Now nationwide and permanent, HMRC's Alternative Dispute Resolution Service offers a simpler way of resolving tax disputes.
HMRC and taxpayers don’t always agree on the amount of tax due, but resolving disputes doesn’t have to involve lengthy and costly appeals, tribunals and court hearings.
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.
The approach was introduced following the establishment of HMRC's Dispute Resolution Unit (DRU) in 2010. Two pilots were launched in 2011 and became part of HMRC’s day-to-day operations in 2013.
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. The scheme for SMEs and individuals, known as SMEi, relies on 25 full-time, in-house facilitators.
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 or 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 does not try to identify solutions. Instead, the ‘magic of mediation’ teases out possible solutions from each party.
When a solution presents itself, the facilitator brings 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.
It’s worth stressing that ADR isn’t a cure-all. Some tax charges, such as penalties and interest, are fixed and non-negotiable, 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.
Both schemes involve a system of ‘triaging’ applications to try to ensure that only disputes that have a chance of being resolved are considered. 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 per cent of the 600 cases put through since the pilot began.
A total of 70 cases went through the large and complex scheme in the same period, with 50, or more than 71 per cent, successfully resolved.
This brought in otherwise outstanding tax revenues of just under £80m.
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 with 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.
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 by visiting the 'Related links' section on this page.