Jesmin Rahman explains everything you need to know about ADR – a means to resolution in tax investigation cases
ALTERNATIVE DISPUTE RESOLUTION (ADR) was introduced as a service in HMRC in 2013. I was engaged as the HMRC ADR Design Lead in 2012 and was responsible for implementing ADR in September 2013 as a business service. Initially, we had only six ADR facilitators from the pilots conducted in 2011 and 2012. By September 2013, I had inducted 22 trained ADR facilitators. It was a service welcomed by the external stakeholders’ group, especially accountants, tax specialists and tax barristers.
But increasing pressures placed on HMRC caseworkers, meetings could not take place due to travel budget cuts and HMRC offices being centralised, led to HMRC becoming a faceless organisation. ADR provided a means to meet face-to-face with a mediator provided by HMRC, whereas HMRC as an organisation is becoming digitalised and non-personal.
What is Alternative Dispute Resolution (ADR) ?
Alternative Dispute Resolution is the procedure for settling disputes without litigation. Under ADR, the parties agree to bring in a third party to facilitate an agreement (mediation).
The Centre for Effective Disputes Resolution (CEDR) defines mediation as: “A flexible process conducted confidentially in which a neutral person actively assists parties in working towards a negotiated agreement of a dispute or difference, with the parties in ultimate control of the decision to settle and the terms of resolution.”
A question I am often asked by accountants and clientele is how we know that the ADR facilitators are neutral and will be non-biased during the mediation. The ADR facilitators sit outside the compliance stream, so they are not involved with the tax caseworker, although they often have a caseworker’s background themselves. As part of the ADR process, feedback sheets are requested so that the impartiality of the ADR facilitators are observed. Moreover, there is feedback from the external stakeholders. The impartiality of the ADR facilitators is one of the key success factors of ADR.
Tribunal judges also support the use of ADR as S3 of Tribunal Rules and Procedures outlines:
Alternative dispute resolution and arbitration
Section 3.1: "The Tribunal should seek, where appropriate"-
(a) To bring to the attention of the parties the availability of any appropriate alternative procedure for the resolution of the dispute; and
(b) If the parties wish and provided that it is compatible with the overriding objective, to facilitate the use of the procedure.
In a recent case, Stirling Jewellers (Dudley) Ltd v Revenue & Customs  UKFTT 44 (TC), the judge stated: “If ever there was a dispute
which cried out for a determined attempt at Alternative Dispute Resolution, it was this one...”
What is the Alternative Dispute Resolution (ADR) Process?
If tax assessments have been issued on the case, the appeal has to be accepted by the tribunal before applying to ADR. This is so the client’s appeal rights are safeguarded and there is no point for HMRC to invest resources in an appeal that has expired.
The ADR application is submitted online and an email acknowledgement is received on the day. The ADR applications are then allocated and considered by an ADR facilitator, who will contact both parties to discuss the applications. If the ADR facilitator is not sure of accepting the case into ADR then will prepare a report which is submitted to a panel of ADR senior experts. The panel will then decide to accept or reject the ADR application. All applications are considered carefully before being accepted or rejected and the decision is taken within 30 days.
Both parties have to provide an opening statement and a signed memorandum of understanding which outlines the ground rules of the process. In most cases, a face-to-face meeting is arranged. There have been teleconferences arranged for more simple disputes. When I left in 2014, HMRC was looking to carry out mediation through Skype or Google hangouts, but there were issues with this because of the data confidentiality issues.
The decision-makers have to be present on the day. The HMRC party must participate in ADR once the ADR application has been accepted. I find that a conversation with the HMRC caseworker before an ADR application is submitted helps to ease the whole process. The whole day has to be reserved as it cannot be predicted how long it will take to reach a resolution. The aim is for both parties to reach a resolution on the day and sign the ADR exit agreement. I find that even if a resolution has not been reached ADR distils the points of the dispute. The ADR process is aimed to be completed within 120 days from the time the application is submitted to the exit agreement.
The ADR facilitators often have a tax compliance background and are trained in mediation as well as tribunal processes. They are not there to make a judgement, but to facilitate an agreement between the decision-makers; in this case, it’s normally the caseworker’s manager and the taxpayer. Often HMRC caseworkers do not give oral evidence any weight and the ADR process does posit that the tribunal judge will also give consideration to any oral evidence.
When should you apply for Alternative Dispute Resolution ?
ADR tends to lend itself to small and medium tax disputes better. ADR will not be used for late penalties i.e. £100, or procedural matters i.e. tax codes, or for debt management matters. One will not find a set criterion as each case is judged on its merits. One case may be accepted even if it is at the statement of case submission stage, but a similar one may be rejected because it is at the statement of case stage. It depends if there is an area in the tax dispute that could be dealt with via ADR. It is important that we test the boundaries of ADR. It is one of the most positive services provided by HMRC and it is effective as a tool to reach a resolution especially when communications have broken down between the caseworker and taxpayer.
ADR should be considered when:
• Parties are unclear or unable to articulate points in dispute.
• There is no dispute over technical analysis, but parties need to agree on a methodology to quantify liability.
• There is a dispute over facts.
• There are strained relationships between HMRC and the taxpayer.
• The taxpayer feels that information and documents have not been considered by HMRC.
How the Litigation Settlement Strategy (LSS) works:
The Litigation and Settlement Strategy (LSS) underpins HMRC’s approach to tax disputes. HMRC caseworkers should be following the guidelines as set out by the LSS, if not I find it helpful to point out the LSS to them. The LSS points out that HMRC aims to resolve those tax disputes which do arise in a way that establishes the right tax due at the least cost. HMRC will be non-confrontational and will work collaboratively with customers wherever possible. The LSS also states that we should explore where there is a range of possible right answers. At the end of ADR, when a resolution is reached the HMRC caseworker has to sign a statement that the agreement abides by the LSS. HMRC cannot accept a less alternative than would be acceptable at tribunal. The LSS states that HMRC will resolve disputes consistently with the law. A recent tax case, The Serpentine Trust Limited v HMRC  UKFTT 535 (TC) established that the ADR resolution was ultra vires contract, therefore, went beyond the legal powers of HMRC therefore the agreement was voided as it was inconsistent with the law.
What is the advantage of Alternative Dispute Resolution (ADR)?
Both parties retain ownership of the decision, whereas at tribunal the decision would be made by the tribunal judge and at HMRC review stage, by the HMRC reviewer. ADR enables parties to begin or resume negotiations when direct negotiations have stalled or are at an impasse. A third-party presence via the ADR facilitator also changes the dynamics of a dispute and brings a fresh perspective. ADR allows for flexible discussions to take place that could not in the normal compliance process.
The ADR process is a confidential and without prejudice process. The confidentiality only becomes redundant if a complaint is made about the ADR process/facilitator or where is not consistent with the law. If litigation is unavoidable, it can also help both parties prepare the facts of the case. ADR also saves on time and costs, HMRC found that 15 hours is spent on an ADR in comparison to tribunal which can be 100 to 250 hours. I see ADR as the last best opportunity to reach an agreement on the case. At tribunal there is a 14-25% success rate for appellants at tribunal from 2015 to 2018. Whereas at ADR, over 80% of the ADR disputes are either fully or partially resolved.
To help break this down further, we have a step by step video on 'How to apply for ADR online' in our videos section. Don't forget to Subscribe to our YouTube channel.