From September 2013, HMRC has made available a form of alternative dispute resolution (ADR) to small and medium enterprises and individuals as a means of resolving tax disputes.
Disputes are usually settled either by agreement or through litigation. Alternative dispute resolution provides additional mechanisms (eg facilitated discussion, mediation, arbitration) that can be used to settle disputes without recourse to litigation. HMRC has been looking at ways to use such processes (mainly forms of mediation or facilitation) in the context of tax disputes.
Individuals and SMEs can now apply to HMRC to use a facilitation-based form of ADR in connection with outstanding tax disputes. This involves the appointment of a trained HMRC facilitator who will work with the taxpayer and the HMRC case owner in order to try to broker an acceptable agreement. The process is intended to be relatively informal and there is no guarantee that it will achieve any particular outcome. However, the main advantage are the potential cost and time savings for both parties.
However, as tax partner and CEDR Accredited Mediator Nigel Popplewell comments, 'The circumstances in which HMRC are prepared to adopt ADR are quite limited. ADR will only have a significant impact if there is some sanction for failure to engage or the FTT has power to order ADR as part of its case management powers. But it is a small step in the right direction.'
Key points
- The ADR process operated by HMRC for SMEs and individuals (and also taxpayers whose affairs are covered by the Public Bodies business units) is designed to cover direct taxes and VAT.
- Eligible taxpayers can apply to HMRC to have their dispute considered for ADR. HMRC will usually respond within 30 days. HMRC do not consider that all cases will be suitable for the ADR process.
- If the dispute is accepted for ADR, an HMRC person with no prior involvement in the dispute will be appointed to act as a facilitator between the taxpayer and the HMRC case owner. The facilitator is not a decision maker and cannot impose his or her views on either party.
- There is no guarantee that the dispute will be resolved by ADR. Importantly, the process does not affect the taxpayer's existing rights of appeal and a taxpayer can withdraw from the process at any time.
When can ADR be used?
Taxpayers will have to sign up to a 'memorandum of understanding' in order to show that they are genuinely committed to using the ADR process for the purposes of saving time and costs.
HMRC will only accept cases if they are considered to be suitable for ADR. Such cases are likely to be those which may benefit from further clarification or evidence as to the facts or from greater understanding as to the other side's technical position. A further requirement is that the case is eligible to be settled by agreement within the framework of HMRC's litigation and settlement strategy.
HMRC will not accept cases for ADR if they involve issues requiring clarification in the wider public interest or which are linked to other appeals. ADR will also not be available if the Tribunal appeals process is too far advanced.
Comment
One of the potential advantages of ADR is that it may reduce cost, particularly if it enables disputes to be resolved without going to the Tribunal. HMRC's trials of ADR have shown that the process helps shorten disputes and avoid litigation. Even if the ADR process does not lead to a settlement, it should help taxpayers gain a better understanding of HMRC's position and vice versa.
The form of ADR available to SMEs and individuals is, however, quite limited. Unlike mediation by a truly independent third party, what is on offer is a form of facilitated discussion involving an HMRC facilitator (in contrast, a wider range of ADR options, including mediation, is available to large business). It is difficult to see how any information provided to the HMRC facilitator would be kept confidential from the rest of HMRC (or withheld from any information exchange requirements). Taxpayers and HMRC should be clear as to what the limits are of using this form of ADR.
ADR may, however, be useful as a tool in reaching a negotiated settlement. SMEs and individual taxpayers who are involved in protracted disputes with HMRC may wish to consider whether ADR is an option for them.
For more information, please call or email the key contact identified at the top of this page.