Maryanna Sharrock, partner and Catherine Robinson (pictured far left, with Sharrock), associate in the tax group at law firm Stephenson Harwood, outline the role and implications of the new Tax Tribunal system in real estate transaction disputes in the UK.
Very few taxpayers positively look forward to being party to a case in a tax tribunal. By definition, there is a dispute with HM Revenue & Customs (HMRC) and one which HMRC think that that they have a fair chance of winning. However, stuff happens and there will be times when taxpayers do find themselves in disputes with HMRC.
The natural reaction in a tax dispute is to try to make the problem go away by negotiating and in many cases this will be the right response. However, in commercial negotiations, where one party is keener to do a deal than the other, it is normally that party who obtains less favourable terms and the same principle can apply in tax disputes. If HMRC sense that a taxpayer is not prepared to fight, they may conclude that there are weaknesses in his case.
The Tax Tribunal system changed radically in April 2009 and now offers a wider range of options for taxpayers wanting some form of process going beyond negotiations. It is worthwhile for taxpayers to understand what these options are so that, if a dispute arises, they can shape their litigation strategy appropriately.
Real estate transactions in the Tax Tribunal
Many tax disputes involving real estate transactions tend to relate to value added tax (VAT), sub-contractor compliance and stamp duty land tax (SDLT). There are also a number of avoidance schemes, notably with respect to SDLT and the recovery of input VAT, which are or are likely to become contentious in the near future.
All such cases, irrespective of the tax concerned, will now be heard before the Tax Tribunal, which replaced the VAT & Duties Tribunal and the General and Special Commissioners. Thus in theory it would be possible to have a Tribunal hearing dealing with both direct and VAT issues, although we are not aware that such a case has been heard so far.
The Tribunal system
The Tax Tribunal comprises a First-tier Tribunal and an Upper Tribunal. The majority of cases will originate in the First-tier Tribunal and will be allocated by the Tribunal to one of four categories: "Default Paper, "Basic", "Standard", or "Complex".
- "Default Paper" cases are generally decided on the basis of paper submissions, as for example, in the case of appeals against construction industry late return penalties and taxpayers often argue their own cases.
- "Basic" cases will generally proceed directly to a hearing with minimal exchange of formal documents, as for example, in VAT default surcharge appeals although HMRC will make sure the taxpayer is informed of any arguments that they intend to raise before the hearing. "Standard" cases are cases which are not categorised as "Default Paper", "Basic" or "Complex".
- "Complex" cases are those requiring lengthy or complex evidence or a lengthy hearing, involve a complex or important principle or issue, or involve a large financial sum. Certain more complex cases may be transferred from the First-tier Tribunal to the Upper Tribunal if the Tribunal and parties agree.
Appeals from the First-tier Tribunal go to the Upper Tribunal, to the Court of Appeal (by-passing the High Court), and then to the Supreme Court if the case raises a sufficiently important question of law.
Appeals in the Upper Tribunal and beyond are concerned only with questions of law – by that stage it is generally too late to raise new factual points and to introduce new evidence. It is therefore important to concentrate on getting the right findings of fact when the case is first heard. In our view, this is perhaps a weakness in the system which, in an effort to minimise costs, encourages taxpayers to conduct their own appeals, or to use advisors who are not experienced litigators, and there may be a correlation between this and the number of cases where the Tribunal’s decision is that the evidence provided does not support the taxpayer’s claims. Accordingly, the taxpayer should consider instructing tax litigation experts at an early stage to ensure that the best case is put forward for him.
In "Complex" cases. the First-tier Tribunal may award costs to the successful party, unless the taxpayer has opted out of the costs regime. In other cases, wasted costs may be awarded where a party’s behaviour is unreasonable. The Upper Tribunal can make an award for costs in any proceedings transferred by, or on appeal from, the First-tier Tribunal. Tribunal hearings are generally in public unless the Tribunal considers that a private hearing is justified (for example, in order to maintain confidentiality of sensitive information).
Payment of tax in advance
In VAT cases, the taxpayer must pay the disputed tax before bringing an appeal unless the taxpayer can demonstrate that this would cause it to suffer hardship. This is not a requirement in direct tax cases, but if the taxpayer loses the case at first instance, HMRC is likely to require the tax to be paid before the case can be appealed.
Other remedies: judicial review, restitution and group litigation
Tax appeals are not the only proceedings that can be brought in respect of tax. There has been something of a growth industry in recent years in judicial review claims, challenging HMRC’s decisions and actions where there is no tax law remedy, and claims for common law restitution, where UK legislation is in breach of European law. In such cases, different procedural rules will apply and most claims will continue to be dealt with by the High Court rather than by the tribunal.
Other options: internal review by HMRC
Taxpayers can also ask for HMRC to conduct an internal review of the disputed matter. The nature and extent of the review will be determined by HMRC, which is obliged to take account steps taken by the parties to resolve the dispute. If a review is chosen, but an appeal remains likely, taxpayers should be aware that the time limits for progressing the appeal after a review decision is made are relatively short, and it is easy for a taxpayer to forfeit its right of appeal.
Statistics from HMRC for the period from 1 April 2009 to 31 December 2009 show that in c. 53% of cases, HMRC’s original decision was cancelled, suggesting that internal reviews may be a useful tool for the taxpayer wishing to avoid litigation and should not be dismissed.
Very few taxpayers positively look forward to being a party to litigation against HMRC and in many cases, seeking an early settlement with HMRC will be the right response. However, in some cases, because of the amount of tax at stake, or the principles involved, a settlement may not be possible, and in those cases it is important that the taxpayer understands its rights and the appeal process in order to get the most out of the litigation.