A Consultation on Tax Management: Analysis of Responses

7. RESOLVING TAX DISPUTES

Background

7.1 Tax disputes arise when a tax authority and a taxpayer have differing views on how much tax should be paid, when it should be paid and/or whether the taxpayer should be liable to pay a penalty and/or interest and potentially also with who Revenue Scotland has reached its decision.

7.2 It is proposed that the management of tax disputes should be based on:

• avoiding disputes
• early resolution; and
• applying the learning for future decisions.

Avoiding disputes

7.3 To help avoid tax disputes, Revenue Scotland must ensure that the process of tax collection is efficient, effective and as clear to the taxpayer as possible. The focus must be on "getting it right first time" with accurate calculations and quick, consistent and high-quality decisions at every stage.

7.4 It is intended that Revenue Scotland publishes accessible, plain-English guidance about the way the tax rules work and its processes and methodology; it should also make direct references to the letter of the law.

7.5 It is also intended that where Revenue Scotland disputes the view of the taxpayer that it should set out clearly in correspondence its reasons for doing so. This will help the taxpayer to understand the position of Revenue Scotland and inform his/her subsequent approach.

7.6 The consultation asked:

Question 24: What are your views on the proposals for avoiding disputes? What else could Revenue Scotland do to avoid disputes arising in the first place?

7.7 Twenty one respondents (75% of all respondents) addressed this question (see Table 25).

Table 25: Respondents to Question 24

Category	No.	%
Tax accountants and professional tax bodies	9	43
Public bodies	3	14
Legal professional bodies	3	14
Local authority bodies	3	14
Business	3	14
Total	21	100

NB Percentages may not total 100% exactly due to rounding.

7.8 The proposals for avoiding disputes were considered to be broadly appropriate. However, a recurring theme was that ultimately, clear, well drafted tax legislation will be the main factor in setting the context for avoiding disputes. Other influential factors were seen as transparency and openness in decision-making.

7.9 The proposed focus on "getting it right first time" received much support. Respondents identified pre-requisites to achieving this focus:

• training of Revenue Scotland staff to ensure they have a high level of tax knowledge and understanding (Tax, Tax, Leg, Bus)
• mechanisms for audit and quality review of Revenue Scotland's performance (Tax, Bus)
• tighter control and accountability of Revenue Scotland's officers in the management of enquiries (Bus)
• frontline staff empowered with the authority to resolve problems quickly (PB)
• accessible communication channels with queries answered within a prompt timeframe (Tax).

7.10 Four respondents (Tax, Tax, Tax, Leg) highlighted specifically their support for the proposal to publish accessible, plain-English guidance. One respondent (PB) considered that the use of plain English in communication helps the taxpayer to feel that they have been listened to.

7.11 Two respondents (LA, Tax) called for the production of memorandum explaining tax changes as a way of contributing towards avoiding disputes.

7.12 When a taxpayer consults Revenue Scotland, it was recommended that a clear, written record of the advice given should be sent by Revenue Scotland, preferably by email, to avoid any future misunderstanding (Tax). One respondent (Tax) considered that dedicated case managers should be allocated for face-to-face meetings (Tax).

7.13 In addition to the proposed approaches to avoiding disputes, set out in the consultation document (7.3 - 7.5 above), three respondents (Tax, LA, PB) recommended a culture of consumer focus and trust between Revenue Scotland and taxpayers as a way to avoid disputes in the first place. One provided their view thus:

"This (culture of consumer focus) can be established by a management who are not frightened of complaints and disputes but genuinely see them as a learning tool" (Scottish Public Services Ombudsman (SPSO)).

7.14 A further recommendation was for the nurturing of a proactive, collaborative approach to addressing disputes between Revenue Scotland and taxpayers, in which a joint solution is worked towards rather than resorting to dispute resolution mechanisms (Tax).

Internal review

7.15 It is proposed that the first stage of the process to resolve a dispute should be for the taxpayer to notify Revenue Scotland, which would then have to conduct an internal review. It is suggested that the internal review should be a mandatory step for Revenue Scotland where taxpayers wish to challenge a decision.

7.16 Such a review would be conducted by a member of Revenue Scotland staff who had no involvement in the original assessment or other matter giving rise to the dispute, and who will conduct the review on an objective and fair basis. In line with the requirement to make the tax administration process as clear as possible to taxpayers, we propose that Revenue Scotland should publish the guidance which reviewers will follow, and the time limits which will apply for requesting and conducting internal reviews. At the end of the review process, the taxpayer will receive a letter from the reviewer outlining their decision and the reasons for this.

7.17 The consultation asked:

Question 25: What are your views on the proposed arrangements for reviews and/or the appropriate duration for the period within which the review must be concluded?

7.18 Eighteen respondents (64% of all respondents) addressed this question.

Table 26: Respondents to Question 25

Category	No.	%
Tax accountants and professional tax bodies	8	44
Public bodies	3	17
Legal professional bodies	3	17
Local authority bodies	2	11
Business	2	11
Total	18	100

7.19 There was much cross-sectoral support for the proposed arrangements for reviews. Reasons given in support included:

• has the potential to minimise the time spent in dispute (Tax)
• gives the tax authority a chance to reconsider its position (Tax)
• relatively cheap for the taxpayer in terms of reducing the need to recourse to tribunals and courts (Tax, Tax)
• can filter out cases to be resolved pragmatically, thus reducing pressure on tribunal and court systems (Tax)
• mirrors the approach taken by the SPSO in handling standard complaints (PB).
• supports learning and development in the organisation (LA).

7.20 General principles were suggested:

• the reviewer should be independent of the original assessment (Tax, Tax)
• the review arrangements should be proportionate to the amount under dispute (LA)
• the reviewer should be of sufficient seniority (Tax)
• Revenue Scotland should follow the approach of HMRC who have set up an internal review system (Tax)
• publishing statistics on the proportion of disputes resolved in this way will be helpful in promoting faith in the system (Tax).

7.21 It was considered important to one respondent (Tax) that the letter from the reviewer to the taxpayer at the end of the review should provide a detailed explanation of the outcome, rather than be "formulaic" in content. Another respondent (Bus) recommended that the letter should indicate alternative sources of action open if the taxpayer disagrees with the review decision. One view (Bus) was that anonymised outcomes should be published.

Views on time periods for the review to be concluded

7.22 It was generally agreed that some flexibility will be required in setting timeframes for the conclusion of reviews in order to accommodate complex cases, or cases where more information comes to light. One suggestion was that a target time period could be agreed between the two parties on a case by case basis rather than setting a standard period (Tax). Another respondent urged that the time period should be as short as possible, as their experience of HMRC has been that internal reviews rarely result in a different decision to the original being reached (Leg).

7.23 Various time periods were suggested by others ranging from:

• 14 days where this does not compromise thoroughness (1 mention)
• 20 days (1 mention)
• 4 weeks (1 mention)
• 30 days (1 mention)
• 45 days (3 mentions)
• six weeks to three months (1 mention)
• three months or as otherwise agreed (1 mention)

7.24 Two respondents (Tax, PB) recommended that where it is predicted that the time limit is going to be breached, then the taxpayer should be kept fully informed.

Views on whether the review should be mandatory

7.25 A common view was that although Revenue Scotland should be required to conduct an internal review if requested by the taxpayer, the latter should not have to follow this route if they feel their case justifies progression straight to a higher rung in the dispute resolution ladder. One respondent (Tax) suggested that even if an internal review has commenced, a taxpayer should retain the option to request their case be moved onto the next stage, if they are dissatisfied with progress.

7.26 One respondent (Leg) advocated making it mandatory for a reviewer to offer to have a meeting with the taxpayer face-to-face.

Other relevant comments

7.27 A suggestion was made (Tax) for the establishment of a quasi-judicial review team sitting outside Revenue Scotland, a precedent being the Department of Work and Pension's previous Internal Review Service set up to review decisions in relation to the Social Fund.

7.28 Guidelines on the circumstances in which a review can be instigated were recommended (Tax) in order to avoid triggering by low level, simple, technical arguments.

7.29 One respondent (Tax) expressed concern over the resource implications of the proposals for Revenue Scotland, as a small organisation.

Mediation

7.30 Mediation plays a role in resolution of tax disputes in a number of jurisdictions around the world. Mediation can be much quicker, cheaper and more effective in resolving tax disputes than through more formal judicial procedures.

7.31 Mediation is a confidential process enabling parties in dispute to reach a solution which they form and agree themselves. Mediation is facilitated by a trained and objective third party and seeks to enable the disputing parties to reach an agreed position. The mediator must not impose a solution. In the context of tax, it is expected that any agreement reached would be final and underpinned by appropriate rules on settlement.

7.32 Mediation works as a voluntary process. It is proposed that Revenue Scotland should adopt mediation as its own preferred approach to resolving disputes that cannot be resolved after dialogue and internal review.

7.33 The consultation asked:

Question 26: What are your views on the proposal to encourage the voluntary use of mediation? Should we be considering any other approaches to dispute resolution?

7.34 Twenty respondents (71% of all respondents) addressed this question.

Table 27: Respondents to Question 26

Category	No.	%
Tax accountants and professional tax bodies	8	40
Public bodies	3	15
Legal professional bodies	3	15
Local authority bodies	3	15
Business	3	15
Total	20	100

7.35 Fifteen of those who provided a view expressed general support for the proposed voluntary use of mediation in dispute resolution. Where reasons were stated these included:

• mediation is a cost effective mechanism for resolving disputes (4 mentions)
• can reduce the number of cases proceeding to a tribunal (1 mention)
• mediation is efficient and fair (1 mention)
• cases can be resolved more quickly with mediation (1 mention)
• It represents a proportionate way to resolve many tax disputes (1 mention).

7.36 Several respondents qualified their support, on the condition that mediation remains a voluntary option for taxpayers.

7.37 Two respondents (Tax, Tax) considered that publishing information and statistics on mediation use will be helpful. Another (PB) suggested that the publication by Revenue Scotland of anonymised case studies, successful and unsuccessful, could boost use.

7.38 Recommendations were made by either one or two respondents for ensuring mediation works effectively:

• It should be made clear to both parties that there are no "winners" and "losers" and the outcome will not be black and white.
• The underlying principles of mediation should be made clear.
• Mediators should be independent and not in-house personnel as in the model adopted by HMRC.
• Mediators should have mediation expertise.
• Revenue Scotland should make clear in published guidance the grounds on which they may be prepared to compromise.
• Revenue Scotland should be permitted to resolve disputes by means of financial compromise.
• Confidentiality should be assured.

7.39 Some respondents expressed caution over the proposals. Three (LA, Tax, Tax) considered that mediation will not always be appropriate within the context of disputes over tax. One commented:

"...a successful conclusion to mediation can require both parties to be flexible in their approach and to work together to get a resolution which is suitable to both parties. This can be difficult to achieve in a situation where a dispute arises over tax liability, where clear rules and guidelines exist" (South Lanarkshire Council).

7.40 Two respondents (Tax, Leg) remarked that independent mediators can be expensive, and mediation can become time consuming.

7.41 One legal professional body described how precedents which could help in future disputes, cannot be readily set, due to confidentially surrounding mediation. Another respondent (Bus) recommended that care should be taken to minimise the potential for other taxpayers to perceive that there are inconsistencies in the way disputes are being resolved.

Handling appeals pending the inclusion of a tax jurisdiction in the Scottish Tribunal System

7.42 Should it not be possible for the new devolved taxes jurisdiction to be included in the newly formed Scottish Tribunals System immediately after the devolved taxes come into effect in April 2015 then transitional options will need to be considered for where appeal cases might be heard. Three options are:

a) The UK Chambers (in the First Tier and Upper Tribunal) of the UK Tribunal could be asked to take appeals against devolved taxes for the period until it is appropriate to move the jurisdiction into the Scottish Tribunal System.

b) Refer appeals against the devolved Scottish taxes to existing devolved tribunals.

c) Refer appeals against devolved taxes to the Scottish court system.

7.43 The consultation asked:

Question 27: What do you think would be the best option for dealing with appeals to a tribunal until a tax jurisdiction is established in the Scottish Tribunal System?

7.44 Eighteen respondents (64% of all respondents) addressed this question.

Table 28: Respondents to Question 27

Category	No.	%
Tax accountants and professional tax bodies	8	44
Public bodies	2	11
Legal professional bodies	3	17
Local authority bodies	2	11
Business	3	17
Total	18	100

7.45 The view of 16 of the 18 respondents who addressed the issue was in favour of option a), namely asking the UK Chambers to take appeals against devolved taxes during the transitional period. Table 29 below summarises responses:

Table 29: Preferences for options to deal with appeals to a tribunal until a tax jurisdiction is established in the Scottish Tribunal System

Option	No. of respondents
a) UK Chambers	16
b) Existing devolved tribunals	1
c) Scottish court system	1
Commentary only - no preference stated	2
Total	18*

*NB Two respondents gave two preferred options.

7.46 The reasons provided in favour of option a) were:

• uses existing experience and expertise (9 mentions)
• already established infrastructure (2 mentions)
• only a small number of cases are envisaged (2 mentions)
• lowest cost option (1 mention)
• promotes most confidence in the appeals process (1 mention)
• best option for facilitating a smooth transition (1 mention)
• minimises risks of uncertainty to best for business (1 mention).

7.47 Very few comments were made in relation to the remaining two options. Option b) was acceptable to one public body; option c) deemed workable to one tax professional who welcomed the Scottish control this would bring. However, others argued that option c) had associated issues of capacity which may result in delays in processing of court cases (Tax, LA).

7.48 Two general comments were that whatever approach is adopted, consideration should be given to capacity (LA); and that any period of uncertainty could bring unwanted impacts (Bus).

7.49 Two suggestions were made for alternative arrangements:

• Core team of Scottish judges supplemented by the existing tribunal judges and members, with a clerk to the tribunal being Scottish law trained (Tax).
• The UK Tax Tribunal System deals with all devolved tax cases as a matter of course (as only two devolved taxes are expected to be introduced in 2015) (Tax).

Meeting the costs of mediation or tribunal appeals

7.50 Whichever option is selected, there will be costs associated with appeals. There will also be costs for mediation. The consultation asked:

Question 28: How should the costs of mediation or tribunal appeals be met or shared?

7.51 Seventeen respondents (61% of all respondents) addressed this question.

Table 30: Respondents to Question 28

Category	No.	%
Tax accountants and professional tax bodies	8	47
Public bodies	2	12
Legal professional bodies	3	18
Local authority bodies	2	12
Business	2	12
Total	17	100

NB Percentages may not total 100% exactly due to rounding.

Views on meeting the costs of mediation

7.52 The most common view (9 mentions) was that each party should bear its own costs, with Revenue Scotland perhaps bearing the standing charge costs. Arguments in support of this view were:

• this is the generally accepted protocol with mediation
• it is a voluntary agreement
• otherwise the mediator's independence could be called into question
• in keeping with the collaborative nature of the mediation process.

7.53 One respondent (Tax) highlighted the possibility of an alternative arrangement being agreed as part of the mediation process. Another (PB) suggested that sharing the costs is only appropriate if independent mediators are deployed, but not if in-house staff are the mediators, in which Revenue Scotland should meet the costs.

7.54 Three respondents (Tax, Tax, Bus) emphasised that taxpayers should be informed of the likely costs of mediation before opting for this route.

7.55 One tax professional recommended that the costs of mediation to businesses should be tax deductable.

Views on meeting the costs for tribunals

7.56 There were mixed views on how the costs for tribunals should be met. One respondent (Leg) expressed concern that the consultation document states that the existing principle is "loser pays costs". Their understanding was that it is only in complex cases where "cost shifting" occurs, otherwise only cases in which one party has behaved in an unreasonable manner will costs awards be triggered.

7.57 Three respondents (LA, LA, Tax) supported the principle of "loser pays costs", one considering this an accepted principle; one respondent (Tax) disagreed stating that this could act as a deterrent to some; another (Tax) commented that this principle may be difficult to apply as some elements of the case may have been won by one party, and some by another.

7.58 Two respondents (Tax, Leg) argued for parties to bear their own tribunal costs, with Revenue Scotland also paying the standing costs. An opposing view (Tax) was that this route could deter small businesses and individuals who feel that they cannot pursue a case as they may incur considerable costs even if they win their case.

7.59 Another potential option was that if Revenue Scotland loses the case, it must bear all costs, but if the taxpayer loses, then the costs could be shared (Tax).

7.60 Four respondents (Tax, Tax, PB, Leg) advocated following the tribunal's own cost rules. However, three of these respondents (Tax, Tax, PB) understood these to be that broadly no costs will be invoked at the First Tier stage; the remaining respondent (Leg) reported these to be that each side pays their own costs, win or lose (at least in the first instance and unless there has been unreasonable behaviour in relation to the appeal by either party), with the winner of any subsequent appeal being entitled to the expenses of the further appeal.

7.61 A few respondents urged that arrangements are in place to enable those on low income to be able to use the appeals process. Ideas were that a volunteer panel of tax advisers be recruited who provide pro bono advice to those otherwise unable to afford professional help; reimbursement of out-of-pocket expenses for those on low incomes; and giving tribunals the discretion to take into account individual financial circumstances in allocating costs.

General comments

7.62 Two respondents (Tax, Tax) requested clarity on the cost policy in the context of the new powers, including defining what constitutes "costs".

7.63 A tax professional commented that if a taxpayer is impoverished by having taken their case to mediation or a tribunal, then according to the EU principle of effectiveness, the remedy has failed.

7.64 One respondent (PB) cautioned that whatever cost policy is put in place, this should not put additional financial burdens on agencies acting on behalf of Revenue Scotland.

Applying the learning for future decisions

7.65 It is considered important that Revenue Scotland ensures it learns from disputes. Whilst the details of any individual dispute may well be confidential, it is proposed that Revenue Scotland should publish in its annual report a summary statement covering at least:

• key statistics on the numbers and nature of disputes that arose during the year including the time taken to resolve them, and for those that have been resolved, whether this was following internal review, mediation or tribunal; and
• the main points of learning which Revenue Scotland has drawn from dealing with the disputes during the year and what action it intends to take as a result.

7.66 The consultation asked:

Question 29: What are your views on how Revenue Scotland could best demonstrate that it is learning from the resolution of disputes?

7.67 Nineteen respondents (68% of all respondents) addressed this question.

Table 31: Respondents to Question 29

Category	No.	%
Tax accountants and professional tax bodies	8	42
Public bodies	3	16
Legal professional bodies	4	21
Local authority bodies	2	11
Business	2	11
Total	19	100

NB Percentages may not total 100% exactly due to rounding.

7.68 The proposal that Revenue Scotland publishes in its annual report a summary statement covering key statistics and main learning points was broadly welcomed.

Specific views on the proposed inclusion of key statistics

7.69 One respondent (Tax) remarked that this action will demonstrate clearly Revenue Scotland's ongoing commitment to improving its dispute handling. It was suggested that the statement should include statistics for previous years in order to identify trends (LA). One view (Tax) was that targets could be set on the basis of statistics collected, with Revenue Scotland reporting back on the degree to which these have been achieved.

7.70 One respondent (Tax) considered that the first bulleted point (in 7.65 above) relates to Revenue Scotland's accountability, whereas the second point refers to the separate matter of organisational competence.

Specific views on the proposed inclusion of main learning points and resulting action

7.71 Two suggestions were made. One was for the publication of learning points on a quarterly rather than annual basis (Tax); the other was for Revenue Scotland to include details of action taken as a result of previous points identified (Tax).

Other proposals

7.72 Other recommendations were made by respondents for how Revenue Scotland could best demonstrate that it is learning from the resolution of disputes:

• publication of anonymised details of previous cases (possibly in manuals) and the resulting action taken (4 mentions)
• implementation of audit and performance measures which show a reduction in disputes generally (2 mentions)
• timely updating and amendment of guidance and manuals to reflect court decisions (although also ensuring historical guidance is available to allow for analysis of how thinking has evolved) (2 mentions)
• occasional newsletter articles outlining rulings and their implications (1 mention)
• staff who are clearly abreast of ruling decisions (1 mention).

Managing complaints

7.73 Complaints arise when taxpayers are unhappy with the way that Revenue Scotland or individual members of staff have behaved. As such, they are not about substantive decisions made about tax, but about how the handling and communication of these decisions has been handled.

7.74 It is proposed that the handling of complaints relating to the administration of the devolved taxes should be aligned to the established approach for the management of complaints about devolved services in Scotland. This has three key stages:

1. The best approach is to avoid complaints arising. This can be done by providing clear statements of customer service standards and providing good-quality guidance and training for staff on what is expected of them.
2. When complaints do arise, they should be raised directly with the body concerned. The body concerned should have a formal published complaints procedure which is easily available and provides for appropriate review at a senior level if the person complaining is dissatisfied with the initial response.
3. Where the complainant remains dissatisfied after going through the complaints process for the body concerned, they may then refer the complaint to the SPSO, or, in the case of complaints about criminal investigations, to the Police Complaints Commissioner for Scotland.

7.75 The consultation asked:

Question 30: What are your views on the proposed approach to the handling of complaints?

7.76 Seventeen respondents (61% of all respondents) addressed this question.

Table 32: Respondents to Question 30

Category	No.	%
Tax accountants and professional tax bodies	7	41
Public bodies	3	18
Legal professional bodies	2	12
Local authority bodies	3	18
Business	2	12
Total	17	100

NB Percentages may not total 100% exactly due to rounding.

7.77 There was broad support across sectors for the proposals, with an acknowledgment that these are in-line with the established approach for the management of complaints about devolved services in Scotland.

7.78 An emerging theme was that the complaints procedure should be visible to taxpayers and their agents, with the proposed Taxpayers' Charter one avenue for publicising the procedure. Two public bodies emphasised what they perceived to be the importance of defining clearly the difference between complaints and review. One remarked:

"We consider it particularly important that Revenue Scotland provide clear and unambiguous information for taxpayers on what matters of service performance may be subject to complaint as separate and distinct from any question of review or appeal rights" (Scottish Committee of the Administrative Justice and Tribunals Council).

The other provided their view that the public do not understand the difference between review and complaint, but do understand the route they need to take to achieve their desired outcome, therefore clear signposting from Revenue Scotland is essential:

"...in practice, these two processes will need to work together, and information from each will be helpful in improving the overall service for the public and preventing the recurrence of any problems" (SPSO).

7.79 Another key theme to emerge was to question the proposed action in cases where complaints are against organisations to which Revenue Scotland has delegated powers. Three respondents (Tax, Tax, Bus) argued that Revenue Scotland should act as the gatekeeper for such complaints. Another respondent (Tax) recommended that rather than it being "expected" that a body with delegated powers notifies Revenue Scotland of a complaint against it, this should be mandatory.

7.80 Three respondents (Tax, Tax, LA) explicitly welcomed the proposal to publish an annual summary of information on complaints handling. This was seen as aiding transparency and a basis to create goals for future complaints handling with subsequent reports demonstrating performance against these.

7.81 In relation to Revenue Scotland being overseen by SPSO, the latter documented their understanding that if Revenue Scotland becomes a NMD, then it will automatically fall within their remit, with resulting resource implications for SPSO.

7.82 One respondent (Tax) recommended the establishment of a structured complaints review process after four to five years. Another suggested it would be helpful to have feedback from complaints handling and further discussion at a forum with taxpayers' agents (Tax).