Resolving a tax dispute with HMRC can be a time-consuming process for a business. Alternative Dispute Resolution (ADR) refers to ways of resolving the dispute without the need to go to court.
Common forms of ADR are:
- mediation: where an independent third party helps the disputing parties to come to a mutually acceptable outcome
- arbitration: where an independent third party considers the facts and takes a decision that’s often binding on one or both parties.
Mediation as part of ADR was introduced by HMRC as a pilot in 2011 with a full launch in 2013. ADR’s aim is to reach an agreement on the day by facilitating a process of negotiating a dispute, while ensuring that the taxpayer and HMRC remain the decision-makers throughout.
Scope of ADR
ADR is usually used when a tax dispute has reached an impasse. The main reasons being:
- the parties have not established or fully understood the relevant facts
- one or both parties have made assumptions about particular facts
- there are differences between the parties about how the law applies to the relevant facts
- the parties have not discussed or fully understood their respective positions.
According to HMRC guidance, ‘ADR can be useful if:
- you and HMRC have different views on exactly what’s happened - the facts
- communication between you and HMRC has broken down
- you need to know why HMRC hasn’t agreed evidence that you’ve given it and why it wants to use other evidence
- HMRC needs to explain why it needs more information from you
- you’re not clear what information HMRC has used and think it may have made wrong assumptions.
ADR isn’t right for disputes about:
- requests for time to pay or similar issues
- fixed penalties on the grounds of reasonable excuse
- tax credits
- PAYE coding
- HMRC delays in using information
- cases that HMRC’s criminal investigators are dealing with
- default surcharges.’
Expertise, independence and impartiality
The mediator should ensure that he/she:
- possesses a general understanding of the law and the necessary knowledge and skills relating to the out-of-court or judicial resolution, to be able to carry out his/her functions competently
- discharges his/her duties in a way that is unbiased as regards to both parties of a dispute
- maintains impartiality by ensuring that his/her remuneration is not linked to the outcome of the alternative dispute resolution procedure.
The mediator should use his/her specialist mediation techniques to facilitate the parties’ discussions as a neutral third party, ensuring that:
- they are satisfied that the parties to the mediation and their advisers understand the characteristics of the mediation process, their roles as parties and advisers, and the role of a mediator
- before the mediation begins, the parties have understood and agreed the terms and conditions which will govern the mediation, including those relating to obligations of confidentiality on the mediator and the parties
- they conduct the process with fairness to all parties and take particular care to ensure that all parties have adequate opportunities to be heard, to be involved in the process, and to seek and obtain legal or other counsel before finalising any resolution
- they take reasonable steps to prevent any misconduct that might invalidate an agreement reached at mediation or create or aggravate a hostile environment
- they are satisfied that the parties have reached agreement of their own choice and knowingly consented to any resolution
- any agreement between the two parties is properly documented at the end of the meeting and that the ADR agreement correctly and fully captures what was decided on the day. The document forms a binding contract (subject, where relevant, to HMRC governance and in accordance with contract law) between both parties.
ADR agreement and HMRC code of governance
Taxpayers with a large or complex dispute must be aware that the agreement reached in principle at ADR could require review and approval by the Tax Dispute Resolution Board (TDRB) or another HMRC governance board before becoming binding. The upward referral depends on the size of the particular tax risk, as well as the overall tax at stake. In addition, if the matter has far-reaching implications or includes unusual or novel features then a ruling from a DRB is necessary before any agreement is formally accepted by HMRC.
For further information view the ADR application form and guidance on how to appeal against a tax decision.