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Review of HMRC's tax decisions by HMRC? By Nichola Ross Martin

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22nd Oct 2007
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Can HMRC really create an internal process to review its decisions that is both impartial and cost effective? Nichola Ross Martin looks at HMRC’s new consultation paper.

Appealing a decision made by HM Revenue and Customs (HMRC) can be an unpleasant prospect and this is not just a matter of cost. Many taxpayers (and accountants) shy away from making an appeal because this could lead to a Commissioners hearing and most just want to enjoy simple, non-adversarial life. Aside from this, many tax appeals can be and could be resolved without involving a tax tribunal if the right mechanism for review and settlement is in place.

Tax tribunals are being radically reformed thanks to the Tribunals, Courts and Enforcement Act 2007. Following implementation, HMRC is now considering its options for creating a new harmonised review process in its latest consultation, issued with the Pre-budget Report entitled “Tax appeals against decisions made by HMRC”. The idea is to have some form of impartial review procedure in place to safeguard taxpayers’ rights across the tax system which is also cost effective, and will not create further administrative burdens. Such a review may enable cases to be settled without recourse to a tax Tribunal, and will also bring cases to a swifter resolution, it is hoped.

The dilemma for HMRC is how to achieve a review system that is impartial, cost effective, and will not duplicate the work of the new Tribunal system. Its solution, which seems highly cost sensitive is to be to keep the process in-house. The dilemma is then how to ensure that such a review is actually impartial.

Background

  • The existing system of the General and Special Commissioners and other tribunals, such as VAT and Social Security will be replaced in April 2009 by a new two tier system. The First-tier Tribunal will hear amongst others tax appeals, and the second or Upper-tier will hear appeals against decisions of the first, or in some cases will hear the initial appeal.
  • The First-tier Tribunal will not be the same as the existing General Commissioners, it will be organised into “chambers”, the tax chamber will be manned by panels who have “the appropriate training and expertise, that is not lay members, like the General Commissioners.
  • Responses to earlier consultations on “Modernising Powers, Deterrents and Safeguards” support the idea of a simple cheap and informal process for resolving disputes or appeals, preferably by someone who is separate from HMRC line managers and management.
  • Sir Andrew Leggatt, in his report “Tribunals for Users – One System, One Service recommended sweeping changes to the Tribunal system. He also recommended that Government should consider the scope for internal review.
  • Under the current system review of decisions are made in a variety of different ways due to the different historical working practises of what were the Inland Revenue and Customs and Excise, and this is considered confusing for taxpayers and not cost effective.

The consultation proposals
Central to this consultation is HMRC’s intention to have a system of review of its own decisions by its own staff, in house. The idea being that the review is being conducted by someone other than the immediate line manager who was not involved in the original decision. The fundamental question for disgruntled taxpayers and agents is what should be done to ensure that such a review is actually impartial. It the actually part possible here? The consultation asks not whether it is possible, preferring to assume, it appears that this is not really the problem, instead it asks “What factors would be most important in ensuring that an internal review was regarded as impartial?” This sounds a bit like “window dressing”, I do hope I am not being too cynical...

It goes almost without saying that the problem for any reviewer is that they may need to go back to the case officer for further information and this contact alone could create bias. Why not? If you all work for the same organisation, and human nature being human nature it would be unnatural not to side with your own. We have all seen cases turn on the performance of a witness, and of course the file under review and case notes will also have been completed from one angle. Impartiality is something of a dilemma, and much will lean on the qualities of the reviewer as an individual and the effectiveness of their training. Accountants who have worked in “internal audit” for any length of time will know all about the problems here.

Moving on, the consultation asks whether a review should be statutory or non-statutory, and whether there should be consistency of approach across taxes. These are interesting questions to be raised, given that one of the points of this new consultation is that the existing system is non-statutory and inconsistent, and consultation to harmonise the process. HMRC rightly says that “one size may not fit all”, but suggests that a common time limit for review might be simpler and more transparent.

Then of course there is the issue of time limits, should a review take place within a set time frame or not? This is a double edged sward for the taxpayer; allow too much time and a review could last months, cut the time limit down and the taxpayer may miss his slot. Further consideration is also given to payment of tax under appeal, administration and transitional issues.

Conclusion
I mentioned the “internal audit” function earlier, as this can be highly effective within organisations but it is only as effective as those who plan it prefer to make it. I don’t think that we should lose all hope that HMRC wants to keep the review process in-house if it is managed well, and taxpayers will still have the right of appeal if it is not. Take time to read the consultation, and respond to it, you may not have had any problems in the past, but you may need to appeal in the future.

Linked news:
Taxpayers set to lose rights under new appeal system

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Replies (6)

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By MikeBellisimo
22nd Oct 2007 10:44

Hmmm
I struggle to see how it would be of benefit to Taxpayers.

One can only assume that decisions will be based on the existing HMCE Tax Manuals which are known to take an interprative view of existing Tax Law.

It looks more like a way to discourage the taxpayer from going to the Commissioners since the TaxPayer will no doubt be told "Well, you lost here, the original assessment was correct. If you try and take it forward the penalties will be much worse".

Having watched certain IR35 and S660a cases being handled I struggle to see how this could ever favour the taxpayer.

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By Sherlock
22nd Oct 2007 15:36

Taxpayer;s Advocate
The suggestion by Robert Maas for a taxpayer's advocate, as set out in a recent Taxation article, becomes more and more relevant.

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By Taxcon
22nd Oct 2007 16:51

Horse before cart please
One would have thought that if HMRC was really interested in saving money the independent review - if such a thing is possible to achieve - should be undertaken beforfe the case is settled rather than following an appeal so that partisan or untenable views from HMRC don't give rise to appeals in the first place

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By AnonymousUser
22nd Oct 2007 22:05

Why not get it right first time?
As I have posted elsewhere, academic research in other areas where internal review is used suggests quite a significant rate of overturning which begs the question - why not spend the money devoted to internal review to getting it right the first time.
And if the dispute involves a genuine dispute over interpretation of a point of law then an independent tribunal is the obvious recourse.
There is also an issue about who appeals. Academic research in other areas of government suggests depressingly low rates of appeal or request for internal review even when critical issues (such as having somewhere to live) are at stake. The thrust of these proposals seems to be to cut down appeals. The taxpayers who are likely to fail to appeal or ask for a review will be those with no or poor representation - and who may be the ones who most need it. Harmonisation and improving processes should not be at the expense of procedural justice.

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By AnonymousUser
02nd Nov 2007 10:09

What exactly does it mean?
I think it's important to understand what is intended here. It's not just some sort of internal audit procedure or check. It will (or at least I assume it will from what's been said) be a formal procedure (as used in other government departments) which taxpayer requests effectively as first step in an attempt to redress a grievance of some kind (for want of a better description). As I say below, it would be better to focus resources on getting decisions right first time. It's also worth noting that in the Leggatt review of tribunals attention was drawn to the extent to which the then Inland Revenue controlled the procedure for listing appeals, giving rise to issues of lack of perceived independence of the Commissioners who were after all a genuinely independent body. I'm sure this has put people off making appeals over the years. How much more so will they be deterred from using an internal review process, no matter how independent the reviewer is from the original decision maker.

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By bbraithwaite.btrcl.co.uk
05th Nov 2007 16:34

Canada has an internal appeals system at R&D
The system has been in place for many years. It acts as a deterent to reviewers from taking arbitrary positions outside of the law and against internal revenue policy. There are exceptions but most taxpayers only proceed to an internal appeal in situations where the facts, law and policy are clearly in their favour or where the amounts are significant. It is mandatory to go through the internal Appeal process before proceeding to court. It is my understanding that the majority of appeals filed are found in favour of the taxpayer.

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