Cooperative compliance and the Litigation and Settlement Strategy ...

Cooperative compliance and the Litigation and Settlement Strategy; results from a survey Judith Freedman, Francis Ng and John Vella May 15, 2014

Background to survey •

Freedman, Loomer and Vella on ‘enhanced relationship’ [2009] British Tax Review, 74

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30 face to face interviews. Broadly positive but reported some concerns and limitations

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System now established and rolled out to a wider range of businesses time to repeat and enlarge on survey

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Relationship now renamed co-operative compliance to explain collaborative and trust based relationship, but also to deal with public perceptions.

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New survey reviews aspects of co-operative compliance, HMRC Staff and Litigation and Settlements Strategy (“LSS”) . Our focus here is LSS (in context of co-operative compliance). 2

OECD (2013) Co-operative Compliance: From Enhanced Relationship to Co-operative Compliance •

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“Managing perceptions is one of the more significant challenges that has to be addressed. It is all too easy for an external (media) and internal perception to arise that companies in this programme are being treated more favourably than either their peers or smaller enterprises....” “Since 2007, the UK has published its Litigation and Settlement Strategy which makes clear how decisions on resolving disputes are reached. And the UK is looking at ways to reinforce the message around its approach and how to communicate externally and internally, that the approach is coherent, consistent and even-handed. The UK has also introduced enhanced governance arrangements for significant tax disputes to provide greater transparency, scrutiny.” “Compliance risk strategies provide important context for co-operative compliance models” 3

Methodology •

Current Survey • 3 main areas: Business Risk Review, HMRC staff, and the LSS • 2 parts: – questionnaire (April - May 2013) – + 30 follow up interviews (May 2013 - Jan 2014)

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Sample & Response

Large

Medium “How well does your CRM understand your business?” (A. 171)*

* NB Graph on the left presents overall responses. Graph on the right presents responses by LBS businesses on top and by LC businesses below.

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CRM Quality •

Many interviewees: quality generally good especially commercial understanding but variable: – “CRMs are the best of HMRC's non-head office staff.” – “The CRM has better commercial awareness than other HMRC staff.” – “CRMs have been of variable quality... The seniority of CRMs matters too ...There are some very good CRMs, some not so good, and some in between.” – “There’s lots of luck involved. Our last CRM was good… bright and pragmatic. Our new CRM is very new to the CRM role. Very much more an administrator than a technician. [The current CRM] will push things straight to specialists and won’t cough without clearing it with a specialist.”

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CRMs & Specialists > “Is further training required?” (A. 168)

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Less commercial awareness: “Specialists do tend to have less commercial awareness – they tend to assume that everything is done for a tax purpose.”

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Slow down process: “…if a specialist gets hold of it the process slows down...”

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CRM vs Specialists: • “Tax specialists can get entrenched in their own technical argument. The CRM makes them focus on materiality – they steer them towards important issues.”

• “The CRM sometimes appears embarrassed by specialists. CRMs do challenge specialists if they think they are wrong, but if the specialists stand firm then CRMs have to back down.” 11

III. Disputes, Litigation and Settlement

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1. Selective general results on LSS – HMRC has not taken forward disputes which could not be justified in terms of revenue at stake (82%) – HMRC adopted collaborative working practices (77%) – HMRC staff were familiar with the law (90%) and facts (78%) underlying dispute

– HMRC respected taxpayer confidentiality all of the time (85%) – Respondent could always understand why HMRC decided to litigate (86%)

– HMRC willing to be convinced that adopted incorrect interpretation of the law (40%) – HMRC staff with whom respondent negotiated had sufficient discretion (52%)

– Package deals (77% didn’t attempt PD, 12% attempted and HMRC didn’t accept, 11% attempted and HMRC accepted), split the difference (83% responded HMRC don’t split the difference) – Current approach is reasonable (66%) – LSS provides sufficient certainty (59%)

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2. Has the LSS made a difference?

> “HMRC’s approach since 2007?” (A. 130)

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2. Has the LSS made a difference? •

Since LSS was move towards consistency divergent views not surprising but explored in interviews. (Becoming easier/ harder is neither necessarily bad nor good)

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Made it easier: – Legitimacy •

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“LSS is ‘massively positive’ and makes commercially sensible settlements easier and much better than the bad old days when everyone got very entrenched…The LSS makes HMRC more comfortable about settling, it provides them with more legitimacy to settle, because they are complying with some rules.”

Made it harder – The LSS ties HMRC’s hands – “rod for their own back” •

“The LSS made it harder to settle. Sometimes our CRM has said that they would like to settle but can’t. They realise that they have boxed themselves into a corner because they need the money.”

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Package deals/splitting difference

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However: ways around restrictiveness?

– Consistency amongst taxpayers: if other taxpayer litigates system blocked

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2011 revision made a difference

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3. How restrictive is the LSS? •

Is the LSS not as restrictive as it might at first appear?

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HMRC have a general discretion: “… the board have a wide managerial discretion as to the best means of obtaining for the Exchequer from the taxes committed to their charge the highest net return that is practical having regard to the staff available to them and the cost of collection.” (R v IRC ex p. National Federation of Self Employed and Small Businesses Ltd (1982) ; R(Gaines-Cooper v HMRC (2011); UK Uncut Legal Action Ltd v HMRC (2013))

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LSS provides a framework for the exercise of this discretion but also refers to this broad legally sanctioned discretion “in certain circumstances”

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NAO (2012) “Large tax settlements are complex and there is [often] no clear answer as to what represents the ‘right’ tax liability”

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“The LSS needs to better reflect the reality of settlements in complex cases where multiple issues are resolved”

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Guidance explains LSS is not rigid and flexibility permitted in settling disputes within LSS framework

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3. How restrictive is the LSS •

We investigated mechanisms for reaching settlements in interviews and a range of methods was described showing varying approaches. We have grouped these under the following headings:a) Alternative view of the facts b) Break down issue into smaller issues

c) Different disputes settled “in the context” of each other d) Distinguish similar issues with other businesses e) Careful instruction of counsel

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3. How restrictive is the LSS Critical question: •

Should it be necessary to resort to these methods which are time consuming, expensive, non-transparent and may not be evenly applied or should the LSS be more open about the way settlements can be reached?

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The latter could be accompanied by an even further strengthening of ex post controls. NB 64% said oversight of settlement process by body independent of HMRC would be helpful (although a number of points were also raised against this by our interviewees).

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3. How restrictive is the LSS? •

Potential problems: – Willingness to find solutions varies from CRM to CRM (as seen above)

– Depends on knowledge and experience of Tax Director/advisor – General willingness to find solutions may vary over time (see next slides) • Settlements can have positive outcomes for the Exchequer in appropriate cases as shown by NAO (2012) but: – framework and guidance needed to ensure goals of transparency, consistency amongst taxpayers and respect of boundaries of discretion are met – and HMRC should not fetter its discretion in a way that affects legally appropriate settlements •

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– Is LSS adequately aligned with legally sanctioned discretion of HMRC? – Are we satisfied that the LSS as amended now reflects the reality of settlements in complex cases as the NAO has suggested it should do? 19

4. Recent attention on settlements > “Has there been a change in approach since the public spotlight was shone on the settlement process?” (A. 132)

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“HMRC now more timid and less willing to find a solution – even though the net result for UK plc might be positive”

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“Twice had HMRC staff say – 'you've got to think about how this will play with Margaret Hodge’… Because everyone within HMRC is afraid of being dragged before the PAC and Hodge, nobody is willing to overrule the specialists ”

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“[HMRC are] very conscious of improving their internal procedures but are keen not to let it impact businesses. But inevitably it does, particularly at junior level. Some are scared to progress matters, or feel emboldened to take more aggressive stances.”

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“Before the PAC/media spotlight, they were being told to understand business and help reach resolution of tough matters and raise as much tax as possible. They were coming to sensible agreements… The swing from empowerment to obsession with due process leads to paralysis. … It is bringing back the cops and robbers struggle…It will cost the revenue.” 20

Conclusions •

Almost universal view amongst interviewees – HMRC do a good job – HMRC should defend itself in public better • “...The UK has become a very good place to locate, but companies must be asking whether it makes sense to come here if they might be dragged through the mud by Hodge... HMRC compare extremely favourably to other revenue authorities. They are far ahead of most other authorities, save for a few, such as the Netherlands.” • “HMRC need to explain that the changes they made have led to more tax being collected, old issues resolved which had been tying down resources for years. One or two anomalous cases have given the outside world the wrong view.”

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Questions for debate:

– Is LSS adequately aligned with legally sanctioned discretion of HMRC? – Is the LSS achieving its objectives?

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