Faster progress needed on large business tax ADR, says expert, as HMRC evaluation published

Out-Law News | 13 Sep 2013 | 4:12 pm | 4 min. read

The use of mediation by HM Revenue and Customs (HMRC) to resolve large or complex tax disputes is welcome, but more needs to be done to make sure that cases are progressed quickly, an expert has said.

Tax expert Heather Self of Pinsent Masons, the law firm behind, was commenting as HMRC published an evaluation of its alternative dispute resolution (ADR) pilot. The pilot, which ended in March, tested the effectiveness of using mediation to resolve large or complex tax disputes in a manner consistent with HMRC's Litigation and Settlement Strategy (LSS).

"The report shows that good progress has been made in identifying cases for ADR; and that the idea of ADR is being welcomed by HMRC, advisers and taxpayers alike," said Self, who is a CEDR-accredited mediator. "However, of the 66 cases accepted into ADR, just one third have so far been resolved, with 39 still in the system."

"Initial results are positive, but more needs to be done to make sure the process moves forward and does not become mired in detail. The 24 weeks quoted for cases which have been resolved is positive, but too many cases are still shown as outstanding almost six months after the pilot phase ended," she said.

The ADR service uses impartial HMRC facilitators to resolve disputes between HMRC and taxpayers at an early stage. It is intended as a quicker, cheaper alternative to the Courts and Tribunal Service, but parties retain the right to refer the case to the courts for binding determination. This month, the service was made available to all individuals and small businesses.

The large and complex disputes ADR pilot ran in two phases. Phase I ran from July 2011 to March 2012. It took on 14 cases and resolved 11 of these. HMRC's target for Phase II was to accept 50 further cases and resolve 35 of these by the end of March 2013; but due to a slow start receiving cases this target was later reduced to 25. The pilot was open to any tax dispute; including those involving corporation tax, income tax, capital gains tax, customs duty and VAT.

HMRC had originally expected to use external mediators, unconnected with both parties, for all cases within the pilot. However, according to the report, HMRC staff trained as mediators who had had no previous involvement with the case were able to "facilitate structured discussions" leading to resolution. Ultimately, 26 cases were resolved in this way while only two used external mediators.

"The use of HMRC facilitators, often acting jointly with an external mediator, is a pragmatic compromise but shows that independent mediation has a long way to go to reach full acceptance within HMRC," said Self.

According to the report, the average elapsed time between application and resolution in cases using ADR was 24 weeks. An average of 34 weeks passed between application and ADR attempt for those cases remained unresolved after the attempt. Cases which went through the ADR process represented tax at stake of just over £57 million while cases still currently progressing have tax at stake of around £93m, according to the report.

Although the report concluded that it was difficult to "quantify" any cost or time savings as a result of the pilot, HMRC was "confident" that it had made "significant savings in both cost and time in resolving disputes through the ADR process for both HMRC and the customer".

However, the report noted that in order to get the best out of the process, the "right people ... with the seniority to make decisions for the customer and HMRC" had to be present on the day. There should be "clarity about the extent of authority each side has to reach a binding decision", and the timescale within which a non-binding agreement should be ratified by more senior people should be known before the process begins. In addition, a dispute was more likely to resolve through ADR "where a hearing before the Tribunal is some way off".

"The pilot has shown that ADR and structured, facilitated discussion is a useful tool in resolving entrenched disputes," the report concluded. "Central co-ordination adds value by providing oversight and governance to ensure consistency of approach and deployment of scarce facilitator resource to the right cases. It also is a useful focus for sharing best practice and managing the relationship with external stakeholders."

Tax expert Jason Collins of Pinsent Masons said that although mediation "could work well for disputes where there is a range of possible outcomes", introducing more flexibility around the LSS would "do more to help resolve tax disputes quickly". The LSS sets out the way in which HMRC handles all tax disputes, subject to civil law procedures.

"Mediation does not work well for 'black and white' tax disputes," he said. "The LSS operates as a 'straitjacket' in this type of dispute.  It prevents HMRC from discounting the tax at stake to reflect the difficulties, uncertainties, and cost of litigation.  It is exceedingly difficult for a mediator to get a result which both parties can live with if the answer has to be 'yes' or 'no' - leading to a massive backlog in the tax tribunal."

"Reforming the LSS would do more to help resolve tax disputes than rolling out mediation more widely. HMRC's 'litigate or die' approach, as set out in the LSS, should be reserved for cases where there is a real behavioural issue to be tackled; such as when a taxpayer repeatedly enters into tax avoidance using abusive devices. HMRC should not be prevented in other cases from taking the kind of pragmatic approach that is needed if business is to engage frankly with HMRC and reach certainty as speedily as possible," he said.