The number of tax disputes going to litigation in the UK has hit record levels, with the number of tax cases waiting to go to a tribunal more than doubling over the last five years. The statistics for 2014 show that there were 29.566 appeals to the first tier tribunal in the year to December 2014. More than three hundred appeals were waiting to be heard by the upper tax tribunal.

A few thousand outstanding cases relate to golf clubs claiming repayment of VAT on green fees. HMRC is arguing that the VAT should not be repaid as it would result in “unjust enrichment” of the recipient business under the VAT rules. HMRC claims that the clubs would receive the repayment at the expense of the golfers who originally paid the wrongly charged VAT.

Some cases waiting to go the Tribunal relate to the VAT missing trader intra-community (MTIC) fraud. The fraud generally involves a repayment of VAT to one party without a corresponding payment by another party. This often involves complex proceedings to demonstrate that a party received a VAT refund knowing that it arose from fraudulent transactions.

Many of the appeals concern aspects of value added tax (VAT), including claims held in the queue in connection with the legal dispute over payment of compound interest. HMRC had to concede the payment of compound interest in the Littlewoods VAT decision in the High Court which it aims to appeal to the Supreme Court. HMRC also considers that there were exceptional circumstances in that case that could not be applied to many other claimants.

The number of tax disputes going to litigation is expected to increase with the new legislation in relation to tax avoidance. The accelerated payments legislation requiring taxpayers to pay tax up front where there is a disputed tax avoidance scheme is likely to result in frequent litigation.

HMRC follows its litigation and settlement strategy when dealing with tax cases. This lays down that where they are certain of their case HMRC will take the issue to litigation if necessary, and that there will be no horse-trading of a concession here in exchange for a concession there on matters where they are sure that their interpretation of the law and the facts is correct. This results in HMRC going ahead with litigation where they consider they have a good case.

The potentially large amounts at stake in many of the cases currently under appeal could be very expensive for the UK Exchequer and the more than GBP 35 billion contingent liability booked by HMRC in its accounts is even potentially large enough to affect the UK government’s efforts to reduce the deficit. HMRC is however confident that it will be successful in most of the outstanding litigation.

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