Technical decision summaries

For those of you who have been unfortunate enough to have endured a long dispute with Inland Revenue (IR), you will no doubt appreciate that throughout your journey, you are essentially dealing with the same person who commenced the initial review of your client’s tax filing positions.

Added to that mix of personnel will be the investigator’s team leader, and at least at the Notice of response (NOR)/Notice of proposed adjustment (NOPA) (if not before), a member of IR’s legal team. In my experience, and no doubt you’ll have your own views based on your own experiences, once this team of IR personnel has formed their view as to your client’s correct tax filing position, it is extremely difficult to change the mindset, no matter how compelling your alternative arguments might be.

It’s then a case of deep pockets syndrome, your client having to personally fund their dispute costs (hopefully with the assistance of Accountancy Insurance to somewhat ease that burden in the first couple of rounds of the dispute), versus the IR personnel who have the benefit of using the taxpayer purse instead of their own, and consequently feel no monetary pain directly.

As advisers guiding our clients through what will often be a fairly traumatic process for them (having IR camped on their doorstep), we have to try to remove the emotions from the equation, and counsel our clients that no matter how strongly they feel that they have done nothing wrong, and that the tax position they have taken is correct, it’s basically a question of economics – how much tax is involved in the dispute versus what cost (both financially and emotionally) will it take to get the desired outcome.

I consistently preach to clients that first impressions count, so do not provide any response to IR initial review enquiries (or for that matter any questions which could trigger a review), without seeking advice upfront. I say this, because going back to my earlier comment, once the IR team has formed a view, you will essentially find yourself having two choices. Option one is that you will attempt to bring the review to a conclusion by conceding to IR’s taken position, simply because your tax cost/fight cost analysis dictates that this is the most prudence course of action for you – numerous times over the years I’ve found myself drafting a concession letter based purely on the economics of the situation, and not the correct application of the law itself. However I do try and make myself feel a little better by ensuring that I always include a statement within the letter, that we don’t actually agree with you, it’s purely a concession based on our client’s cost exposures.

The second option is that we’re in for the long haul – I advise my client that we are unlikely to see the IR personnel have a change of heart throughout the various stages of the disputes process (because unfortunately, that’s just human nature – those IR personnel involved not wanting to admit that they may have been wrong (am I being too harsh?)), but our one bright light of opportunity is their case being sent to the Adjudication Unit prior to heading off to court, where a fresh set of eyes will review the dispute at hand and rule accordingly. If the AU rules for your client, then that decision is binding on the Commissioner and the dispute ends then and there. However, if the AU rules in favour of the Commissioner, then your client can then still pursue the dispute through the hierarchy of the courts should they so wish.

Due predominantly to the economic equation, historically I have only had two cases reach the AU (and both for the same client on two different issues), where we won the first case (which gives you some hope as to the true independence of the AU) but lost the second. I’ve recently just lodged a third case, and potentially have a fourth on the way (still in the early stages but this client is prepared “to go all the way”).

Now to finally come to the point of this article post my initial rambling. Over the years we’ve all had relatively easy access to the decisions of the various courts in tax cases, however, the decisions were usually in favour of the Commissioner, which should not have been unexpected if you take the cynics’ view that the Commissioner only takes to court those cases she expects to win. My frustration in this regard, was not having any insight into those cases that did not proceed to court, mostly due to the case reaching the AU phase, with a ruling outcome against the Commissioner.

That frustration has now been somewhat quashed, however, by the powers that be who decided in early 2021, that it would actually be helpful from a taxpayer education perspective at least, for AU to publish all of its decisions (absent naturally the taxpayer’s specific identification details). These publications are referred to as Technical Decision summaries (TDS by reference), and they can be located on IR’s website here.

So a recommended read, because firstly they do provide a good analysis behind the tax position that IR took and the reasons why AU either agreed or disagreed with that position. But secondly, because AU often comments on the taxpayer’s shortcomings from an evidential perspective which can be very useful for your own learnings in terms of educating your clients around the type of records they need to maintain if they wish to take a tax position, which could at some time in the future be contested by IR.

Happy reading!???

This article from the 'A Week in Review' newsletter was originally published Monday 8th August 2022. If you have any questions or would like a second opinion on any national or international tax issues, please contact me [email protected].?

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