ADR is the involvement of a third party (a facilitator) to help resolve disputes between HMRC and taxpayers. It is mainly used by SMEs and individuals for VAT purposes. Its aim is to reduce costs for both parties (the taxpayer and HMRC) when disputes occur and to reduce the number of cases that reach statutory review and/or Tribunal.
Practically, a typical process is; HMRC officials and the facilitator meet with the taxpayer and adviser in a room, and agree on what the disputes are. They then retire to two separate, private rooms, and the facilitator goes between the two parties and mediates on a resolution.
ADR is a free service from HMRC and the only costs the taxpayer will incur are fees from their advisers on preparation and any representation they require on the day.
Taking a case to Tribunal is often an expensive, complicated and time consuming option, but until recently, it has been the only option open to a taxpayer to challenge a decision made to HMRC. From personal experience, the number of cases from which HMRC withdraw “on the steps of the court” illustrate a weakness in their legal procedures and possibly a lack of confidence in presenting their cases. This is very frustrating for our clients as they have already incurred costs and invested time when HMRC could have pulled out a lot earlier. Of course, our clients cannot apply for costs. The sheer number of cases going through the Tribunal process means that there are often very long and frustrating delays getting an appeal heard.
Therefore, should we welcome ADR as a watered down version of a Tribunal hearing? Or is it actually something else entirely?
HMRC say that “ADR provides an excellent opportunity for Local Compliance to handle disputes in a modern and collaborative way. It is not intended to replace statutory internal review which is an already established process aimed at resolving disputes without a tribunal hearing. Review looks at legal challenges to decisions whereas ADR is more suitable for disputes where there might be more than one tenable legal outcome”.
After a two-year pilot which shaped the final programme, and was guided by a Working Together group that included CIOT, AAT, ICAEW and legal representatives HMRC concluded that “ADR has shown that many disputes, where an impasse has been reached, can be resolved quickly without having to go to tribunal.” And “ADR is a fair and even-handed way of resolving tax disputes between HMRC and its customers and helps save time and costs for everyone.” Ignoring the dreadful use of the word “customers”… what has the profession made of the scheme?
Hui Ling McCarthy – Barrister has reported “HMRC’s ADR pilot studies have produced extremely encouraging and positive results – owing in large part to HMRC’s willingness to engage with taxpayers, advisers and the professional bodies and vice versa. Taxpayers involved in a dispute with HMRC would be well-advised to take advantage of ADR wherever appropriate”.
So what was the outcome of the two year scheme? The headline is that 58% of cases were successfully resolved, 8% were partially resolved and 34% were unresolved.
Of the fully resolved facilitations –
- 33% were resolved by educating the taxpayer/agent about the correct tax position.
- 24% were resolved due to the facilitator obtaining further evidence.
- 23% were resolved by educating the HMRC decision maker about the correct tax position.
- 20% were resolved through facilitators restoring communication between both parties.
These figures are encouraging and the conclusion that; well planned, constructive meetings, with the intervention of an HMRC facilitator, do increase the chances of dispute resolution – appear to be well founded.
Further, the fact that the project team saw no evidence of any demand from HMRC, taxpayers or their agents for access to external mediators and that there is also conclusive evidence from taxpayers that HMRC facilitators have acted in a fair and even-handed manner add to the feeling that ADR is a useful new tool.
Features of ADR:
- Without prejudice discussions – “anything said or documents produced during the ADR process cannot be used in future proceedings without the express consent of both parties subject to the obligations placed on the parties by the operation of English law”
- Appropriate place for ADR in the lifecycle of a compliance check – Evidence is that ADR can work for both VAT and Direct Taxes disputes both before and after an appealable decision or assessment has been made. However, ADR for VAT disputes is more suited to post appealable decision and assessments.
- Memorandum of Understanding (MOU) and a Code of Conduct – a MOU is created to commit customers/agents to the requirements of the ADR process. The project team are exploring the introduction of a Code of Conduct for HMRC staff.
- Elapsed time – The average elapsed time for all closed ADR cases is 61 days. This figure is from application to resolution or the papers being returned to either the caseworker or the review team. The average elapsed time for VAT it is 53 days.
- The average age of VAT disputes entering the project was 8 months.
- At the time of writing there have been 334 applications in both stages. Excluding applications currently in process, the ADR Panel has rejected fewer than 30% of applications.
- ADR Panel – An ADR Panel has been created to accept or reject applications for ADR. This is in order to strengthen procedures and reduce dependency on the project manager. It screens all applications and not just those where ADR was thought to be inappropriate.
- Customer / Agent Questionnaire Summary – Findings from customers and agents included:
- An appreciation of the personal interaction that the ADR process allowed.
- Facilitators were even handed and impartial in all cases and kept the taxpayer well informed
- ADR was particularly well suited to resolution of long standing disputes.
Conclusion of the HMRC pilot scheme:
- Project objectives have been met.
- HMRC facilitators have proven to be objective and even-handed for all types of taxpayers.
- External stakeholders strongly support the project and its roll-out to business as usual.
- Successful facilitations have ensured that the right amount of tax has been identified and secured with less delay for both parties.
- A better understanding of disputes has been gained.
- Resource savings have been identified.
The commentary from HMRC on ADR is (probably understandable) positive. However, reactions from the profession and taxpayers who have gone through the process are equally generous on ADR as a mechanism for settling disputes.
My view is that any alternative to a Tribunal hearing is welcome and even if ADR works half as well as reports conclude then it should certainly be explored. It should definitely be considered as an alternative to simply accepting a decision from HMRC with which a taxpayer disagrees.