 BLR 26:
‘The basic purpose of pleadings is to enable the opposing party to know what case is being made in sufficient detail to enable that party properly to prepare to answer it. To my mind it seems that in recent years there has been a tendency to forget this basic purpose and to seek particularisation even when it is not really required. This is not only costly in itself, but is calculated to lead to delay and to interlocutory battles in which the parties and the court pore over endless pages of pleadings to see whether or not some particular point has or has not been raised or answered, when in truth each party knows perfectly well what case is made by the other and is able properly to prepare to deal with it’ (FTT’s emphasis)
In the FTT’s view, HMRC had continued to insist on particularisation when it was not required. Each party knew what the other party’s case was and was able properly to prepare to deal with it. Accordingly, the FTT directed HMRC to provide its statement of case within 60 days.
We have noticed that HMRC appears to be more inclined to seek specific disclosure of documents and further and better particulars of a taxpayer’s grounds of appeal in circumstances where it is well-aware of the taxpayer’s case. The FTT rightly prides itself on a lack of formality in proceedings before it. Such applications may be commonplace in the Commercial Court, where the litigation is conducted in accordance with the more formal rules contained in the CPR, but there should be no place for such litigation ‘tactics’ in proceedings before the FTT.
This article was first published in Tax Journal.