When an appeal becomes unappealing

When an appeal becomes unappealing

Wed 02 Aug 2017

When a UK taxpayer receives an Assessment or Determination or Penalty Notice from HMRC, typically their adviser will encourage them to appeal on the grounds that “You’ve got nothing to lose by appealing”. Unfortunately, in some instances, that can be wrong, as has been recently demonstrated by the Upper Tribunal decision in the case of HMRC and C M Utilities Ltd (“CMU”) [2017] UKUT 305 (TCC).

Appeal-gavelYou see, there is a common misunderstanding that, if you decide for whatever reason that you don’t want to proceed with your appeal, you can simply decide to withdraw it. That is only partly right because, whilst you can withdraw your appeal, there is a little known and rarely used piece of legislation that allows HMRC to object to the withdrawal. And that can prove problematic when HMRC are thinking of using the appeal to increase the amount of their assessments.

The background to the CMU case is that CMU made contributions between 2007 and 2010 to certain trusts, either to an employee benefit trust (“EBT”) or to business benefit trusts (“BBTs”). HMRC issued Regulation 80 Determinations and Section 8 Decisions (the “Assessments”) on CMU to effectively charge these payments to PAYE because it considered that the contributions made constituted earnings on which income tax and national insurance contributions (“NICs”) were due. CMU appealed against this decision at the First Tier Tax Tribunal (the “FTT”).

Subsequent to CMU’s decision to appeal, HMRC filed their statement of case in January 2015 stating that in the light of further information it had received, HMRC considered that the amounts in the Assessments were actually too low and should be increased. A point to note is that, in determining any appeal, the Tribunals have the power to uphold or vary any assessment as they see fit – and if the Tribunal concludes that an assessment is too low, they can increase it.

Four days before the listed date for the substantive hearing of the appeal before the FTT, CMU informed HMRC and the FTT that it wished to withdraw from the appeals because it was in “no position to defend itself” – although, presumably, they recognised the danger of the assessments being increased. The FTT wrote to HMRC informing it that the appeal had “failed” and stating that the Tribunal considered that it could not increase the Assessments following CMU’s withdrawal.

HMRC decided to appeal this decision to the Upper Tribunal and, in their arguments, HMRC pointed to Section 54(4) TMA 1970 which says:

“(4) Where—

(a) a person who has given a notice of appeal notifies the inspector or other proper officer of the Crown, whether orally or in writing, that he desires not to proceed with the appeal; and

(b) thirty days have elapsed since the giving of the notification without the inspector or other proper officer giving to the appellant notice in writing indicating that he is unwilling that the appeal should be treated as withdrawn,

the preceding provisions of this section shall have effect as if, at the date of the appellant’s notification, the appellant and the inspector or  other proper officer had come to an agreement, orally or in writing, as the case may be, that the assessment or decision under appeal should be upheld without variation.”

In essence, HMRC wanted to ensure that the appeal hearing went ahead so that the assessments could be increased to charge the additional amounts that they now thought were due.

The Upper Tribunal agreed with HMRC and decided that the FTT had erred in law. It explained that “in a case where HMRC give notice of objection to the appeal being treated as withdrawn, and puts the case for an increase, the FTT retains its jurisdiction, and it continues to have a duty, to increase the assessment or determination in accordance with s 50(7) … to the extent that it decides that the appellant has been undercharged by the original assessment or determination.”

In other words, HMRC can object to a request to have an appeal withdrawn and in such cases, the FTT has authority, and indeed a duty, to increase any Assessments if there is sufficient evidence to support such a claim.

In practice, the circumstances in which HMRC will invoke this power will be rare. This is because typically their estimated assessments, determinations or penalty notices will be pitched to be sufficient or even more than adequate to charge the amounts that are due and, if exceptionally HMRC realises that the charges aren’t high enough, that normally means that they will have ‘discovered’ something new – and that discovery puts HMRC in a position to make a further estimated assessment. It’s only when the assessing time limits prevent the making of a discovery assessment that they would need to object to the withdrawal of an appeal. The case demonstrates however that the point remains that HMRC have legislative authority to reject a withdrawal of an appeal by a taxpayer.

In the circumstances, whilst the default mode for many advisers might be to recommend that the taxpayer appeals against everything that HMRC sends out, there are clearly situations where it might be better to stop and consider before automatically hitting the ‘Appeal’ button. If it is possible that the assessment, determination or penalty might actually be on the low side, the taxpayer needs to also recognise that there are some situations where an appeal might ultimately do more harm than good.

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