In most cases, taxpayers who receive an unfavourable decision from HMRC can, as an alternative to notifying an appeal to the First-tier Tribunal (Tax Chamber) (FTT), choose to have that decision reviewed internally by HMRC. As part of our ‘Challenging HMRC’ series, we summarise how the review process works and the potential advantages for taxpayers. We also look at figures from HMRC’s recently published annual report for 2020-2021 to consider whether the review process represents a worthwhile option for taxpayers to consider in practice.
Taxpayer’s right to review
If a taxpayer disagrees with a decision made by HMRC (such as a notice of assessment or enquiry closure notice), in most cases a challenge may be brought by way of appeal to the FTT. Where there is a right of appeal, taxpayers will also have the right to have the decision reviewed by a different HMRC officer not previously involved in the matter. This process is sometimes referred to as a ‘statutory review’.
The review process will vary depending on the taxes involved:
- For most indirect taxes (e.g., VAT), appeals are made directly to the FTT and HMRC are obliged to offer a review when issuing their final decision letter.
- For most direct taxes (e.g., income tax, capital gains tax and corporation tax), the taxpayer must first appeal to HMRC. Once the appeal has been notified to HMRC, the taxpayer has the right to request a review. In the absence of a specific request from the taxpayer, there is no formal requirement for HMRC to offer a review but they will generally do so in practice.
In either case, if a taxpayer accepts or requests a review, HMRC must carry out the review and set out their conclusions in writing within 45 days unless a different period is agreed.
Importantly, the review process is intended as an alternative to litigation. If the taxpayer does not agree with the review conclusion letter, it will retain the right to notify its appeal to the FTT (usually within 30 days). However, once the review process is underway, the taxpayer will be barred from notifying an appeal to the FTT until it receives the review conclusion letter from HMRC (or the 45-day or other agreed review period has otherwise expired). Equally, once an appeal has been notified to the FTT, it is no longer possible to invoke the right of review.
Potential advantages
Whilst the review process is not mandatory, there are some obvious potential advantages in accepting or requesting a review:
- Timing: According to HMRC’s latest published figures, it typically takes 12 to 18 months for an appeal to be resolved in the FTT (and, in some cases, it can take much longer). In contrast, the review process is subject to strict time limits and therefore represents a potentially much faster alternative to resolving a dispute.
- Cost: If successful, a review would cut out the costs of litigation and therefore represent a potentially much cheaper alternative.
- Different personnel: Reviewing officers must have had no prior involvement with the case and will be ‘independent’ in the sense that they will form part of a different management chain to the HMRC officer that issued the original decision. Tax investigations can last several years, by which time it is common for views to have become entrenched. The review process, at least in theory, allows a different HMRC officer to take another look at the evidence and arguments with a fresh pair of eyes.
- Confidentiality: Although it is possible for appeal hearings to be heard in private and for FTT judgments to be anonymised, such cases are rare. The potential for adverse publicity will be a key consideration for taxpayers and one of the main advantages of the review process (if successful) is that it would keep matters out of the public domain.
Waste of time?
Taxpayers (and many tax advisers) may be inclined to dismiss the statutory review process as a waste of time on the basis that most reviews conclude with HMRC’s original decision being upheld. The original and reviewing HMRC officers will be bound by the same policy and practice, meaning it is generally difficult to achieve a different result unless the original decision was clearly wrong or unsound. Indeed, according to HMRC’s latest published figures, approximately 75% of reviews in 2021-2021 upheld the original decision (excluding reviews relating to automated penalties and surcharges, where only 16% of original decisions were upheld).
However, HMRC’s published figures are heavily warped by the fact that the vast majority of reviews considered (approximately 81%) involve unrepresented taxpayers. Even based on those figures, hundreds of reviews (approximately 25%) concluded with HMRC’s original decision being changed or cancelled altogether.
Comment
The merits of accepting or requesting a review will depend on the specific facts of each case, but the odds of overturning a decision on review will be considerably improved where taxpayers have sought specialist legal advice. Due to the strict time limits relating to reviews and appeals (as well as differences in the statutory process depending on the taxes involved), it is critical to seek advice as soon as any potential dispute arises.
Given the potential advantages as set out above, it is always worth considering a review before taking the leap into litigation. In most cases, there is unlikely to be a material disadvantage in doing so. As noted above, the review process is subject to strict time limits. Moreover, a well-advised taxpayer will invariably use the review process to set out their position in detail for the reviewing officer by reference to the relevant facts and legal arguments. As that exercise would be required as part of any appeal to the FTT, the review process should not represent a material added cost even if the review proves ultimately unsuccessful (and, given the strict time limit for appealing to the FTT, the review process may offer valuable additional time to fine tune the taxpayer’s case).
Even if HMRC are expected to uphold their original decision, there may still be further tactical advantages in accepting or requesting a review. For example, as part of the review process, HMRC will need to set out their own position again, which may provide further potential grounds for challenge in an appeal or help to focus the issues under dispute.
CMS Tax Disputes & Investigations
As part of the CMS global network with tax capability in over 70 offices, the CMS Tax Disputes & Investigations team is well-placed to advise on all forms of (direct and indirect) contentious tax matters. Our dedicated specialists have a wealth of experience guiding both individuals and corporates (across a wide range of sectors) through all aspects of tax dispute prevention, management and resolution.
Where a dispute cannot be resolved to the parties’ satisfaction, our team is well-placed to advise on pursuing the matter through the judicial system. At CMS, we have experience litigating a wide range of (direct and indirect) tax matters at all levels from the tax tribunals to the Supreme Court. Where applicable, we can work alongside any existing tax advisers or accountants to ensure that suitable preparations are made for litigation while discussions with HMRC continue.
For more information, please contact a member of our team or click here.
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