This Content Was Last Updated on February 9, 2017 by Jessica Garbett


New approach to resolving disputes between HMRC and taxpayers

HMRC and taxpayers don’t always agree on the amount of tax due, but resolving these disputes doesn’t have to involve the appeals, tribunals and court hearings which can prove so lengthy and costly for both parties.

Alternative dispute resolution (ADR) gives HMRC and customers the chance to sit down with a neutral third party to work through a case, clarify the issues and reach an outcome which satisfies both sides. 

Collaboration as key

The approach was introduced following the establishment of the Dispute Resolution Unit (DRU) in the summer of 2010. The unit had a remit to improve the handling of tax disputes across the department, and address the length of time it took to resolve them and, as part of this it was tasked with looking at how ADR could apply to tax disputes. This is in line with HMRC’s ‘litigation and settlement strategy’, which highlights the important role which collaboration should play in resolving tax disputes.

Two pilots were launched in early 2011 – one dealing with individuals and SMEs which involved around 250 cases, and the other focusing on roughly 60 large and complex cases. These pilots became part of HMRC’s day-to-day operations last year.

Both ADR schemes use a third party who hasn’t been involved in the case before, although that third party differs depending on the case involved. For large and complex cases, HMRC can call on the services of 45 facilitators who have been trained and accredited externally by the Centre for Effective Disputes Resolution organisation.

These facilitators work in various parts of the HMRC business and the DRU involves them in organising and facilitating the mediation of a dispute when necessary. The scheme for SMEs and individuals, known as SMEi, relies on 25 full-time in-house facilitators.

The ADR process

ADR facilitation usually takes place in a single day and follows a standard process. Both HMRC and the taxpayer, who will normally be accompanied by their agent / accountant, give an opening statement to each other, before going into private rooms for separate, confidential discussions with the facilitator.

The facilitator works with each party to explore what might be possible but they do not try to identify solutions. Instead, the ‘magic of mediation’ teases out possible solutions from each party. When a solution presents itself, the facilitator is able to bring the two groups together to confirm the way forward and, potentially, write up an agreement about how each will proceed. Decisions about how to resolve the dispute are made by the HMRC caseworker and the taxpayer, not by the facilitator. They must also be consistent with the law – ADR isn’t about reaching deals, it’s about agreeing a way forward.

It’s worth stressing that ADR isn’t a cure-all. Some tax charges, such as penalties and interest, are fixed, and as such can’t be negotiated, and ADR is not used in cases where there is an established HMRC policy ‘red line’. If, having thoroughly tested understanding of the relevant facts and the law, one side genuinely cannot move its position then the case may not be resolved through ADR.

The schemes for both large and complex cases and individuals and SMEs involve a system of ‘triaging’ applications to try to ensure that only disputes which have a chance (however small) of being resolved go into the schemes. Some customers see ADR as another chance to change HMRC’s mind on a ‘red line’, but those applications are likely to fail.

ADR has, however, proved particularly useful in dealing with VAT and direct tax disputes between HMRC and SMEs and individuals, while the service for large and complex cases has proved particularly effective for VAT and corporation tax.

While there is the chance that ADR won’t result in an agreement, just by getting HMRC and the taxpayer into the same room, the process can open the lines of communication and enable discussions to move forward on a more constructive basis.

The success of ADR is borne out by the figures. In the SME and individuals’ scheme, the approach has resolved 80% of the 600 cases put through the facilitation process since the pilot began. A total of 70 cases went through the large and complex scheme in the same period, with 50, or over 71%, successfully resolved. This brought in otherwise outstanding tax revenues of just under £80m. Another £71m of revenue is currently being worked on.

It’s not just about the revenue though. The amount of time and money saved on both sides by avoiding going to tribunal or court is just as big a benefit of the ADR process. On average, HMRC spends just 15 hours resolving disputes through ADR – compared to up to 250 hours if a case goes to First Tier-Tribunal.

This is particularly significant when you consider the average age of a direct tax dispute entering the SMEi pilot scheme was 23 months. There are, of course, similar benefits for the taxpayers and their agents involved.

While it may be relatively early days for ADR, the approach has already achieved huge buy-in from HMRC staff members, taxpayers and agents alike, resolving old and difficult cases quickly, at lower cost and in a way that satisfies both parties.

Find out more about ADR.

Article contributed by ACCA