Many importers have found that being in dispute with HMRC can be a costly business. Where margins are tight and room for manoeuvre limited, the unexpected tax bill can make a business venture uneconomic. Where there is a risk of dispute, it is always best to address the issue as early as possible. At FPM, we have an experienced dispute resolution team who have a strong track record of reaching favourable outcomes for our clients.
A much sought after service line offered by our AAB Customs team is the review of a business’s historical customs’ declarations. Whilst this is primarily to assess whether a business has been compliant with all aspects of customs duty law, it is also to identify opportunities to recover customs duty that may have been paid incorrectly in the past.
Where we do identify an opportunity, we seek HMRC’s cooperation at the outset. By inviting HMRC to the table, we can outline the legal basis for a potential reclaim and seek their agreement to take the matter forward.
The reclaim may relate to the improper tariff classification of a product, a higher valuation of the goods than was legally necessary or may result from the importer not exploiting the plethora of free trade agreements that exist between the UK and its overseas trading partners.
There are occasions however where HMRC do not agree with our assessment of a given situation and will reject a claim for repayment. For example, we may interpret the classification legislation to mean that an incorrect tariff code has been used at import and their view may be that the code was correct. The team recently challenged HMRC over the classification of plant pots imported by one of its clients. HMRC determined that these were ornamental and as a consequence applied a duty rate of 6%. We countered that the pots had a practical function and were designed for the growth and wellbeing of plants. This classification attracted duty at 0%. This disagreement brought us into conflict with HMRC.
Traditional routes to resolution
By way of resolution, the next stage would be to apply to HMRC for a decision. In the above example, this could be a classification ruling, otherwise called an Advanced Tariff Ruling (ATR). ATRs are issued by the Tariff Classification Service (TCS) of HMRC and legally determine the classification of the goods. TCS is the policy division in charge of tariff classification policy for the UK.
The purpose of applying for a decision is to commence a legal process with HMRC which has the potential to reach the highest court in the land (Supreme Court). To that extent, it is the mechanism which, if necessary, allows decisions to be taken out of HMRC’s hands and determined by the courts.
It should be noted that whilst the AAB Customs team strive to avoid expensive litigation, there have been cases where we have pursued HMRC beyond the territory of the UK and resolved matters in our client’s favour at the European Courts of Justice (ECJ). However, following the UK’s departure from the UK, the ECJ is no longer available to us.
Much of course will depend on the nature of the disagreement, the amount of money involved and the client’s appetite for justice. The disagreement is not always instigated by the business. It could be an assessment issued by HMRC to a business concerning the underpayment of customs duty. In this case, HMRC will issue a Right To Be Heard (RTBH) letter along with the assessment which is considered an ‘appealable decision’.
The appeal process involves a number of phases each of which impose deadlines on the parties to the dispute. The first stage is that HMRC will offer the Appellant 30 days to appeal the decision. This is called a Formal Departmental Review (FDR) and is undertaken by an Officer of HMRC who was not involved with the original decision. The Officer conducting the FDR has 45 days to familiarise themselves with the case and deliver their verdict. They can either agree with the Appellant or uphold the original decision.
In our experience, FDR is rarely successful. This is particularly the case where the decision has been issued by a policy division such as TCS (see above). An Officer in the outfield would ordinarily seek recourse to the policy division where there were any areas of legal ambiguity. It follows, therefore, that the FDR Officer is unlikely to disagree with the original decision maker who would be considered the HMRC expert.
This is not necessarily the case where an Officer has issued an assessment to a business where they have not sought the advice of the policy division, or even their superiors. In this case, an FDR is more likely to be successful.
Where it is not possible to resolve the matter at FDR, the next stage is First Tier Tribunal (FTT). This requires that the business make a formal application (within 30 days of the FDR decision) to the Tax Tribunal service. Here the Appellant must outline the areas of dispute, the legal basis for their position and provide all copy correspondence.
Beyond an acknowledgement, the FTT can take some time to respond with Directions to the parties. The Directions will require that the parties provide available dates and will instruct the Respondent (HMRC) to outline their case to the Appellant. This is often termed a Statement of Case. The process is both time consuming and frustrating. A reluctant Respondent can delay the hearing and seek to obfuscate the issues in dispute.
Alternative dispute resolution
UK Government has recognised that a vast amount of taxpayer’s money is subsumed within the Tribunal system and whilst the majority of this expenditure is associated with immigration, housing and benefits, they are keen to reign back costs in the taxation area also. For this reason, HMRC has introduced Alternative Dispute Resolution (ADR)
ADR is an excellent initiative which allows both parties to attend a meeting (now almost always virtual) and thrash out the areas of dispute. The major advantage is that the result cannot find its way into the public domain. This means that HMRC are less ‘nervous’ about agreeing to a decision that could set a legally binding precedent. The ADR is less formal than tribunal and is managed by a facilitator that has no connection with the case. In our experience, the facilitators have always been fair and impartial.
The Appellant (or their representative) is given the opportunity to verbally outline the case along with the matters in dispute. The Respondent gets the opportunity to reply and there then follows a series of exchanges which are largely concerned with procedures and matters of law. There are virtual break-out rooms that can be used by the parties to discuss matters in privacy and the facilitator encourages the parties to return to the table in an attempt to reach consensus. Legal representation is also permitted.
AAB Customs recently resolved a matter at ADR for an importer who had failed to provide the correct preference statement on their supplier’s invoices at import. HMRC had issued an assessment, but conceded at ADR that the goods were manufactured in a country with which the UK has a trade agreement and there was therefore no loss to the exchequer. This may not have been possible at Tax Tribunal due to a precedent being set.
It should be noted that you cannot apply for ADR without making an application to tribunal. That said, you can apply for tribunal in order the secure the ADR and can always vacate the tribunal if the business believes that having listened to the points raised by HMRC at ADR, that the case is unlikely to succeed.
How FPM can help
Whilst the AAB Customs team has considerable experience of Tax Tribunal, High Court (Upper Tribunal) and Supreme Court processes, we would always encourage businesses to seek to resolve matters through effective dialogue and reasoned negotiation. It is also a lot cheaper!
With the right support and advice, it is possible to achieve a favourable outcome in disputes with HMRC. If you would like to find out more about AAB Customs’ dispute resolution services, please contact a member of Cross Border Team or your usual FPM contact.