Alternative Dispute Resolution under a new light

HM Revenue and Customs (‘HMRC’) has announced two significant changes to the availability of Alternative Dispute Resolution (‘ADR’) in resolving disputes with taxpayers, which will have a major impact on the way in which disputes could be managed going forward.

So, what does this mean for clients, tax advisors and HMRC?

Faruk Ali and Aude Delechat-Patel set out below a reminder of the mediation process through ADR and explain the new changes implemented.

What is ADR?

Tax advisors and readers alike will agree that it is easier than you would imagine finding yourself in a dispute with HMRC. An initial ‘routine enquiry’ can quickly escalate into an unnecessary standoff with costly delays, and no clear roadmap to a resolution. Historically, this has led to an unprecedented number of cases being registered for litigation. It has been  generally acknowledged that not all cases required litigation and it should have been possible to reach a mutual satisfactory agreement if the discussions had been more constructive.

Accordingly, ADR was introduced by HMRC as a means of addressing this in 2014. It is important to note that this was in conjunction with the Litigation Settlement Strategy (‘LSS’) - which sets the principles on how HMRC handles all tax disputes subject to civil law procedures.

How does it work?

Under ADR, the parties agree to introduce a third party - an independent trained HMRC mediator - to facilitate an agreement over the matters in dispute. The mediator will have no prior knowledge of the dispute, act independently, and will work with both sides to seek a fair and without prejudice outcome for both parties, helping to reduce their costs and avoid a Tribunal.

The ADR approach was widely welcomed by the tax profession. However, it was recognised that HMRC often opted to reject ADR requests after cases had been submitted to the First Tier Tribunal (‘FTT’) and / or where HMRC had provided their statement on the case. HMRC’s limited guidance on the matter suggested that such cases would only be considered under ‘exceptional circumstances.’

Regrettably, it seemed counter-intuitive by HMRC to treat such circumstances as a barrier to ADR when such a situation should represent an opportunity for each party to explain their position in the hope to reach a settlement.

This move alone was described by many as a backward step in resolving dispute through effective mediation.

So, what has changed?

On 15 June 2020, the FTT published a practice statement concerning appeals against HMRC decisions where the parties wish to engage in ADR after an appeal has been made to the Tribunal. The practice statement can be found here .

It was pleasing to see that the FTT confirmed that ADR applications can now be made at any stage of the process up to the date of the Tribunal hearing. This announcement not only encourages the use of ADR, but, importantly, provides taxpayers the opportunity to resolve disputes before they reach the Tribunal regardless of whether it had been submitted to the FTT – an opportunity which, as mentioned above, was made unreasonably difficult by HMRC.

HMRC has since amended their policy to reflect the update discussed, which now falls in line with the primary objective of the ADR process.

ADR and Covid-19

In the current climate, it would be remiss not to mention the impact of Covid-19 – particularly concerning ADR.

Prior to the pandemic, HMRC offered routine face to face meetings in almost all ADR cases. However, due to the uncertainty brought by lockdown and social distancing, HMRC has stated that as a result, changes will be made to the mediation process, in the short term and in the long run. A fundamental change in this respect concerns face to face meetings – the importance of which, and its direct link to potential success of the ADR process, should not be understated.

In Agent Update: issue 79, HMRC has confirmed that face to face meetings will no longer be offered routinely in every case, rather it will be one of the several options available to the mediator when considering how to resolve the dispute in contention.

Whilst we fully appreciate the adverse impact of Covid-19, many in the profession would agree that face to face meetings create opportunities to break down the dispute and allow all parties to work in a collaborative way to aide facilitate a successful outcome - an opportunity that is often limited under the usual paper correspondence exchange with HMRC.

In our experience, by submitting a clear and professionally prepared ADR request is often sufficient to prompt HMRC to review the case in a more collaborative way and a face to face meeting helps facilitate a more successful outcome.

How can we help?

The Mazars Tax Investigation team has considerable experience of assisting clients to reach acceptable resolutions through ADR, thereby saving the considerable costs that might be incurred if the dispute were to proceed to the Tribunal.

Our team consists of experienced tax practitioners and ex-HMRC inspectors who have represented both HMRC and clients in tax disputes. This allows us to thoroughly consider each case and provide the most appropriate advice tailored to individual circumstances.

If you would like to know more about ADR or are in dispute with HMRC and would like to discuss whether your dispute is suitable for ADR, please call us on 0207 063 4639 or 0161 238 9235 to speak to a member of our Tax Investigations team.

Further information

HMRC’s factsheet CC/FS21: Alternative Dispute Resolution

Guidance on gov.uk: Use Alternative Dispute Resolution to settle a tax dispute

HMRC Compliance Handbook  CH280400

HMRC Agent Update: Issue 79