Guide to HMRC Alternative Dispute Resolution

The HMRC (Her Majesty's Revenue and Customs) Alternative Dispute Resolution (ADR) process is an important mechanism designed to resolve tax disputes between taxpayers and HMRC without the need for litigation. 

ADR aims to provide a more flexible, quicker, and cost-effective resolution to disagreements, fostering a collaborative approach to settling disputes.

It is an approach which Bishop Fleming has used to benefit a number of clients where the enquiry process has stalled.

This guide will delve into the intricacies of ADR, its advantages and disadvantages, the circumstances under which it should be employed, and strategies for maximising its effectiveness.

Understanding HMRC Alternative Dispute Resolution

ADR is a voluntary process that involves an impartial third party, known as a mediator, who assists in resolving disputes between taxpayers and HMRC. 

The mediator's role is to facilitate discussions, help identify areas of agreement, and guide both parties toward a mutually acceptable resolution. It is important to note that the mediator does not impose a decision; instead, they work to help the parties reach their own agreement.

The default position is that the mediator comes from within HMRC’s own ADR team.  Whilst this might seem a conflict, in our experience we have always found the HMRC mediators to be extremely impartial, fair and professional.

The ADR Process

The ADR process typically involves the following steps:

• Application: Either the taxpayer or HMRC can apply for ADR. The application should outline the issues in dispute and why ADR is considered appropriate.
• Acceptance: If both parties agree to use ADR, the application is accepted, and a mediator is appointed. 
• HMRC team: the HMRC team are appointed and are made up of the ‘decision maker’, who is the caseworker who has been handling the enquiry to that point, a ‘counter-signing officer’ who is there as an additional control mechanism to sign off (or not) on the caseworker’s conclusions; and, of course, the mediator.
• Preparation: Both parties prepare for the ADR meeting by gathering relevant documents and evidence. The mediator may request additional information to understand the issues better.
• Mediation Meeting: The mediator facilitates a meeting where both parties discuss their positions, explore potential solutions, and work toward an agreement.  Typically, these are now held virtually using Microsoft Teams.
• Resolution: If an agreement is reached, it is documented, and both parties are bound by the terms. If no agreement is reached, the parties can still pursue other dispute resolution methods, such as litigation.

The Pros of Using ADR

ADR offers several benefits that make it an attractive option for resolving tax disputes:

• Cost-Effective: ADR can be significantly less expensive than litigation, as it avoids court fees and reduces legal expenses.  There are no charges for the ADR itself, nor the use of the HMRC mediator.
• Time-Saving: ADR is generally quicker than the litigation process, which can be lengthy and protracted.
• Flexibility: The process is more flexible than formal litigation, allowing for collaborative engagement, with the aim of reaching common understanding and, hopefully, resolution.
• Confidentiality: ADR proceedings are confidential, which helps protect the privacy of the parties involved and the details of the dispute.
  Preservation of Relationships: ADR fosters a collaborative approach, which can help maintain positive relationships between taxpayers and HMRC, reducing the adversarial nature of disputes.
• Control: The parties retain control over the outcome, as the mediator does not impose a decision.

The Cons of Using ADR

Despite its many advantages, ADR also has some potential drawbacks:

• No Guarantee of Resolution: There is no guarantee that the ADR process will result in an agreement. If no resolution is reached, the parties may still need to resort to litigation.
• Non-Binding: ADR agreements are not legally binding unless documented and agreed upon by both parties. This could lead to enforcement issues if one party does not comply.
• Formalities: Although ADR is less formal than litigation, it still requires thorough preparation and documentation, which can be time-consuming.

When to Use ADR

ADR is particularly useful in the following situations:

• Where both parties are willing to negotiate in good faith and seek a practical resolution.
• When the dispute involves complex issues that would benefit from a collaborative approach and expert input.
• Where the trust and relationship between HMRC and the taxpayer is threatening to break down and/or where the parties are deadlocked with opposing positions.
• When confidentiality is a priority for both parties.
• Where time and cost savings are significant considerations.

Getting the Most Out of ADR

To maximise the benefits of ADR, consider the following best practices:

• Seek Professional Advice: Consider engaging a tax advisor or legal professional to guide you through the ADR process and ensure your interests are adequately represented.
• Prepare Thoroughly: Gather all relevant documents, evidence, and information to support your position. Be ready to present your case clearly and concisely.
• Be Open-Minded: Approach the process with an open mind and be willing to consider alternative solutions that may not have been initially apparent, albeit all settlements need to be compatible with HMRC’s Litigation and Settlement Strategy.
• Engage Actively: Participate actively in discussions, listen to the other party's perspective, and engage in constructive dialogue.  ADR should facilitate engagement and communication, and in turn HMRC developing a better understanding of the facts from the tax payer and vice versa.
• Maintain Confidentiality: Respect the confidentiality of the ADR proceedings to protect the integrity of the process.
• Focus on Resolution: Keep the ultimate goal of resolution in mind and be willing to compromise where necessary to reach a mutually acceptable agreement.
• Be respectful: the UK legal system is adversarial.  The enquiry process will have been frustrating (otherwise you wouldn’t be considering ADR).  It is critical, however, that you remain measured, professional and calm.  This is about collaboration not an adversarial court battle.
• Know the mediator: help the mediator help you by ensuring they have access to all the information they might need to understand the case. Keep it civil and friendly. There is no point getting off on the wrong foot with the mediator. They are there to help and, in our experience, very professional and helpful.

Conclusion

HMRC’s ADR process offers a valuable tool for taxpayers and HMRC to resolve disputes in a more efficient, cost-effective, and collaborative manner. 

By understanding the process, recognising its benefits and drawbacks, and following best practices, parties can leverage ADR to achieve fair and practical outcomes, while preserving positive relationships. 

Whether you're a taxpayer or an HMRC representative, ADR can be a powerful means to navigate the complexities of tax disputes and reach amicable solutions.

Bishop Fleming has extensive experience of using ADR to great effect. For support in this area please contact our team today.