4.40 Tax Collection

Primary Reference to Article 29 – Enforcement and Collection of Tax, Interest and Penalties

The review of the practices of the jurisdictions contained in the survey discloses a range of approaches in relation to tax collection. The areas in which difference arises include the extent to which, if at all, taxation debts are given priority to other debts in insolvency, the liability to make payment when the tax assessment is disputed, and the attitude of tax authorities to collection during any dispute.

It is important to make a distinction between monies owed because the taxpayer has withheld amounts on account of tax from third parties, and monies owed on account of the taxpayer's own liability to tax. As noted in the discussion on Penalties, in the former case the taxpayer is essentially engaged in misappropriation of monies withheld on account of tax, and collection practices may properly reflect that fact. Where, however, there is a genuine dispute, legitimate questions arise as to the method of enforcement of debts.

Again, two categories of tax debts can be identified. The former comprises cases where there is a significant risk that tax assessed may not be collected due to taxpayer misconduct – for example, removal of assets from the jurisdiction.

In normal circumstances, notification of a tax debt should bring with it a short, but reasonable, time in which to make payment. If an assessment is considered, on reasonable grounds, likely to give rise to an attempt to frustrate the liability by removal of assets, a situation in which an assessment can require payment at an earlier time is justified.

This reflects the position at general law, where courts have the power to prevent the removal of assets from the jurisdiction to frustrate any judgment which the court might make, typically known as Freezing Orders or, more commonly, Mareva injunctions.

The area of greatest divergence in practice arises in relation to the collection of monies where tax debts are genuinely in dispute.

There is a real risk, if the fact of the dispute is not taken into account in some way, that very real injustice could occur. At its most extreme, the tax authority might issue an assessment, proceed to judgment, enforce the judgment through bankruptcy or corporate winding up processes, and, using control of the bankruptcy or corporate winding up process, terminate the taxpayer's appeal against the assessment.

At a less extreme level, the issue of an assessment, if it requires immediate payment, may produce the result that a company is regarded as insolvent because, having regard to the tax debt and its other debts, it is unable to pay its debts as they fall due. This may have corporate law consequences such as a requirement to cease carrying on business. Particularly where multiple assessments in respect of the same amount of income are involved (which can occur in step transactions) the injustice is self-evident.

Best practice requires that the competing interests of the tax authority and taxpayer are appropriately taken into account. It needs to be recalled that most jurisdictions have a regime whereby underpaid tax attracts a liability to interest, which may be higher than commercial rates, non-deductible, or both. Provided the tax authority is not at risk, this state of affairs should provide sufficient incentive to taxpayers to comply with their responsibilities.

Best practice and the interests of justice require that payment of disputed tax liabilities should be deferred until after final resolution of the underlying tax dispute. Payment should not be required until a definitive determination of the taxpayer's liability is concluded, which would be after the internal review or after a decision of a court or tribunal.

It may be argued that this gives to taxpayers an incentive to behave irresponsibly.  But the Courts have, as in most matters of general civil jurisdiction, the right to dismiss unmeritorious cases summarily, and there is no reason, in principle, why that should not be exercised in relation to unmeritorious tax appeals, and with costs.

The Model Taxpayer Charter considers the rights of a taxpayer not to pay tax validly in dispute as being of high importance for the reasons set out above.