Taxpayers vs HMRC: Must David pay to fight Goliath?

Donald Drysdale By Donald Drysdale for ICAS

9 October 2015

Should taxpayers pay a fee to take their case to the First-tier Tax Tribunal? Donald Drysdale assesses the implications of the new proposals. 

By any stretch of the imagination, HMRC can't be described as anything other than a Goliath organisation.  Its staff count of around 60,000 is exceeded by only two other Government departments – the Department for Work and Pensions (DWP) and the Ministry of Justice (MoJ).

By contrast, our imaginary David and other taxpayers who've had dealings with the First-tier Tax Tribunal (or, in earlier years, the General Commissioners) should be aware that these bodies have provided free access to justice.  It's not surprising, therefore, that MoJ proposals to charge fees for taking cases to the Tribunal have attracted severe opposition from ICAS and other professional bodies.

The General Commissioners used to operate in a relatively informal manner; no court fees were charged, and no award of costs could be made for or against an appellant whether they won or lost their case.  When the First-tier Tribunal was introduced, the MoJ supported the decision that the same arrangements should apply save in exceptional circumstances.  By contrast, there are now fears that the new fee structure proposed by the MoJ could deter justifiable appeals from taxpayers.

The proposed fee structure

Fees would be paid by appellants in advance. For the First-tier Tribunal a registration fee would amount to £50 for a basic case, or £200 for a standard or complex case; then (where applicable) a hearing fee of £200 (basic), £500 (standard) or £1,000 (complex).  For the Upper Tribunal there would be a fee of £100 to seek permission to appeal, and £2,000 for a substantive appeal hearing.

The First-tier Tribunal, which is open to all UK taxpayers and HMRC alike, is the starting point in the judicial process for settling tax disputes.  The majority of cases it hears relate to individuals, small businesses or micro-entities, simply because the majority of taxpayers (by number) fall within these categories.  Typically the appellant is a taxpayer of limited means, often unrepresented, who takes exception to a decision or determination by HMRC.  Many of these cases concern disputes over tax or penalties where the amounts are small in absolute terms but may be very significant in the context of the appellant's financial circumstances.

A dispute will often arise when HMRC decides to assess an amount of tax, or a penalty, and the taxpayer feels that the demand is incorrect.  It seems fundamentally wrong that a taxpayer, especially a person of limited means, should be expected to pay for the privilege of contesting a decision made by the machinery of the state.

As an example, a taxpayer with no outstanding tax liabilities might be a few days late in submitting their self-assessment return, and could therefore be charged a £100 late filing penalty.  On asking HMRC to review the penalty, their purported excuse is rejected.  To pursue their objection further, they would be expected to pay (in advance) £50 simply to register their objection to the £100 penalty, plus a further £200 if their reasonable excuse needs to be argued at a hearing – and that's before they've paid for any professional help.  And yet we've all read of cases where reasonable excuses rejected by HMRC have been accepted by the Tribunal.

Paying for justice?

I'm sure all tax professionals would like to see tax law working as Parliament intended, with HMRC's enforcement processes involving the minimum of administrative hassle for all concerned.  In such circumstances fewer disputes would be taken to the Tribunal, and most of them might be found in favour of HMRC.  However, the reality is somewhat different.

A research report commissioned by HMRC and published by them in August 2014 looked not at the Tribunal but at HMRC's internal review process.  Many of the cases examined concerned penalties.  An astonishing 48% of the taxpayers surveyed reported that HMRC's original decision had been challenged successfully, and 88% of them said they would dispute HMRC's decision if a similar issue arose in future.  Clearly HMRC were reaching the wrong decision in the first instance in an unacceptably high number of cases.  Perhaps this is why so many tax specialists feel strongly about the need for free access to a system for challenging HMRC's decisions and resolving disputes.

HMRC's internal review process is free of charge and could be used (and is used) for many straightforward cases that might otherwise go to the Tribunal.  However, there should be an alternative means of resolving disputes independently of HMRC, and this should remain accessible to all taxpayers – either at no cost or at a price proportionate to the sums in dispute.  If the MoJ sees no alternative but to impose a new fee structure, they should at least consider nil fees for cases where the sum disputed is small either in absolute terms or in relation to the taxpayer's circumstances, and cases where the taxpayer remains dissatisfied after an internal HMRC review.

While tax disputes come in differing shapes and sizes, I've indicated that the penalty provisions give rise to a large number of cases going through HMRC's internal review process and/or to the Tribunal.  This flows largely from the 'automatic' imposition of late filing and late payment penalties, and their unforgiving nature in failing to differentiate between genuine misdemeanour and innocent mistake.  Humans will be human, and the concept of 'reasonable excuse' has too often been interpreted unduly narrowly.  It is encouraging that HMRC are now consulting widely on the scheme of tax penalties and how they should work in future.

There has been speculation that the new Scottish Tax Tribunal will be extended beyond the current devolved taxes – Land and Buildings Transaction Tax and Scottish Landfill Tax – and may hear income tax cases relating to taxpayers based in Scotland.  It is perhaps a crumb of comfort north of the border that the Scottish Government seems to have no plans (as yet) to charge fees for access to the Tribunal.

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