Don't be fooled. HMRC are NOT going soft...

The FT has published an article headlined: Tax officials to soften stance on avoidance. This is being picked up and widely misinterpreted in my opinion.

AccountingWeb asks: Is Dave Hartnett going soft? Elsewhere the FT's headline has been bastardised as: HMRC goes soft on tax avoidance and: Revenue 'to go softer' on tax avoiders. In the latter case at least the difference between avoidance and evasion is not made clear. The implication given is that tax evaders and avoiders will have an easier ride in future. This is misleading to say the least.

The author of the FT piece is the highly regarded Vanessa Houlder (although I suspect the headline was picked by a sub-editor). Let's see what's really going on.

I'll start by picking out a couple of key quotes from the article:

The Revenue’s fresh approach is primarily focused on business rather than wealthy individuals.

Mr Hartnett said: “If it is a strong case, we will fight to the death.”

Now let's go back to the opening paragraphs:

Revenue & Customs will adopt a less combative approach to resolving tax disputes with businesses in a move designed to cut a mounting legal logjam and unlock billions of pounds tied up in court battles over avoidance.

Dave Hartnett, permanent secretary for tax at HMRC, said there had been examples of officials being too “tough” in disputes over tax assessments. “HMRC is packed full of very intelligent people, but we are sometimes too black-and-white about the law,” he told the Financial Times.

I know Dave. The prospect of him going 'soft' on 'abusive' tax avoidance, whether undertaken by individuals or businesses is as likely as Gordon Brown being invited to join the coalition government.

Bottom line. This is all about a welcome change in the way HMRC approach tax disputes with large corporates. The central themes of the Litigation and Settlement Strategy (LSS), launched in 2007 are:

• Seek non-confrontational solutions where possible.
• Focus on issues that will best serve HMRC’s goal of tax gap reduction.
• Choose cases for their wider impact, as well as for their own value.
• Where we have a strong case we should seek full value from settlement, or take the matter to litigation.
• Do not pursue weak arguments.

The LSS was introduced in line with the Varney Review (Links with Large Business) principles which commit HMRC ‘to fewer enquiries, focused on material items and concluded more quickly’.

Not surprisingly HMRC are under pressure to reduce costs. They want to reduce the resources they tie up in long-lasting disputes and the number of cases they lose. In the real world of course even if HMRC are advised that they have a more than 50% chance of winning, it's likely that the taxpayer has been told the opposite (ie: that HMRC have a less than 50% chance of winning). Either side could still lose.

No doubt HMRC also want to speed up the collection of funds due to them from settlements. As the FT reports:

The recent £1.25bn settlement of the five-year dispute with Vodafone was an early indication of the policy change.

All of which points to a more commercial (as distinct from a 'softer') approach. Certain elements of the LSS may well be changing and that may be perceived as good news for companies in dispute with HMRC. Everyone's legal costs may fall as a result. There may also be a return to more 'horse trading'.

Overall though this only really affects companies involved in large scale disputes with HMRC. It should lead to faster resolution of disputes on realistic terms and less risk of having to go to court to prove your case.

As the FT report, HMRC are 'softening' their approach. They are not going soft. Only very naive or mischeivious advisers and commentators would suggest that this change in approach means HMRC walking away and letting more companies get away with 'abusive' tax avoidance activities. And as I highlighted above, "The Revenue’s fresh approach is primarily focused on business rather than wealthy individuals."