ICPA Analysis: HMRC's alternative dispute resolution scheme

Moving to a resolution

HMRC is piloting its alternative dispute resolution scheme, says Ben Chaplin. But will it prove to be the way forward?

At the start of the year HMRC launched a pilot scheme introducing a potentially new way of resolving disputes between themselves and SMEs. The Alternative Dispute Resolution (ADR) scheme is designed specifically for SMEs. It uses ‘independent’ HMRC facilitators to resolve disputes between HMRC and taxpayers during a compliance check but before a decision or assessment has been made. HMRC states that ADR aims to find a “fair and quick” outcome for both parties, helping to reduce their costs and avoid a tribunal.

The launch of this pilot, in North Wales and the North West, follows a successful trial in 2011. During this trial, cases were selected from those that had gone for internal HMRC Review and looked to be headed for the tax tribunal. HMRC believed the results were encouraging and the data suggested that ADR might work at an earlier stage in the Compliance Check Process.

In the initial trial, HMRC claim that 60% of the disputes that entered the pilot were either fully or partially resolved and the overwhelming majority were fully resolved to the satisfaction of both the taxpayer and HMRC. HMRC have been encouraged by the fact that the pilot would appear to have been well received by both taxpayers and their advisors, who welcomed the opportunity to use ADR as a means to resolve disputes with HMRC.

HMRC’s, Jim Stevenson, Assistant Director, Local Compliance, said: “ADR will help SMEs resolve disputes without having to go to a tribunal – saving them both time and money. It is a good opportunity for HMRC to work together with our customers to potentially resolve disputes much earlier than at present.”

The facilitators are HMRC members of staff who have been trained in ADR techniques and have not been involved in the dispute. “We have found that often there are communication problems. So the HMRC facilitator will help all parties reach a shared and full understanding of the disputed facts and arguments. They will also ensure there is good communication, and help explain what each side is trying to say to the other. The aim is to resolve the dispute or, if not, as many issues as possible.”

So how do you ask for a case to be included in the ADR and what happens once it has? For the purposes of the pilot and because HMRC want to test the success of ADR at an earlier stage in the compliance check process, they are restricting the availability of ADR to cases where an ‘appeal-able’ tax decision or assessment has not been made. Where a taxpayer and/or his representative believes that ADR may speed up resolution of their dispute with HMRC they can call 01492 523 747 and make an application to be included in the pilot. HMRC will advise a taxpayer/representative of whether a case has been accepted for ADR within 30 days of receipt of the request.

Suitable cases

HMRC have indicated that for this pilot suitable cases for ADR may involve disputes where facts can be further clarified; disputes that may benefit from the uncovering of more suitable evidence; and facts and/or technical matters in which there is legitimate scope for any party to obtain a better understanding of the other’s arguments.

Areas not suitable for ADR are identified as those that may involve issues that require clarification in the wider public interest. These might include matters of industry-wide application, issues linked to or involving co-ordinated appeals issues (‘stood behind’ cases); for example, ‘Compound Interest’ type disputes and cases that could only be resolved by an HMRC departure from its established technical or policy view.

Where the case falls within the appropriate criteria, the facilitator will contact the taxpayer or their representative to explain the process, and ask for the completion of a simple Memorandum of Understanding to confirm the customer’s participation in and commitment to ADR. Similar agreements are a feature common to Dispute Resolution in all areas of dispute, not just tax. The facilitator will then work closely with the taxpayer and/or their representative and the HMRC officer who has been dealing with the case, in an open, flexible and objective way to see whether progress can be made towards resolving the tax dispute.

For those involved in the pilot at the end of the ADR process HMRC will ask participating taxpayers and their representatives for feedback on how well the process has – or hasn’t – worked.

Taking part in the pilot in no way prejudices a taxpayer’s case and it does not affect their right to have an internal review or to take their appeal to Tribunal. The facilitator will not be called as a witness by HMRC or be involved in the appeal.

Initial reception for the pilot and the idea of ADR in general from professional advisors seems to be positive. ADR will formalise a process of case review that HMRC has used internally for many years but which failed to allow the taxpayer or their representatives any input.

CASE REVIEW

In the past, many accountants have requested that cases be reviewed if they have felt a particular HMRC officer has not understood the client, his trade or a technical issue, but without being able to be directly involved in the review and stating their case. This has resulted at times with the professional advisor feeling issues have still not been fully discussed or reviewed and has, ultimately, led to cases being sent to the Tax Tribunal. Under ADR, if it is fully implemented, this will change.

HMRC hope ADR will dramatically cut the current number of taxpayers asking for a Tribunal hearing.

One of the areas for discussion appears to be around the fact that ‘facilitators’ are HMRC staff “who have been trained in ADR techniques”. What specific training are they given? What HMRC background do they have and, more importantly, why is it only HMRC staff and not suitably qualified accountants and tax advisors who are deemed suitable? These are some of the questions being asked.

Business owners can shun the ADR if they are not convinced that they will get a fair hearing from the ‘independent’ facilitator. Your client will be asking you for your opinion and advice.

BALANCED VIEW

Some argue that finance professionals should be allowed to work as facilitators, to give a more balanced commercial view across the diverse range of cases they will encounter. However, if this was to be introduced as part of ADR, what training would HMRC want to provide, and would this external facilitator be paid by HMRC for their time both in training and reviewing cases? How many would have to be selected and what minimum time involvement could it require? Could those members of the Tribunals selected from the profession be used in some limited role in ADRs? Would a taxpayer or his agent have a right of objection to a particular accountant being named facilitator?

Another alternative would be to allow the taxpayer to select his own facilitator from an HMRC-approved panel of suitably qualified professionals.

HMRC will no doubt argue that by offering a formal system of case review involving a specially trained officer with no previous contact with the case and allowing direct input into the review by the taxpayer and their appointed representative gives a balanced discussion and outcome. Would you be happy that your involvement and expertise on the taxpayer’s side would be sufficient in the ADR process, or would you be happier in the knowledge that fellow professionals were working as facilitators?

As the pilot continues and first-hand experience is gained by both the profession and HMRC changes to the process will no doubt be incorporated. For the time being, and most importantly for those in the pilot area, ADR will hopefully give SMEs the opportunity to resolve tax disputes without the heavy cost of litigation via the Tax Tribunals, which has to be progress.

In terms of fee protection insurance the ICPA SPS fee protection product includes Taxwise Plus cover automatically. This includes insuring your time in dealing with the ADR process during the course of your clients’ enquiry should you proceed with this option.

Your comments on or your first-hand experience of ADR would be welcome.

Ben Chaplin is Managing Director of Taxwise Services Ltd

This article is taken from “Accounting Practice” the ICPA quarterly magazine. Dedicated to supporting and promoting the needs of the general practitioner. You can find us at  www.icpa.org.uk  or email info@icpa.org.uk  or by ‘phone on 0800-074-2896