Resolving tax disputes is an expensive and time consuming process for businesses. In New Zealand, tax disputes are currently settled exclusively by litigation or outside of court by agreement between the taxpayer and the Inland Revenue Department (IRD).
The United Kingdom tax authority, HM Revenue & Customs (HMRC) is however embracing a different way of settling tax disputes. Faced with 10,000 live appeals lodged with the Tax Tribunal, it has sought a quick and cost-effective method of resolving suitable cases. The process that it has adopted is Alternative Dispute Resolution (ADR). Whilst ADR has been used for many years in the resolution of civil disputes, it has only recently been considered for tax disputes.
Following a two year pilot, HMRC has now expressly committed to ADR for small and medium enterprises. Although not yet formally announced, it is expected that ADR will similarly be rolled out permanently for large businesses.
Although ADR can take many forms, HMRC’s focus has been on facilitated mediation, rather than other ADR variants such as arbitration or expert determination, which HMRC considers are inappropriate in a tax context as in its view any adjudicatory function belongs to the courts. Its self-styled ‘facilitated discussion’ is derived from the concept of facilitative mediation, where a mediator tries to bring two sides together without offering an opinion on the parties’ arguments.
The United Kingdom is not the only jurisdiction utilising ADR techniques in an effort to clear the backlog of tax cases. The Australian Tax Office is currently conducting an ADR pilot using in-house facilitation to resolve small indirect tax disputes. The IRD by comparison, has to date made no commitment to ADR. Arguably, however, the New Zealand tax disputes process would greatly benefit from the inclusion of an ADR element and could easily be enhanced to do so.
How is ADR used in the United Kingdom?
HMRC’s support for ADR stems from its commitment to use collaborative dispute resolution to resolve disputes efficiently, as set out in its refreshed Litigation and Settlement Strategy. HMRC’s commitment to ADR is significant. A large number of HMRC staff are now accredited mediators, having been formally trained alongside private practitioners. It has also established a Dispute Resolution Unit (DRU) charged with selecting appropriate cases for ADR, providing facilitators and generally assisting the parties through the process. The DRU has also drafted and circulated detailed practical guidance as to the use of ADR.
The use of facilitated discussion has been well received by taxpayers and tax advisers in the United Kingdom. The process involves trained facilitators bringing the parties together and challenging each side as to how their dispute may play out in court. Although facilitators will usually be provided by HMRC, they can also be provided by the taxpayer. In all cases the facilitator will not have had any previous involvement with the case. The aim of facilitated discussion is to attempt to reach resolution of the dispute at a single meeting (albeit one that may last a full working day and carry on into the evening). Accordingly, prior to the meeting date, the parties usually exchange written submissions as to the issues agreed to be in dispute.
ADR has been found to be suitable for a wide range of disputes, particularly those where a narrowing or clarification of the facts or issues in the dispute is necessary. It is particularly useful in fact-heavy cases such as transfer pricing or capital versus revenue disputes. In general, it is useful when the parties have become entrenched in their positions and little progress is being made towards resolution. It does, however, require a willingness by both parties to settle which may inevitably involve making concessions.
Could ADR be used to resolve tax disputes in New Zealand?
New Zealand has a statutory pre-litigation disputes process entailing a number of formal steps. The process can be lengthy and costly. Taxpayers would almost certainly benefit from the introduction of an ADR element into the process. The most obvious improvement would be to augment the conference phase by offering ADR. The conference occurs at a stage where the parties have set out their respective positions but litigation is not yet inevitable. Although not legislated for but nonetheless an important administrative practice, the purpose of the conference is to identify and clarify the facts and issues in dispute. The conference could easily be supplemented by introducing a formal process and the use of ADR techniques, including the appointment of trained mediators to actively try to bring the parties together and broker an agreement between them. The overall aim would be to give the conference phase more substance by presenting a real opportunity to settle disputes without recourse to the courts. There should be no barrier to the IRD participating in ADR, it being already empowered to settle disputes in accordance with its existing care and management powers. Certainly, HMRC is confident that ADR falls comfortably within the parameters of its almost identical powers and duties.
Although ADR might naturally fit at the conference stage, there is of course no reason why it could not occur earlier in the disputes process.
It seems illogical to ignore the potential efficiencies that ADR can bring. The non-binding and confidential nature of ADR means that there is very little downside to either party. If resolution cannot be reached, each party will be likely to conclude the process with a better understanding of the other’s position. After ADR, the issues will almost certainly have been narrowed. Accordingly, if litigation is ultimately required it will be on a much more focused basis than it would have been absent the ADR process.