Making the most of alternative dispute resolution – pilot for large or complex cases branded a success by HMRC

HM Revenue & Customs (HMRC) has published its evaluation of the alternative dispute resolution (ADR) pilot for large or complex cases. The pilot has been running since July 2011  and the findings confirm that, in the large or complex space, ADR is a success.

ADR is a flexible toolkit for resolving disputes. It involves mediation and facilitation, with both parties working to overcome any hurdles to settlement. ADR is well known in the commercial world, but it’s only in the last two to three years that HMRC has begun experimenting in the tax arena with different forms of ADR and the appropriate governance that’s needed. 

Our recent newsflash highlighted the small to medium-sized enterprises and individuals ADR process – this helps smaller taxpayers who are having problems reaching a settlement. But as the name implies, large or complex cases are likely to be higher value, more technically complex and carry a real risk of proceeding to tribunal at a cost to both taxpayers and the Exchequer. It’s important to note that this includes individuals with higher value issues as well as large corporates.  In this context, ADR has an additional use – it determines at the earliest stage whether a dispute has to go to litigation or whether settlement discussions could lead to the possibility of a resolution.

Results of the evaluation

The statistics up to March 2013 are surprisingly positive, with nearly 100 applications considered from July 2011 to March 2013.

  • 67% of applications were accepted, covering £148m of potential tax in unresolved disputes.
  • Half of these applications were internal; i.e. from HMRC case owners or specialists and resulted in HMRC making an unprompted offer of ADR to the taxpayer.
  • 23% resolved to date totalling £57m of tax, with 39% still being actively worked.
  • 5% of cases accepted into ADR have failed to reach settlement.
  • Average resolution times of 24 weeks from application to agreement, compared with an average of 70 weeks from tribunal appeal to hearing.

What kinds of cases are suitable?

HMRC’s report quotes a wide variety of taxes and issues that have been examined in ADR. In our experience, ADR applications are most likely to be accepted where there are a range of settlement possibilities; for example, around an area of judgement in a valuation or determining a transfer pricing adjustment.

The more binary and clear-cut an issue, the greater difficulty HMRC has in seeing the benefit that ADR could add. Even in these situations, putting in an ADR application can reveal whether the issue is truly black and white, or if the parties just have become polarised over time. This is also true of issues that a HMRC case inspector has decided are a policy red line – ADR prompts HMRC to internally re-examine whether its only option is to go to tribunal on a point of principle.

The impact and benefits of ADR

The pilot has definitively shown that the additional focused effort from both sides is worthwhile in getting to a resolution quicker and at less cost than litigation.  

Here are the main points to consider.

  • ADR can be a useful way to explore and reach settlements with HMRC when a dispute has become entrenched.
  • HMRC doesn’t accept all ADR applications– it’s important to emphasise why a case has reached deadlock.
  • The possibility of ADR can be discussed with the case team. But under HMRC's governance, only the ADR team can consider and accept or reject an application.

If you’d like to find out more about alternative dispute resolution, or want to talk your clients through what options they have available, you can contact Jessica McLellan on 0161 245 2301 or your usual contact in our Tax Dispute Resolution team.