HMRC Alternative Dispute Resolution – does it work?

HMRC has been offering ADR for tax disputes for several years now and has a dedicated unit consisting of officers who have been trained in mediation and facilitation techniques. While the statistics produced by HMRC on the percentage of disputes resolved using ADR is impressive, success can, in our view, depend on the officer assigned to the case and how the facts are presented by you on behalf of your client.

What is ADR and how does it work?

ADR was formally introduced by HMRC in 2013 as an ‘independent’ process to assist in resolving tax disputes or issues arising from ongoing enquiries and investigations. It can be used for both direct and indirect tax disputes and generally during most stages of an enquiry or investigation, even after an appeal has been submitted to the Tribunal. It’s a misconception that ADR can only be valuable once HMRC has set out its position or issued a formal decision. It can be used whenever there is a ‘blockage’ or significant issue. It can also be used in most types of enquiries and investigations from Code of Practice 8 & Code of Practice 9 investigations conducted by HMRCs Fraud Investigation Service to HMRC Supplier Chain Reviews and VAT Reviews.

However, applications for cases involving tax avoidance or where they involve issues requiring clarification in the wider public interest or linked to other appeals are likely to rejected. 

The ADR process broadly involves an independent officer from HMRC (from HMRCs dedicated ADR Team) who has not previously been involved in the dispute, mediating between the client and the HMRC officer dealing with the case to try to broker an agreement between the parties.

Recent examples of where we’ve successfully used ADR to resolve disputes include:

• Cases where the HMRC inspector was ignoring evidence which did not support his contentions;
• Extensive and inappropriate HMRC information requests despite the significant volume of information already provided and where the officer was not prepared to take a reasonable view;
• Where the relationship between the client (and his advisor) and the inspector had broken down and there was a lack of trust between the parties.

It’s interesting to note that often the simple suggestion to the case officer or inspector that our client is considering applying for ADR, can be enough to prompt the inspector to look at his case in a different way, which can result in resolving the outstanding issues without the need for the formal ADR process. 

It’s also important to note that entering an ADR process does not impact a client’s rights for internal review or appeal to the Tribunal.

What does the ADR process look like?

Applying for ADR is relatively straightforward using HMRCs online form. HMRCs response time to applications is generally, in our experience, pretty good.

When applying for the ADR process you and your client (and the HMRC case team) will also be asked to confirm agreement to the ADR principles. These generally consist of the following:

• That you understand that the mediator has responsibility for the ADR process – the client and HMRC share the responsibility for deciding the tax outcomes;
• That you must be available for a meeting which could last for a full day and can take place by telephone conference call, video call, or in a face-to-face meeting;
• If the mediator asks for more information, this is to be provided within an agreed date;
• If you discover new information before a meeting, you will give this to the mediator as quickly as possible (to avoid any ‘high jacking’ at the ADR meeting!);
• If you cannot meet a deadline you will need to notify the mediator and agree an alternative.

Mediation is a confidential process carried out on a ‘without prejudice’ basis. This means that things said during ADR cannot be used as evidence later. However, if you tell the mediator something which changes your client’s tax/penalty position, or provides evidence of criminality, this can be shared with HMRC by the mediator and may be used in formal proceedings. Being careful about what you say and how you say it is, therefore, important from the outset.

The next step is to set out your ‘opening statement’ and share this with the mediator together with any documents or evidence you intend to rely on as part of the ADR process (see below for further information). The mediator will obtain the same document from the officer dealing with the enquiry and share the respective documents to both parties at the same time.

Following the exchange of documents, the ADR meeting is held. From HMRCs side, this will usually involve the case officer/inspector and his/her line manager as well as the HMRC mediator. Having the line manager present is useful as he/she will be the final decision maker.

Assuming that the issues are resolved and agreed during the meeting (or shortly thereafter) your client will be required to sign an ADR agreement which sets out the points agreed and what both parties have committed to doing to resolve the dispute.

What do I need to know to ensure I can get the best outcome?

• Quickly building rapport with the mediator and engaging in constructive discussions around the nature of the issues and explaining the concerns in a balanced and objective way can be helpful to ensure that the mediator respects your position (and you) from the start. It can be useful to have a third party who hasn’t previously been involved in the enquiry or issue to assist in these discussions and the ADR process;
• If you agree to a deadline within the ADR process, do your utmost to stick to it (as the HMRC side may often not!);
• Getting the opening statement right is critical in our view as this sets out the background and highlights the specific issues that need to be addressed. This can, depending on the nature of the issues, be a lengthy document and it’s important, therefore, to ensure that sufficient time is allowed for this to be completed properly. Focusing on the key issues and facts and drawing out where HMRC is being unreasonable or not considering the evidence etc. in a concise but compelling way is vital. Getting this document right will help to ensure that the mediator properly understands the concerns from your client’s perspective;
• In addition to sending the opening statement, try to speak with the mediator to go through the statement to ensure that the client’s case is properly understood and to clarify any areas of uncertainty;
• Prepare fully prior to the ADR meeting. Ensure you know your case inside-out and can effectively challenge any points made by HMRC;
• While the ADR process usually asks for the client to be present at the ADR meeting (to show commitment to the process and to sign off on any agreement) there is no absolute requirement for this. Whether the client attends can be a strategic decision based on the client (how well they come across to HMRC etc.) and the nature of the issues involved. If the client does not attend the ADR meeting, he/she should be available on the end of a phone so that they can sign off on any decisions made.

How can Pannu Tax help?

At Pannu Tax we are accredited (CEDR) Mediators and trained negotiators. We have successfully represented clients through numerous ADR processes. In addition, our knowledge of HMRCs powers and processes means that we can effectively present your case and challenge HMRC, where appropriate.

If you have a tax dispute or issue you think could potentially benefit from an ADR process, please get in touch. We’re happy to have an initial discussion to explore the issues and advise on whether ADR may be appropriate on free and confidential basis.