Diplomacy is the art of letting someone else have your way.
– Sir David Frost
An onslaught of judicial review claims has been predicted in light of the introduction of ‘follower notices’ by the Finance Act 2014. My own view, however, is that the review option will not be needed in genuine cases of discrepancy. This is based on my experiences of negotiating with HMRC, which have been overwhelmingly positive to date.
Consider the following scenarios in circumstances where a dispute arises over tax liabilities:
(A) HMRC disagree with you and the courts agree with them;
(B) HMRC disagree with you but the courts agree with you.
Now consider this:
(C) Your advisor writes a letter to HMRC. HMRC agree with you and withdraw 100% of their claim.
We live in a world of false choices. The focus in practice is all too often on the route that leads us down to (A) or (B), not so much on (C). Promoters start off with a ‘fighting fund’ and the selection of a litigator as primary advisor. When a dispute first arises, consensus is often not considered viable enough an option in its own right, with the instruction of a barrister being deferred until after the appeal notice has been issued. And looking back from a successful resolution, it certainly is the case that a legal team which has procured a victory in litigation has a more glamorous prize to boast of than one which has obtained a settlement or a withdrawal by HMRC of its claim.
This is strange. May I submit that there is, quite simply, no better service one can render the lay client and his insurers than to achieve the same result sooner whilst at the same time protecting him or her altogether from the stress, the burden, the vagaries, the costs and the publicity of litigation? Once you get to (B), the question which you must then really ask yourself is why (C) was not obtained in the first place. Seen this way, (B) is a failure. When you have failed to settle it is not just so much that you have failed to convince HMRC of the merits of your case, it is more that you have failed to convince HMRC that you would not fail to persuade the courts of the merits of your case – this, as a matter of logic, is a lower threshold to satisfy, as the courts will naturally not always agree with HMRC.
There are various reasons as to why there is this proclivity towards litigation, especially in terms of perception. First, there is the publicity which attaches to a decision – there is a particular date, an outcome, a label, a name. The very attraction of a sub rosa negotiation is perhaps its greatest weakness here. In addition, there is some inbuilt bias towards litigation within the legal profession itself – given that a decision is not only the source of law but also the fossil of a previous dispute, it is not surprising that our minds are inclined to viewing its ratio primarily as a tool to be applied to a subsequent dispute. The silk system has traditionally been based on experience in advocacy, even though there has rightly been a shift in recent times with a greater emphasis now being placed on securing the best outcome for a client in a dispute. As far as the lay client is concerned, there may be a distrust of HMRC and a desire for the case to be heard by the judges. There is also a sense of machismo attached to litigation which, based on my readings of non-fiction around the banking crisis, might well appeal to many in the City, lawyers and non-lawyers alike. I suspect that the greatest factor may well be momentum – the biographies of most advisors recount their involvement in cases and, to a lesser extent, settlements – but less so the ‘six’ of facilitating a withdrawal by HMRC of its claim. It may simply be that practitioners have been unsure as to how to highlight this in their resumes, given the established format which they follow.
Smoothly does it…
And so the purpose of this piece is not so much to undermine our own hard-fought victories in litigation as it is to highlight, through an adumbration of my other experiences, the seminal part that negotiation can play in practice.
When I was first training to be a barrister, negotiation was taught to us as a separate discipline, taking it’s own distinct place alongside drafting and advocacy. It then disappeared from my sphere of operations, at least on a formal basis, as I joined the tax bar. Then, in 2006, I was involved with an income tax dispute. An agreement had been reached between the client and HMRC over a telephone conference. Subsequent claims by HMRC seemed to disregard this agreement. I restated the case for the client. HMRC withdrew 100% of their claim.
In 2008, I advised on the SDLT treatment of a particular transfer of land. The matter was disclosed to the HMRC. They made some enquiries. I told the client to convey X, Y and Z to HMRC. The client did so. HMRC did not raise any further questions.
In 2012, I was involved in a VAT dispute. The client had a charity fund-raising company and auctioned goods on behalf of charities at fund-raising events. HMRC argued that the client ought to have accounted for output tax on those auctions. I wrote a letter to HMRC and they withdrew 100% of their claim.
Soon afterwards, I was involved in a residence dispute. As is usual, there had already been some correspondence by the time my involvement commenced. I wrote a letter to HMRC and they withdrew 100% of their claim.
In a period approaching 10 years, HMRC have, in any direct dealings between ourselves, always agreed to my interpretation of tax provisions.
As to why this has been the case, it seems to me that there are various factors at play here. To some extent, we are, of course, entering here those realms of professional pursuit which are governed more in their outcomes by our personal characteristics than others. Some of it must come down to the style of the negotiator concerned.
But if there is one thing which I believe to be paramount to achieving a successful early settlement, it is a consistency in the theory of the case. The concept of ‘theory of the case’ is more commonly used in criminal law but has as much a place in tax. The idea being that the parties are able to explain from the outset as to what exactly has been done and to take a strong and clear stance on what they believe the general and tax ramifications of it being done are. For instance, in Philip Boyle, there was uncertainty as to whether the payments were loans. The use of a foreign currency was claimed but not evidenced. There is nothing to be achieved in claiming facts which cannot be evidenced or in evidencing facts which cannot avail in any event (this is my understanding of the use of foreign currency here).
There will inevitably be cases where the negotiator is brought in at a later stage. As an advisor being brought in, there is nothing to be gained from lamenting past actions. A QC in our chambers, when I once made such a complaint to him, told me a joke about a man who asked another man he had come across the way to a certain town. The other man thought about it for a moment and said, ‘If I were you, I wouldn’t start from here!’ Very true. The best thing here would be for the parties to seek legal advice as soon as possible with a view to characterizing the facts and the law in the best way possible. For what it’s worth, my interventions in some of the cases above were after-the-event interventions. Often, it is the mere act of having sought detached independent legal advice which in itself goes some way towards pacifying HMRC.
But a coherent theory of the case will really be best put together where the actions have all along been based on proper legal advice. In other words, there is no substitute for sound planning. When things are done by the book, one will be in a position to provide prompt answers to any HMRC questions and nip the thing in the bud. It is not just the answer but the meticulousness which will impress. In writing for professional clients, I am in a sense preaching to the converted. However, the point is not simply that comprehensive legal advice must be sought, rather it is that planning is best proceeded with under the auspices of an expert in the particular area rather than say a litigator who may well go from one area to the next. For instance, in Leeds Design, I understand that there was some difficulty in explaining why the interest was formed as a discount. In Kings Pollen, there was difficulty in explaining the policy objectives underlying the HMRC argument. No professional is likely to have as much ownership of the planning as the architect himself. As the saying goes in the film business, ‘You are more likely to make a good film with a good script, but with a bad script, the odds are against you.’
I am conscious that there is perhaps an air of self-congratulation in my recounting of my experiences. However the clandestine nature of negotiations renders it hard to discuss negotiations other than those experienced firsthand. Furthermore, the tenor of this piece is that the key, even more than the negotiator, is sound planning ab initio. I have also tried to challenge the commonly held perception of HMRC as difficult. My experience of negotiating with HMRC has shown them to be always helpful, open-minded and, as seen, even acquiescent.
The lessons learnt from negotiation can be brought to bear on disputes arising with HMRC in the context of ‘follower notices’. It seems to me that follower notices, rather than attempting to extend the scope of judicial precedents, are targeting more those instances where the parties wish to lean on the circuitousness of the appeal system to defer the payment of tax due. I have some sympathy for what is being attempted by the legislator.
The discipline ought to be given greater consideration to in general practice too. Counsel ought to be instructed with the specific objective of settling once a dispute first looms. And when it comes to planning, the litigation tail ought not to wag the dog. Where one’s budget allows for it, advice is really best obtained from a specialist in the particular area with a record of having consistently been agreed with by none less than HMRC itself.