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The tax tribunals: lessons learnt

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Appeals to the Tax Tribunals are divided into four categories: default paper; basic; standard; and complex. The general consensus is that this categorisation has been a success but experience has shown that, good idea though the categorisation was, not everything was perfect. For instance, appeals against very large fixed penalties usually fall into the default paper category, though they are quite unsuitable for disposal on written submissions alone. Also, the dividing line between the standard and complex categories has led to some disputes and satellite litigation. The safety valve, the onward appeal route, too, has changed. There may be further gradual evolution as the Tribunal finds better ways of providing its service.

The third anniversary of the creation of the Tax Chamber of the First-tier Tribunal is fast approaching, and it seems a suitable moment to look back at what we have achieved, where we have made mistakes, and where we may go in the future.

Background to tax appeal reform

Tax appeal reform was already very much on the agenda when I became a Chairman of what was then the Value Added Tax Tribunal 21 years ago this month. The Special Commissioners had just been merged for administrative purposes with the VAT Tribunal, but the two retained distinct identities and procedures, while the General Commissioners, separately administered and with a quite different judicial structure, had surprisingly little intercourse with the Specials. Nevertheless, with a few exceptions the system worked tolerably, and sometimes very, well despite all its faults. The debate about reform might have continued, without much actual result, for many more years had it not been for the process of wholesale reorganisation of the administrative tribunals which began in 2001, boosted by the merger of the Inland Revenue and Customs and Excise in 2005. Even then, we had to wait four more years.

I shall continue to make every effort to ensure we provide a simple, quick, cheap and, above all, effective means of resolving the smaller disputes which come our way 

The reform posed a number of challenges, some quite formidable. The range (in terms of technical difficulty, as well as money at stake) of the appeals we receive is considerable and we had to find a way of ensuring that what is, at the ‘top end’, commercial litigation in all but name continued to be dealt with in a manner which was suitable for the resolution of disputes of that kind, while the much more numerous low-value and, usually but not always, technically straightforward appeals were not overlaid with unnecessary procedural requirements. We could not simply replicate the Generals – that the Generals did not conform to modern judicial standards was one of the principal drivers for reform – but we did need to find a way of enabling taxpayers to challenge, for example, the £100 late-filing penalty without taking a day off work.

The four categories

The solution was to divide our appeals into four fairly broad categories:

  • default paper;
  • basic;
  • standard; and
  • complex.

This approach (I cannot claim the credit for the idea) has been quite a success. There is now a properly recognised means of having small cases dealt with on the strength of written submissions alone, though either side can ask for a hearing if they prefer. Our basic category cases are designed to reproduce, so far as we can, the ‘turn up and talk’ approach of the Generals, and to provide a simple, low-cost means of resolving what are usually purely factual disputes. Resource limitations mean we cannot provide quite so local a service as the Generals, but we do as much as we can to meet taxpayers’ convenience. At the other extreme is the complex category, for the heaviest of cases. The standard category encompasses everything in between. And cases can be moved from one category to another when appropriate.

Experience has shown us that, good idea though the categorisation was, we did not get everything right. This is in part due to the manner in which the new penalty régime has developed: on occasion it leads to the imposition of very large ‘fixed’ (that is, not tax-geared) penalties. Appeals against very large fixed penalties usually fall into the default paper category, though they are quite unsuitable for disposal on written submissions alone. At the moment we simply move them to a different category, but once a few formal requirements have been dealt with I shall be issuing new categorisation guidance which, I hope, will better match appeals to the manner in which we deal with them. As now, either party will be able to ask for an appeal to be moved to a different category.

The dividing line between the standard and complex categories, too, has led to some disputes and satellite litigation. Only a handful of appeals have been categorised as complex as a prelude to a move to the Upper Tribunal for their first hearing – from my perspective, as President of the First-tier Tribunal Tax Chamber, a gratifyingly small number. There are, of course, some cases which do merit transfer, either because they should be linked with parallel judicial review proceedings, or because they raise issues of law which demand an Upper Tribunal decision. The President of the Tax & Chancery Chamber (Mr Justice Warren) and I are, therefore, quite willing to agree to transfer in an appropriate case.

It is when there is a request for a move from the standard to the complex category, not with a view to transfer to the Upper Tribunal, but in order to take advantage of the costs-shifting régime which applies to complex cases, and the re-categorisation is opposed by the other party, that problems sometimes arise. Guidance about the criteria for allocation to the complex category was given by the Upper Tribunal in Capital Air Services Ltd v HMRC [2010] STC 2726, an example of the satellite litigation I have mentioned, but that case did not, and could not, decide the question whether complexity alone should dictate the availability of a costs-shifting régime. Costs in tribunals is a topic on which a consultation will soon be launched and I shall therefore say no more about it here.

A matter for some surprise following the 2009 reforms, of the Tribunal itself and of the appeal process, was the difference between the number of appeals made or notified to us and the much greater number for which we had planned. There are recent signs of an increase in new appeals, though the intake is still well below the levels predicted in 2009. There are two obvious reasons, though even taken together they do not offer an entirely satisfactory explanation. The first is the extension of the review system, from a relatively modest number of indirect tax and duty disputes to the whole range of HMRC decisions. I can only assume that this has been a success – the disputes resolved on review obviously do not come to us, so such evidence as I have is no more than anecdotal.

The second was the feeling in some quarters that the new system was not as user-friendly as the Generals, a forum which many high-street accountants and tax advisers had used for a long time, and with which they felt comfortable. Both my predecessor, Sir Stephen Oliver, and I have been very conscious of that feeling, and we have done our best to make our procedures in all but the heaviest cases easy to understand, and the Tribunal a user-friendly environment, by reducing the pre-hearing requirements as much as possible, and by ensuring that there is no more formality at the hearing than is really necessary. I shall continue to make every effort to ensure we provide a simple, quick, cheap and, above all, effective means of resolving the smaller disputes which come our way. Of course, getting to the right answer is as important as ever.

The onward appeal route

Unfortunately, we are fallible and don’t always get it right. The safety valve, the onward appeal route, too, has changed. Before, an appeal lay without the need to obtain permission to the High Court. The filter was cost – the High Court charged a fee which put many off, some of them taxpayers with meritorious appeals but not enough money to afford the risk. Now, the filter is the need to obtain permission. About half the applications we get are misconceived, since they attempt to challenge only the findings of fact, but many of the others raise interesting points of law, and around half of those are granted, either by the First-tier Tribunal judge or, on a second application, by an Upper Tribunal judge. However, the ultimate success rate is quite low: only about 20% of appeals to the Upper Tribunal which reach a hearing are allowed. As many of those appeals involve novel and difficult points of law that is, I think, a commendable record.

MTIC appeals

One of the greatest challenges we face now is the handling of the many so-called MTIC appeals we have. As anyone who has been involved in such an appeal will know, they are very demanding of resources: they commonly take two or three weeks to hear and occasionally even longer, they require very large courtrooms, and the judge and member need to have some experience if they are to do justice to the appeal. Fortunately the merger of the Courts and Tribunals Services has made it much easier to obtain suitable accommodation, and the imminent arrival of three new salaried judges, recruited during the course of the year, will significantly increase our judge-power. I am optimistic that we will be able soon to see a significant reduction in the number of MTIC appeals which are waiting to be heard, and at the same time deal with the remainder of our workload with the efficiency our users are entitled to expect.

Solid foundations

The Chamber I inherited from Sir Stephen Oliver last April wasn’t perfect – it would be remarkable if every choice made before the transfer of the legacy tribunals to the Chamber in 2009 had been absolutely right – and we made a few mistakes as the new system bedded down. But I believe there is a general consensus that the foundations were right. We have done our best to react to our mistakes and to heed what our users have told us. Stephen introduced a few changes. I spent the first six months of my time as President continuing and building on Stephen’s work, and listening to our users. I do not see radical change on the horizon, but gradual evolution as we find better ways of providing our service. I am very conscious that we will retain the respect of our users and the wider tax world only if we deserve it.

Judge Colin Bishopp