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HMRC’s refreshed LSS: a practitioner's view

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HMRC have taken the opportunity to refresh rather than re-write the Litigation and Settlement Strategy. There are no fundamental changes to the strategy as originally launched in 2007 but the rewrite does bring emphasis to certain aspects. HMRC have produced detailed guidance to support the LSS setting out a collaborative approach to all stages of working and resolving tax disputes. There is general support for adopting a collaborative approach in tax disputes but there is a real challenge to embed this effectively across a broad spectrum of intervention activity including compliance checks and the most complex avoidance disputes. As the scope for collaborative working continues to evolve it will be important not to lose sight of the legislative framework and the safeguards available to taxpayers.

A refresh rather than a rewrite

The original Litigation & Settlement Strategy (LSS) published in 2007 has undoubtedly impacted the way HMRC handle and resolve tax disputes.

The tax dispute resolution landscape has evolved since 2007 with a greater emphasis on collaborative working through HMRC’s High Risk Corporates Programme (HRCP) as well as other less formal channels.

More recent developments include piloting of Alternative Dispute Resolution techniques, including mediation.

In light of these developments HMRC have taken the opportunity to ‘refresh’, rather than rewrite, the LSS to bring it up to date while also addressing some of the misunderstandings that may have existed, both inside HMRC and outside, about how the LSS operates in practice.

The refreshed LSS doesn’t herald any fundamental changes to HMRC’s strategy for resolving tax disputes – HMRC remain clear there will be no return to ‘package deals’ or splitting the difference in ‘all or nothing’ cases.

Further insight from Jason Collins


Greater emphasis is placed on certain aspects that should improve the handling and resolution of tax disputes going forward, including:

  • the potential benefits of a collaborative approach;
  • the need to test whether a dispute is genuinely ‘all or nothing’;
  • the opportunity, at all stages in a dispute, for HMRC to consider new information/analysis;
  • the impact of potential ‘read across’ to other open or prospective disputes; and
  • the requirement that all disputes must be resolved in accordance with the law.

Resolving disputes (paras 16–19)

The LSS guidance sets out the routes for resolution which differ depending on whether the dispute is one with a ‘range of possible outcomes’ or one which is ‘all or nothing’.

In either case critical ‘judgments’ will be made which will determine the basis on which the dispute can be resolved.

To have the best chance of successful resolution these judgments should be influenced by, or at least recognise, the taxpayers'/agents' view.

Range of possible tax outcomes

The critical ‘judgment’ in these types of dispute is highlighted in paragraph 17 of the refreshed LSS which says: ‘…HMRC will not settle by agreement for an amount which is less than it would reasonably expect to obtain from litigation.’

In our view, the range of possible findings the Tribunal might come to should ideally be considered collaboratively by all parties to the dispute as the effort expended working together on this can bring clarity to each party’s position and may identify a mutually acceptable basis of settlement.

All or nothing

The critical ‘judgement’ in these types of dispute is highlighted in paragraph 18 of the refreshed LSS which says: ‘Where HMRC believe that it is likely/unlikely to succeed in litigation…’. 

The challenge for HMRC will  be to embed this practice culturally  and operationally across a broad spectrum of intervention  work

In short, the LSS says, where HMRC believe that they are likely to succeed in litigation it will not reach an out of court settlement for less than 100% of the tax, interest and penalties (where appropriate) at stake.

Again, in our opinion, reaching a view on whether something is ‘all or nothing’ and the likely outcome in litigation, should be a fair and balanced judgment established through open exchange of views with the taxpayer/agent.


The refreshed LSS at paragraph 17 says: ‘…HMRC will seek to reach resolution of the dispute by litigation as quickly as possible.’

While this is a worthy aspiration, as uncertainty arises in instances where there are delays in decisions on whether to litigate an issue, or which taxpayer to litigate, there remain concerns as to whether this is achievable given HMRC’s resource constraints.

Handling disputes (paras 9–15)

Below are some of the key points in the dispute life cycle where good quality bilateral collaboration in handling and resolving tax disputes will be needed.

Clear articulation of points in dispute and timescales for key decisions (para 9)

The LSS guidance recommends that:

  • the nature of the potential issue/perceived tax risk should be clearly communicated to the taxpayer or agent;
  • the parties should jointly agree timetables; and
  • as a matter of best practice, HMRC should always aim to be as informative and clear about their actions.

Experience tells us that when this happens from the outset it does make a difference in resolving the dispute efficiently and effectively.

Both taxpayers and their agents will fully support the view that good, clear communication is a key facet of dispute resolution.

Establishment and understanding of relevant facts (para 11)

The LSS guidance recognises that tax law does not operate in a vacuum and must apply to the particular facts and circumstances, so establishing these facts is important.

Encouragingly the guidance now acknowledges that HMRC should seek to establish only the facts required to address the specific tax risk identified.

Annex 5 sets out a useful best practice approach to fact finding in large and/or complex disputes.

The approach of identifying the key technical areas for debate at the outset of an enquiry, which then informs and focuses the fact finding process, is one that taxpayers and agents would welcome as being a more efficient approach than is often the case now.

Taking specialist advice (para 12)

This is a key event which can influence HMRC’s approach – timing is critical.

If taken too early in the process there is a risk that HMRC can prematurely ‘pin their colours to the mast’ and this can hinder truly collaborative dialogue and the search for acceptable solutions.

The guidance says no single piece of advice is necessarily decisive in determining HMRC’s position and advice should be revisited and refreshed and this is an approach that we welcome.

Sharing and testing strengths and weaknesses of arguments (para 13)

The guidance acknowledges that HMRC do not have a monopoly on understanding how tax law applies to a particular set of facts.

If this translates into a greater willingness to work collaboratively on sharing and testing strengths and weaknesses of arguments this should benefit all parties.

The guidance also notes HMRC will continue to be open to considering the impact of any new information and/or analysis even after a considered decision has been reached – this is welcomed if it genuinely means there is a willingness to revisit disputes that appear to have become entrenched as there could still be an opportunity to reach a mutually acceptable agreement.

Considering whether an issue is ‘all or nothing’ (para 14)

This addresses one of the perceived problems with the original LSS – too many disputes were labelled ‘all or nothing’ when perhaps with more detailed analysis there were alternative basis for reaching settlement.

Taxpayers and agents will fully support the position that real effort should be expended by all parties to a dispute to test whether it is genuinely ‘all or nothing’.

Inappropriately labelling disputes ‘all or nothing’ reduces the scope for negotiated settlements.

The LSS guidance recognises that tax law does not operate in a vacuum and must apply to the particular facts and circumstances

Disputes involving tax avoidance

Experience shows that disputes involving tax avoidance can be some of the most difficult to resolve.

This difficulty is in part due to the complexity of  transactions and/or interpretation of the law and in part due to the practical aspects in the way these disputes are handled and resolved, given HMRC’s project management, governance and decision making.

In contrast to the original LSS the refreshed LSS does not refer to any particular aspects that apply to disputes involving avoidance.

Peppered throughout the guidance are various references to avoidance and while it would be possible to piece these together to get an overall picture of how avoidance disputes are handled, if reading the LSS as a stand-alone document taxpayers could assume – wrongly – that avoidance disputes are handled and resolved in the same way as other disputes.

From an operational perspective, an additional challenge in avoidance cases is keeping the taxpayer/agent informed of developments in HMRC’s wider strategy, or in other disputes, which will impact their dispute.

Good practice has been experienced in some of the HRCP projects, but there are instances where efforts to settle a dispute have been derailed by other events of which the taxpayer/agent, and sometimes the HMRC case team, were not aware until late in the dispute.

Primacy of the legislative framework

Whatever ‘tools’ are being used to resolve a tax dispute stakeholders should not lose sight of the primacy of the legislative framework.

The LSS guidance and other collaborative working initiatives should be clearly set in that context.

There are aspects of ‘real time’ engagement where taxpayers can be invited to work with HMRC outside the legislative framework.

While there can be benefits in this, taxpayers may forgo their statutory safeguards in doing so.

Therefore it will be important that taxpayers, and their agents, are put on notice of their rights and obligations so that decisions to adopt a non-statutory approach are taken ‘with eyes wide open’.

Taxpayers who wish to avail themselves of their legal rights and protections (eg, applications for closure notices; appeals against information notices and assessments) should not be viewed as uncooperative, confrontational or otherwise be open to criticism for that reason alone.

Resolution of future tax disputes under the refreshed LSS

It is a difficult task to capture in a single document a strategy to cover the whole life cycle of disputes of all types, affecting all classes of taxpayer who will have varying quality of relationship with HMRC.

The refreshed LSS is a more concise document and as it is now supported by detailed guidance covering HMRC’s approach to collaborative working and resolving disputes, it is an improvement on the original.

Although there are no fundamental changes to HMRC’s strategy for resolving tax disputes, taxpayers and agents will recognise potential benefits of the collaborative approach outlined in the refreshed LSS and guidance.

Efficient fact gathering, timetabling that both parties adhere to, collaborative analysis of technical positions and consideration of settlement options plus open communication of developments in a dispute (and impact of other disputes) are all aspects that in practice bring improvement to handling and resolving tax disputes.

To be effective, collaboration must be genuinely bilateral and there should be a real upside for taxpayers who choose (and are enabled to make a conscious choice) to engage with HMRC in this way.

Although the documents fairly describe best practice for collaborative working and resolving disputes, the challenge for HMRC will be to embed this practice culturally and operationally across a broad spectrum of intervention work.

However, if this best practice can become the norm then all stakeholders should benefit.

Julie Hughff, Tax Partner, KPMG LLP

Kevin Elliott, Tax Senior Manager, KPMG LLP


Are the changes too subtle?

Jason Collins
Partner, McGrigors

HMRC have refreshed their Litigation and Settlement Strategy, in part in response to criticisms levelled at the Department by the National Audit Office (NAO) in its enquiry into how HMRC settle disputes with large business.

The NAO identified instances where senior HMRC officers were involved in both the negotiation and overall sign-off of settlements, which ‘reduced the demonstrable assurance to taxpayers and Parliament that the settlements reached were appropriate’.

The NAO also pointed out instances where HMRC had not sought proper legal advice on settlements and in particular whether they were permitted to forgo tax.

These governance failures, although the exception rather than the rule, come as no surprise as HMRC have sought to grapple with the inflexibility of the LSS they published in 2007.

The strategy now provides more room for movement in a dispute

In many cases since 2007, it may have been blindingly obvious to HMRC staff that litigation should be avoided and a settlement reached, but they have found themselves constrained by the terms of the LSS with the effect that on more than one occasion its terms have been interpreted very liberally indeed.

The NAO noted that, although HMRC planned to refresh the LSS, they would not be changing its substance, just making the messages clearer.

The new LSS (with accompanying internal guidance) certainly does not represent a wholesale change in approach – HMRC continue to resolve not to offer ‘package’ or ‘split the difference’ deals.

However, there are some significant, if subtle, changes.

The strategy now has less hard edges, providing more room for movement in a dispute.

Gone is much of the war cry audible in the old version, and the overbearing focus on avoidance,which is mentioned only once in the LSS itself.

Equally, the reader is exhorted – twice – to ask whether a dispute is ‘genuinely’ all or nothing.

If it is, the decision to litigate is now made not just on merits alone but also whether ‘litigation would be both effective and efficient’.

Also gone is the hard-edged reference to 50% prospects – instead HMRC must consider themselves ‘likely’ to win before resolving not to settle for less than 100% of the tax.

HMRC also recognise that settlement and litigation are not mutually exclusive, and will be open to revising their approach as arguments and  facts become clearer during preparation for trial.

Nevertheless, the changes are perhaps going to be too subtle to work effectively.

The LSS might work better if the steadfast refusal to entertain ‘split the difference’ compromises under any circumstances was replaced by a stipulation that such settlements will not be considered if they would reward errant taxpayer behaviour – as that is what that particular policy is actually all about.

Freedom to do such deals in other cases would give HMRC maximum flexibility and discretion  and would lead to the settlement of many more disputes. 

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