Over the last decade one of the most significant changes in litigation has been the growth of alternative dispute resolution (“ADR”) mechanisms and the proportion of cases resolved outwith the traditional court room setting. Adjudication has become commonplace in resolving construction related disputes and mediation is increasingly common in commercial litigation.

In 2011, HMRC introduced a pilot programme aimed at resolving tax disputes by way ADR, as an alternative to the traditional tax tribunal.

Two pilot schemes are currently being run, which both follow HMRC’s Litigation and Settlement Strategy (“LSS”). The first of these relates to small and medium enterprises and individuals. HMRC is currently evaluating the results of the second stage of this pilot, but is still accepting applications. The other relates to larger scale cases, where disputes tend to be more complex. This will run until March 2013. 

The Process

The pilots both use mediation, a process whereby a neutral party assists the parties to the dispute to work towards a negotiated agreement. The parties to the dispute retain full control of the decision to settle. HMRC believes that this process can be “a cost-effective, consensual and speedy” way of resolving disputes.

Whilst there is no obligation for a taxpayer to use these schemes, any taxpayer can apply to have their case included in relation to any type of tax. On receipt of an application, HMRC will allocate a facilitator to the case who is a member of HMRC staff trained in ADR but who has had no prior involvement in the particular matter in dispute. The facilitator decides if the case is suitable for the ADR procedure and must act independently.

If a case is accepted for the process, the facilitator contacts the taxpayer to develop a process which meets their needs. Face to face meetings have been rare under the pilot. Indeed, of the 144 SME disputes included in HMRC’s Pilot Evaluation Report of the first stage of this pilot, only 16 face to face meetings took place. A majority of the process was carried out by telephone. The evaluation of the second stage of the pilot will confirm if this trend has continued.

Potential Benefits

There are several potential benefits to a taxpayer of using ADR to resolve a tax dispute, instead of the traditional methods:

  1. It may restore or create a collaborative working relationship between HMRC and the taxpayer.
  2. It can lead to savings in costs and time. HMRC do not charge a fee to take part in the trial, and have stated that most disputes take less than two months to either resolve or reach a stage where both parties agree to differ. Whether savings in costs and time are made very much depends on whether the process is successful, as if the case proceeds to a Tax Tribunal anyway, an extra step has been inserted into the process.
  3. Litigation in a public forum will be avoided if settlement is reached, allowing sensitive information to be kept confidential.
  4. The taxpayer will have a greater level of control over proceedings than if the case proceeded to litigation. This should give the taxpayer an opportunity to achieve a better result.
  5. The first stage Pilot Evaluation Report states that 60% of cases involved in the pilot were fully or partially resolved by the ADR process. These figures do not take account of the cases which were withdrawn from the process at an early stage.
  6. The early feedback regarding the pilot schemes has been largely positive, with taxpayers and agents recognising the benefits the system can provide.

When is a case suitable?

There are several factors which must be considered in deciding if a case is suitable for the ADR process. These include:

  1. State of communications - HMRC considers that the ADR process is suitable where communications between the customer and HMRC have broken down, as the facilitator may be able to restore communication.
  2. Type of case – is the case an “all or nothing” case, or is it a question of value with several different issues to be determined? It is more likely that the latter type of case will be suitable for the ADR process.
  3. Value of Dispute – where the sum involved is small, the legal costs involved in a Tax Tribunal case are particularly unattractive, so these cases favour the ADR process.
  4. Sensitivity of Information – if a taxpayer is keen to avoid disclosing commercially sensitive information, the ADR process will allow this to be kept confidential. Of course, if unsuccessful, such information may be disclosed in further proceedings.
  5. Complexity of Dispute – the more legally complex a dispute, the less suitable the ADR process will be.

Careful thought should be given to whether a case is suitable for the ADR process, both by the taxpayer and HMRC. This is by no means an exhaustive list, and each case will be judged on its individual circumstances. It should be noted that HMRC will not settle a case if it means going beyond the LSS.

The success of the ADR process depends on the attitude of the parties as well as the issues in dispute. Unless both parties are willing to work towards a settlement, it is unlikely to be successful.