Tax dispute backlog ‘could penalise business’

Friday 27 September 2013

HMRC’s ever-growing backlog of tax disputes is well-known, but an expert has warned of the possible pressure that limited company contractors and other small businesses could feel as waiting times grow.

Jason Collins, tax law specialist at Pinsent Masons, has explained to the firm’s news site Out-Law.com that even before a case is heard protracted delays can have serious implications for some companies’ cash flow. Businesses drawn into disputes with HMRC are often required to pay VAT ahead of the dispute, even though they might be refunded if they are eventually successful in their case. But this will still mean a long period without those funds, in which time liquidity can suffer.

He was speaking after Pinsent Masons obtained data showing that in the last financial year, HMRC’s list of outstanding cases rose substantially. From 24,273 in 2011-12, the figure rose to nearly 27,000 - nearly double the number of unresolved cases in 2009-10. Mr Collins suggests that HMRC is deliberately taking a more aggressive approach to collecting unpaid taxes in recent months as the furore around tax avoidance has grown, and this is reflected in the figures.

Of course, there are companies that manage to have their payments postponed until after the case is heard, but Mr Collins points out that they can still lose out. Underpayments are collected with added interest of 3.5 per cent, but if a business or individual has paid too much tax, HMRC will only repay them with an interest rate of 0.5 per cent.

“For many businesses already struggling to cope with the impact of the recession, whether from reduced trade or constrained bank lending or both, this could be life or death,” Mr Collins says.

Contractors who find themselves caught up in disputes with HMRC are fully aware of the time and money involved in taking their case forward. Indeed, the tax authority has recently established the Alternative Dispute Resolution (ADR) service as a means of saving valuable resources both for HMRC and the taxpayer.

Rather than going through the wranglings of a full tribunal, ADR allows both parties to work alongside a specially trained HMRC mediator who has had no prior involvement with the case to reach an agreement acceptable on both sides. But for those who began proceedings before or even after ADR was rolled out nationwide, the protracted wait before resolution gets underway can still cause major problems.

Additionally, Mr Collins explains that some taxpayers are reluctant to enter into ADR out of fears that an HMRC official, even if they have never seen that specific case before, would not be impartial. Also, it is unlikely to solve all of the problems in the tax dispute system.

“HMRC itself needs to be far more willing than it currently is to instigate constructive negotiations with taxpayers with a view to achieving sensible settlements. It still has a long way to go to establish workable ways to recoup tax without entering into so much costly legal wrangling,” Mr Collins explained.


By Victoria McDonnell

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