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ADR: Reaching a settlement

25th Apr 2014
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In the final part of our BDO alternative dispute resolution (ADR) series, tax director Dawn Register and Manchester partner Ed Dwan outline what happens when a settlement is reached.

As you will have seen in the series finale, Mr and Mrs Spencer-Smith signed their settlement agreement, handing over a cheque to HMRC, based on a figure they spent a day mediating. But what are the processes behind this?

According to Dwan, it’s more than simply sorting out a figure - it’s about getting agreement on the issue at hand first of all, and then making the final figure clear to the taxpayer.

“The key part for our client, the taxpayer, is that they really want to understand what the final bill is going to be. However, the final bill is dependent on a variety of factors, that need to be agreed by HMRC.  

"Tax advisers have to work through what all the potential tax ramifications in the agreement are," he said. 

The role of the tax adviser in securing a settlement agreement is multi-faceted, he added. 

They need to ensure that both parties understand all implications of the agreement to avoid situations where taxpayers believe they have agreed something in principle, but find out this not the case in an assessment a few months down the line.

Moving on from the adviser, the client team (such as BDO, in this case) also have many roles to play to help the taxpayer. 

Keeping taxpayers 'on-side' and upbeat and encouraging them to stick with what is sometimes for them a tiring process are just some of the elements of the role. 

"It's only right at the end that taxpayers see the potential benefit of mediation," Dwan explained, "there have been times when the taxpayer was about to walk out, but we have been able to reassure them that the pace of progress is typical, and doesn't mean that progress is not being made." 

Another role is simply being on hand with the relevant spreadsheets to calculate what the figures ultimately mean for the taxpayer.  

Usually private clients are not as concerned about what the the final figure is comprises of made up of (i.e. penalties and interest), but in getting to the ‘bottom line’, the amount paid over to HMRC. 

The taxpayer’s client team therefore add a lot of expertise to the wording of the settlement documentation and what the taxpayer is signing. 

As Register explains: "HMRC often produces all sorts of variations of forms, contract settlements and full disclosure certificates for taxpayers. It can be dangerous for taxpayers to sign a HMRC document without properly understanding it or having the document reviewed by a specialist." 

Another key part in reaching a settlement agreement is working out what interest and penalties are due - and negotiating these penalties. 

Elements such as having a Time to Pay agreement can be a tricky part to negotiate and is worth flagging up to HMRC from the outset if you know that's what the taxpayers will need.

Mediation day is an ideal environment for negotiating things such as Time to Pay arrangements and penalties, as its more effective face-to-face rather than through protracted correspondence, Register said. 

Interest is mostly non-negotiable. While historically there was some leeway, it's now very rare to come up with a situation where interest will not be charged. 

The very final role of the taxpayer’s client team is getting the agreement drafted in principle. 

HMRC draft the initial agreement and the client team reviews it for their taxpayer. But they must also ensure that every implication of what's been argued is present, and if not, or if there are other things needed to be brought in, this needs to be articulated in that document. 

In cases where there is no settlement, one option is going down the route of a Tax tribunal hearing.

Dwan and Register explained that even if there isn’t a settlement at the end of ADR and it does go down the tribunal route, it is quite often it can be beneficial for crystallising the arguments and making the case run smoother.

This concludes the in-depth exploration into the five stages of ADR, from the viewpoints of both the mediator and the tax investigation specialists at BDO.  

AccountingWEB is keen to hear your thoughts and opinions - let us know what you think about ADR by commenting below. 

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By david5541
28th Apr 2014 14:08

IT WAS A WASTE OF TIME

Adr WAS A WASTE OF TIME FOR A SMALL LOCAL TAXPAYER WHO HAD HEALTH ISSUES AND AN INSPECTOR FROM AN ETHNIC MINORITY BACKGROUNDWHO SHOWED LITTLE DESIRE TO MEET IN THE MIDDLE(and a very detailed confontational style)- THE TAXPAYER MADE EVERY EFFORT TO MEET "face to to face" AND IN THE MIDDLE BUT STILL EVEN THOUGH THE YEAR OF ASSESSMENT WAS MORE THAN FOUR YEARS AGO THE ADR RETURNED THE adr REFERRAL SAYING IT WAS NOT IN THIER POWERS TO ASSIST THE TAXPAYER- so what ever the BDO "theory" of the ADR process is; HMRC resources and manning on the ground 9/10 times prevent progress under ADR- QED for the rest of HMRC, depite the 8% increase in payroll/income tax take recently!

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