On 2 September 2013 HMRC announced that Alternative Dispute Resolution (ADR) will now form part of their regular business when dealing with Small and Medium Enterprises (SMEs) and individuals. This follows a two year pilot to test the effectiveness of the process, the main findings of which are detailed below.
The hope is that ADR will provide an opportunity to find a quick and, more importantly, a fair way of resolving tax disputes with HMRC. It is not designed to replace the statutory appeals and internal review process but rather to provide an alternative for those cases deemed suitable. The hope is that more and more cases will be settled through ADR, thus reducing the burden on the already overloaded Tribunal system. The average time elapsed for those cases forming part of the pilot was just 61 days, a significant reduction on any case with which the Tribunal has become involved.
The ADR process allows for the involvement of a trained HMRC mediator (a ‘facilitator’), an individual who has remained independent of the case, to work with both parties in attempting to resolve the issues in dispute. An application for a case to be considered for the ADR process may be made at any time although it is more appropriate once all of the facts of a case have been established and an impasse has been reached between the two parties on a particular issue or issues.
Of the cases included within the pilot, a total of 58% were fully resolved with a further 8% being partially resolved. The success rates improved throughout the duration of the pilot and this contributed to the refinement of the application process and the introduction of the ADR panel, given the task of considering the suitability of cases.
Clearly, not all cases will be suitable for ADR. The following characteristics are indicators of a case where ADR could prove beneficial:
- Disputes that may benefit from obtaining more suitable evidence
- Communications between HMRC and the SME/individual have broken down
- Facts and/or technical matters in which there is legitimate scope for either party to obtain a better understanding of the other’s arguments
- Issues which are capable of further mediation and settlement by agreement within the framework of the Litigation and Settlements Strategy (LSS)
Conversely, cases involving a disagreement regarding a point of law, a decision on which may set a precedent for other cases, are unlikely to be suitable for ADR.
An application for a case to be considered for ADR does not affect a taxpayer’s other rights and obligations and it is not necessary for an appeal to be in place prior to an application being made. In the event that the dispute cannot be resolved by way of mediation then the formal internal review process, or an appeal to the First Tier Tribunal, may be utilised instead. There are no obvious disadvantages associated with applying for a case to be managed under the ADR process and the application itself is very straightforward, taking an average of 5 to 10 minutes to complete, according to the pilot results.
Following the announcement regarding SMEs and individuals, there was a further announcement from HMRC on 9 September that the ADR process was to be opened up to large and complex cases also. A pilot involving these cases had been running in tandem with the SME pilot and the findings were similarly positive, particularly in respect of the reduced time to resolution. The average elapsed time from application to resolution for those cases settled through ADR was 24 weeks, compared with an average 70 weeks for a case taken to a Tribunal hearing. The ADR process for large and complex cases differs slightly from that for SMEs and individuals in that it may involve an external mediator, although the majority of cases in the pilot were managed by specially trained HMRC staff as facilitators. Large and complex ADR cases are managed by the HMRC Dispute Resolution Unit, a small unit which is part of the Tax Professionalism and Assurance Directorate, and its staff includes externally accredited mediators.
When dealing with enquiries, our involvement is aimed at resolving the issues before matters reach the ADR stage. However, should it be agreed that ADR may afford the opportunity to resolve the issues, we have the knowledge and experience to guide your client through the process.
Should you have an ongoing issue with HMRC that you consider might benefit from ADR, or would like to understand more about the process, please contact the TaxDesk on 0845 4900 509 and ask for Isobel Clift.