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HMRC 'refresh' their litigation and settlement strategy

21 July 2011. Published by Adam Craggs, Partner

As tax practitioners will be aware, HMRC's Litigation and Settlement Strategy ('LSS') is the framework within which HMRC seeks to resolve tax disputes through civil procedures.

The Litigation and Settlement Strategy

First introduced in 2007, it has in theory, although not always in practice, brought consistency to the way HMRC settle disputes with taxpayers.

No 'package deals'

A fundamental principle of the original LSS was that HMRC would not enter into 'package deals' with taxpayers whereby global settlements would be reached in relation to a number of unrelated issues.  Nor would HMRC agree a compromise in a case which they considered they would be more likely than not to win should the matter be litigated – this is what was termed an 'all or nothing case'.

The large corporates

In recent years, HMRC has, as part of its High Risk Corporate Programme, concluded a number of settlements with taxpayers which, for example in the case of Vodafone, have attracted considerable public scrutiny and indeed some criticism.  It has been suggested that this programme has been driven, at least in part, by a desire on the part of the government to increase the coffers of the Exchequer and also as a consequence of diminishing resources being available to HMRC. As we all know, litigation can be both time consuming and expensive and HMRC have to choose their battles carefully.  This means that, in practice, most corporate disputes are likely to be settled. However, as part of this process HMRC have to be seen to be acting consistently, in accordance with the LSS, and in a way which can be shown to be fair to all classes of taxpayers both large and small alike.

The roll of mediation

HMRC are keen to use mediation wherever possible as a potential alternative to litigation.  It is worth noting that in commercial disputes mediation is most effective when used as part of the litigation process.  Litigation begins when parties refer a matter formally to a tribunal or court.  During this process the parties then have an opportunity to decide if an independent third party mediator might be able to assist the parties to reach agreement and thus resolve their dispute.  The presence of litigation is an effective way of focusing the minds of the parties and enhances the prospects of a successful settlement.  It also assists the parties if the matter cannot be settled, a point made explicit by the LSS which states:

'In certain cases, Alternative Dispute Resolution can help support the resolution of disputes either by facilitating agreement between the parties or by helping the parties to prepare for litigation'. (Paragraph 16).

The refreshed LSS

In the refreshed LSS, HMRC state, amongst other things, that they must apply the law fairly and even-handedly and that they will not take up a tax dispute unless the overall revenue flows potentially involved justify doing so.  They will seek to handle disputes non-confrontationally and as part of their strategy will try and establish and understand the relevant facts as quickly and efficiently as possible.  They will seek to ensure the respective arguments are fully shared, although this will not normally require the exchange of copies of Counsel's or other legal opinions.  Somewhat disconcertingly, HMRC also state:

'…HMRC would not normally (emphasis added) expect legal professional privilege to be waived in respect of confidential legal advice'. (Paragraph 13).

It is difficult to envisage any circumstances in which it would be appropriate for HMRC to expect legal professional privilege to be waived and it is not clear why this caveat has been inserted into paragraph 13. It is unlikely that HMRC would be prepared to waive legal professional privilege in relation to legal advice they had received!

For disputes where there is a range of possible figures for the correct tax due, the LSS gives HMRC flexibility to take into account the possibility of a settlement based within an acceptable range of figures.

A key part of the refreshed strategy is to be found at paragraph 16:

'Where there is more than one dispute between a customer and HMRC, each dispute must be considered and resolved on its own merits, not as part of any overall "package deal".  As a matter of process, however, it may be that a number of disputes will be resolved all at the same time (each on their own merits, for example as part of the process of bringing a customer's affairs up to date.'

This wording appears to give HMRC the flexibility to enter into global settlements with taxpayers across a number of tax issues.  It is perhaps a matter of semantics whether this is very different in substance to a 'package deal'.  It is unrealistic to expect the parties not to have in mind, when negotiating, the fact that they may be conceding some issues whilst retaining the benefit of others.  Such thinking is part of the psychology involved in any negotiating situation.

In relation to a dispute which is genuinely of an all or nothing nature, the position remains as before.  Where HMRC believe they are likely to succeed in litigation and that 'litigation would be both effective and efficient' they will not reach a settlement for less than 100% of the tax, interest and penalties at stake.  If, however, HMRC believe that they are unlikely to succeed in litigation they will, in the majority of cases, concede the issue.  It is stated that taking a case to litigation when HMRC believe that case is unlikely to succeed would need to be justified by the particular circumstances of that case, for example, where a very large amount of tax is at stake or where there is a fundamental point of principle or behaviour at issue.  However, it is questionable whether HMRC should ever pursue litigation in circumstances where they consider it is unlikely to succeed. It is arguable that to put a taxpayer to the expense and inconvenience of litigation in circumstances where HMRC consider the taxpayer's argument is likely to succeed is an abuse of power!


The refreshed LSS does not introduce any fundamental changes to HMRC's strategy for resolving tax disputes – they remain clear that there will be no return to 'package deals' or 'splitting the difference' in 'all or nothing' cases.  However, the revised wording of the LSS does give HMRC more flexibility.  HMRC may have taken the opportunity to refresh their LSS in order to facilitate an improvement in the cash flow of revenue into the Exchequer (some consider it preferable to receive from taxpayers £1 today rather than £2 in a year's time after a lengthy dispute) and also because of reduced resources at HMRC and the need for them to be able to reach negotiated settlements with large corporates on a range of issues in a manner which is (and is seen to be) consistent with their published LSS.  Given HMRC's new found enthusiasm for mediation and the change in emphasis in the refreshed LSS, it is clear that HMRC are hoping to be able to settle more disputes by negotiated agreement.  Whether this will be achieved remains to be seen.

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