IT HAS BEEN widely reported there are currently at least 20,000 tax tribunal cases waiting to be heard. Given this tremendous burden on both HM Revenue & Customs and the taxpayer, HMRC's announcement that the Alternative Dispute Resolution (ADR) scheme is being made permanent for those involved in tax disputes from January 2013 is a very welcome development.
ADR has been used for many years to solve commercial and other civil law disputes, however, it has only recently been considered for tax disputes, yet given the clear benefits that it offer - it's confidential, saves time and money for both HMRC and the client - it is perfectly suited to tax disputes. So how does it work in practice?
It involves an independent person - called a ‘facilitator' - who has not been involved in the dispute before, working with both the taxpayer and the HMRC case owner to enable them to settle the disputed issues. It is important that the mediator is not a judge or decision-maker.
HMRC will accept applications from taxpayers where there are appealable tax decisions or assessments in dispute. The taxman reserves the right to refuse any application for ADR if it does not feel that the particular dispute can be resolved by this process.
It is most suitable for restoring communication where the relationship between the taxpayer and the HMRC officer has broken down as it ensures that the facts are clarified and entrenched views are ‘reopened'.
It also ensures assumptions made by HMRC are reviewed, such as those around business economics and extrapolations. ADR does operate within the litigation & settlement strategy so HMRC will not compromise on legal or policy points of principle.
Crucially, ADR is a cost-effective way of resolving issues for HMRC. It is usually time-effective for the taxpayer compared to a court hearing, and with no adverse publicity as it is entirely confidential.
It is voluntary and any party can withdraw from the mediation process; the taxpayer also retains their rights of appeal. Professional costs can be significantly reduced compared to tribunal costs as the ADR process is a free service provided by HMRC. The nature of the mediation process itself is less confrontational than conventional dispute resolution as the objective shifts towards reaching a workable settlement as opposed to maximising the tax yield.
There remains some mis-understanding about ADR, particularly around the assumption that it will inevitably involve a "meeting in the middle" with HMRC, at the expense of an outcome that may have gone more in favour of the client if they had stuck with their guns and defended a case through the courts. This is not, however, the case and, in our experience, clients have received some very positive outcomes as a result of the ADR pilot.
At BDO, we took part in an ADR pilot case and found that giving all parties an opportunity to talk through all of the issues was a very effective way of reaching a compromise. In the case in question the factors under dispute were how much private residence and lettings relief was available, what the total base cost of the property was and how much the enhancement expenditure was.
A relatively quick solution was accepted as both parties agreed to meet half way on the valuation of the property. With regards to the other two points under dispute, it was again obvious that in the absence of any further information, reasonable assumptions would have to be accepted. Following three years of ongoing correspondence between HMRC and the client the mediation was concluded in a day and by early afternoon the facilitator came back with an offer from HMRC. The figures demonstrated that HMRC was prepared to make quite significant concessions in order to arrive at a resolution.
That experience shows ADR may be a very useful mechanism to make progress on an enquiry or investigation where matters have reached an impasse, and where one or both of the parties has reached an entrenched position. The results from ADR have been encouraging so far, and it would be recommended that clients consider using mediation where appropriate.
Dawn Register is a tax director at BDO
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