How is COVID-19 affecting UK tax disputes?

The impact of COVID-19 will likely be felt most keenly by those with pending litigation but it will also affect those with ongoing HMRC enquiries. 

Here are some things to be aware of.

Litigation

First-tier Tribunal (FTT) proceedings

On 24 March 2020, the FTT ordered a general stay of all proceedings for 28 days and an extension of all time limits by the same period. 

The tribunal buildings are of course closed as part of the general UK lockdown measures, and guidance has been issued which explains that there will be no physical hearings until further notice (with very limited exceptions).  

Cases will be dealt with by tribunal judges on the papers or by email so far as possible (more on that below). 

Hearings for those matters that cannot be dealt with in that way will be conducted by telephone or video conference (we understand that Skype for business is the default) and, if a case is not suitable to be dealt with in this way, it will be listed for a physical hearing on a future date when it is safe to do so. 

Similar measures have been taken by other courts across a number of jurisdictions.

These measures are likely to mean that lengthy or evidence-heavy substantive appeal hearings (especially those involving witnesses requiring cross-examination) will be deferred for some time. 

There will also be a knock-on impact for other cases that have not yet been listed, adding to the backlog for an already over-loaded tribunal system. 

The FTT has alongside this issued a provisional practice statement on the categorisation of tax cases during the COVID-19 pandemic. 

For an initial period of six months (albeit subject to review), various types of cases that would ordinarily be classified as 'standard' and accordingly require HMRC to provide a statement of case will instead be categorised as 'basic' so as, essentially, to dispense with that requirement. 

Affected cases include in particular appeals against information notices and applications for closure notices. 

HMRC should still notify the taxpayer of any grounds for contesting the appeal or application that have not been previously been raised. 

However, the key point will be to ensure that the FTT has sufficient visibility of the parties’ respective positions on the issues in dispute, especially if the matter will be dealt with on the papers rather than via a (virtual) hearing.

Upper Tribunal (UT) proceedings

Similar guidance on dealing with cases on the papers rather than through a hearing has also been issued by the UT, alongside an indication that the impact of the COVID-19 pandemic will be taken into account when considering applications for the extension of time for compliance with directions. 

One difference though is that the UT is proposing to operate a 'triage' system under which, if the UT considers that it could decide the matter without a hearing, it will provide a provisional decision to the parties which will be treated as binding if both parties consent. In those circumstances, the case will only proceed to a hearing (which may be conducted remotely) if one or both parties confirm a hearing is required. 

This is an interesting proposal, as it would give the parties some insight into how the UT perceives the merits of the case without the benefit of oral argument (and consequently increase the importance of skeleton arguments). 

A cynic might suspect though that, for taxpayers who do not receive a favourable provisional decision, it could still be worth requesting a hearing in case their counsel is able persuade the UT to reach a different view.

HMRC enquiries

The Tribunals are not the only ones extending time limits. 

Although HMRC has not (yet) issued a blanket extension, taxpayers coming up against deadline should expect a sympathetic response to requests for additional time – whether that is for appealing an assessment or responding to an information request.  

As communications with HMRC are likely to be via email, it would be sensible to ensure that protocols have been put in place that permit HMRC to issue formal notices via email and taxpayers to respond to any outstanding information requests via approved document sharing platforms or document transfer systems. (HMRC’s preference is for Dropbox, but other secure file transfer systems may be used subject to approval having first been obtained.)

Understandably, HMRC are resource constrained and personnel are likely to be redeployed from enquiries to assist with other priorities, such as assisting with putting into operation the various relief measures the government has announced. 

In the short term, while that is a major focus, HMRC’s foot is likely to rest more lightly on the pedal when it comes to progressing ongoing tax enquiries. We expect to see those continuing, albeit with slower turnaround times.

It is only to be expected though that HMRC’s foot will go back onto the gas at some stage. And with the extensive spending the government has committed to having to be funded somehow, HMRC will no doubt come under some pressure to bring in tax revenues from historic enquiries as well as from prospective tax changes.

In the longer term therefore, taxpayers may well see enquiries being pursued with renewed vigour.  

Relatedly, while cash is king, taxpayers may speculate as to whether there will be an increased willingness on the part of HMRC to agree a settlement of long-running enquiries.  

However, HMRC will only be able to agree settlements that are in compliance with the litigation and settlement strategy, so any taxpayers considering putting forward a proposal should bear in mind how it could be justified on a principled basis.

No doubt other points will emerge in time, and it remains to be seen how smoothly HMRC are able to operate 'business as usual' in practice.

For now, as more widely, some forbearance on both sides may be required – and (to end on a more positive note) that is likely to be beneficial for the taxpayers’ relationships with HMRC going forwards.