How to use ADR

10 Jan 2014

Meg Wilson asks whether it is worth using HMRC's alternative dispute resolution service for SMEs

It is four months since Alternative Dispute Resolution (ADR) became part of HMRC's normal business for small and medium enterprises (SMEs) and individuals.

ADR aims to provide a quick and fair way of resolving direct tax and VAT disputes. It does this by appointing one of 20 independent HMRC facilitators, who will not have been involved in the dispute, to work with both the taxpayer (and their adviser) and the HMRC case worker to try to reach an agreement.

The objective of ADR is to reduce the number of cases that reach statutory review and/or tribunal, cutting costs for taxpayers and HMRC. It is estimated that it takes approximately 100 HMRC hours for a standard case to reach the First Tier Tribunal (FTT), compared to 15 hours using ADR, so it is clear to see the benefits.

Similarly, as taxpayers do not have to pay to use ADR, it is likely to be cheaper for them to resolve a dispute using ADR, rather than going to tribunal (although there will still be time costs and, for represented taxpayers, professional fees).

An added benefit for taxpayers and their advisers is that, through potentially quicker resolution, ADR can reduce uncertainty and ease the strain on relationships that can sometimes result from HMRC compliance checks.

Since April 2013, more than 80% of cases accepted for ADR have been fully or partially resolved (the vast majority fully).

The application

Any taxpayer wanting to use ADR must apply to HMRC, ideally using its online form. The application is then considered by a facilitator and, if necessary, the ADR panel.

Around 100 applications have been received since September 2013 and just under a third have been rejected as being 'out of scope', meaning that they do not meet the selection criteria or the applications have been made too late.

Selection criteria

According to HMRC, the key requirement for all ADR cases is a 'genuine desire and commitment on the part of all parties to promptly progress matters and thereby limit costs wherever possible'. ADR should not be seen as a way of bypassing the case worker, as the facilitator just acts as a mediator, the decision on settling the case stays with the taxpayer and the HMRC case worker.

Suitable cases are likely to involve:

facts capable of further clarification;
disputes that may benefit from obtaining more suitable evidence;
fact and/or technical matters that could be understood better by either the taxpayer or HMRC; and
issues which are capable of being settled by an agreement within the framework of the Litigation and Settlements Strategy (LSS).
Certain cases are not within the scope of ADR and these include:
disputes about: payments, fixed penalties on the grounds of reasonable excuse, tax credits, PAYE codings and ESC A19 claims;
issues which cannot be settled within the framework of the LSS other than through litigation;
disputes involving issues with a wider public interest, such as for a particular industry;
disputes involving issues linked to co-ordinated appeals issues; and
disputes that could only be resolved by HMRC deviating from its established technical or policy view.

When making the application, it is important that if several issues are in dispute with different HMRC stakeholders, this is made clear.

Timing

There does not have to be an appealable decision or assessment for an ADR application to be made.

In fact, David Croad, HMRC's ADR business unit head, suggests that once HMRC has had a chance to gather all the facts 'ADR should be considered as soon as deadlock has been reached between the taxpayer and HMRC. Do not wait until a Statutory Review is requested or litigation is being progressed'.

The ADR panel is refusing increasing numbers of applications because the taxpayer or agent is leaving it too late to apply. The panel will generally refuse an application where the appeal has been moved to the tribunal and the application is received less than 20 days before a statement of case is due. If a statement of case has already been made, the only chance of an ADR application being successful is if the taxpayer can persuade the tribunal to stay proceedings.

The process

If an application for ADR is successful, the facilitator will work with the HMRC case worker and the taxpayer (and adviser) to agree how to proceed. At its simplest, the process may involve one or more telephone calls. If a meeting is deemed appropriate it is likely it will:

be held at the adviser's offices – subject to having suitable facilities, such as enough meeting rooms, with enough space between them so that each of the parties can be allocated their own room in the knowledge that their discussions will not be overheard;
start mid-morning with no fixed end time;
usually last for between one-and-a-half and six hours;
be attended by three or four HMRC staff, being the case worker, their manager, the facilitator and possibly a co-facilitator; and
hopefully, finish with the dispute being resolved, in which case the facilitator will summarise the agreed resolution. This will be followed up by the HMRC case worker writing up the summary agreement and sending it out to the taxpayer (and adviser).

If agreement is not reached during the meeting, the facilitator will try to keep up the momentum on the case. It is not unusual with unresolved cases for an agreement to be reached soon after. But if resolution is not reached following the meeting, the facilitator will advise on the options available.

The aim is for the process to be completed within 120 days of the application. The current ADR completion time from acceptance of the application to completion is about 90 days.

So should you use ADR?

Accepting that the days of local HMRC offices and personal contact with HMRC inspectors are gone, ADR does appear to be a step in the right direction for dispute resolution. It should be especially useful where communications have broken down between the HMRC case worker and the taxpayer.

The system will not suit every taxpayer in dispute with HMRC, but given the possibility of resolving matters for a fraction of the cost and time of taking a case to tribunal for many it will be worth a try.

Some people have questioned the impartiality of the facilitators, given that they are HMRC employees. Some comfort can be taken from the results of the questionnaire that is sent out at the end of the facilitation process. Of the 200 completed questionnaires, Croad advises that 'not one has suggested that the facilitator had been anything but fair and impartial'.

Accepting that the days of local HMRC offices and personal contact with HMRC inspectors are gone, ADR does appear to be a step in the right direction for dispute resolution

HMRC also has an open gateway between the SMEs and individuals, and Large & Complex (L&C) ADR teams. This ensures that some of the most complicated SME disputes can easily be escalated to the L&C team.

ADR does not affect the taxpayer's existing rights for a statutory review or to appeal to the tribunal, but the taxpayer will need to stick to the usual time limits to keep these legal rights.

It is too soon to evaluate the success of ADR since it was rolled out nationally. Given the potential cost savings to HMRC of using ADR it is hoped that it will continue to fully support ADR, listen to feedback and be ready to increase the number of facilitators if and when the need arises.