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Alternative dispute resolution 'not a horse trade'

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18th Sep 2013
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HMRC’s alternative dispute resolution (ADR) service is not a “horse trade” and is useful for cases where clients are ready to make a settlement with HMRC, according to BDO.

The Revenue rolled out the full ADR service across the UK this month and published a summary of pilot schemes detailing how it works in both large and complex, and smaller, individual cases.

Having taken individual, VAT and corporation tax cases though the ADR pilot, BDO tax director Dawn Register welcomed the move to make it a permanent service.

While Register is now one of BDO's staff accredited by the Centre for Effective Dispute Resolution (CEDR), she noted that a general lack of awareness about how and when to use ADR could lead to scepticism in some about the service.

“The answer is: ADR does work. But there are some who might be sceptical of mediation, particularly where HMRC provides the mediator, or facilitator,” she said.

“But the feedback in the pilot summary is very strong and positive about these mediators."

The BDO tax director warned that clients should be prepared to make a settlement with HMRC when going through ADR and not approach it in "fighting" mode.

“HMRC won’t compromise on points of policy. This service is not about doing a deal with HMRC; there does need to be a basis for settlement,” Register explained.

ADR is a free service from HMRC and the only costs the client will incur are hourly charge rates of the accountancy firm and any representation they require on the day.

The programme is designed to facilitate quick and fair outcomes to disputes with taxpayers. It’s now available to all business and individuals for both direct tax and VAT disputes.

ADR was launched as a response to the “unsustainable” number of cases pressuring the tax tribunal system.

The two-year pilot has shaped the final programme, which was guided by a Working Together group that included CIOT, AAT, ICAEW and legal representatives.

The process itself, illustrated in more detail by BDO’s case study at the end of this article, includes HMRC officials visiting the accountancy firms’ offices and spending the day attempting to settle the dispute.

It typically takes 61 days from application to resolution in individual and SME cases and some cases can be solved on the day itself, HMRC said .

First, HMRC officials and the facilitator meet with the client and accountant in a room, and agree on what the disputes are.

They then retire to two separate, private rooms, and the facilitator goes between the two parties and mediates on a resolution.

In BDO’s case study, a fair, acceptable agreement was reached rapidly and the case solved in one day after about two years' dispute.

While BDO praised this success as a good example of ADR in practice, the firm advised those considering it to do so only when appropriate.

“Our experience has shown that ADR may be a very useful mechanism to make progress on an enquiry or investigation where you feel matters have reached an impasse, and where one or both parties has reached an entrenched position.”

Register said that while ADR may be viable for clients currently with smaller firms or sole practitioners, cases will most likely be referred to larger firms more experienced in dealing with the process.

As it is now part of HMRC’s normal “day-to-day” business, she added that she expects it will become more widespread in its use.

While the bigger firms may be keen on ADR, as Register suggested, some AccountingWEB members are more sceptical.

“We used ADR and all it did was crystallise the issues. It in no way shortened the enquiry process or reduced HMRC enquiry costs. Like AAMS it will probably be a time waster for agents,” commented David5541.

Other members who used ADR included mabzden, whose application was rejected by HMRC.

“This is the only time I've applied to ADR so I can't claim to be an expert. But I was left with the feeling that my dispute was too complicated for ADR to get involved with.

“But it's the complicated disputes we need an arbitration process for - not the easy cases where the parties are all reasonable sorts who just need to get together over a coffee,” they said.

But the nature of the mediation process is less confrontational than conventional dispute resolution, aimed at reaching a cost effective settlement rather than maximising the tax yield from the dispute, BDO said.

Below is an anonymised case study of a successful case BDO resolved through ADR:

Case study: BDO ADR case

  • A district enquiry was opened into the affairs of client X. 
  • HMRC were enquiring into the disposal of a residential property that the taxpayer did not include on his return on the basis that he considered that this was her Principal Private Residence (‘PPR’) and therefore not subject to capital gains tax.
  • Client X approached BDO for advice from a smaller firm. BDO reviewed the facts available and prepared a computation calculating the tax arising on the property disposal.
  • Following the initial submission, HMRC challenged a number of the factual positions included within the BDO computation. This led to the rejection of the original computation and resulted in protracted correspondence and eventual stalemate.

The factors under dispute can be summarised as follows:

1. How much PPR and lettings relief is available?

2. What is the total base cost of the property?

3. How much was the enhancement expenditure?

The total tax plus penalty due per HMRC was £216K as opposed to tax of £90K per BDO’s calculations. 

Given the absence of any additional information, in order to take the position forward, it was considered that this case could be usefully resolved through the ADR pilot program.

An application was made to take part in the pilot in 2012 and a mutually convenient date for the ADR was arranged later in the year.

Summary of the day – What to expect

On the day, HMRC arrived with eight representatives. This did not bode well and the theme of “overkill” looked set to continue as the opening representation by HMRC included a very detailed rehash of the issues complete with detailed summary files for information and a detailed timeline of events to support their position.

Initially the morning progressed relatively slowly with both parties going over old ground and repeating arguments. 

As the day went on however it became apparent that the previously entrenched positions that both parties held were in fact open to quite significant movement. 

The first breakthrough came with regards to the valuation of the property at the date of transfer between client X and another party, and a relatively quick solution was accepted as both parties agreed to meet at about half way.

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. 

This was a huge breakthrough and once HMRC overcame this psychological hurdle, it was mostly a case of giving credence to our assumptions through the use of general date available on the internet (such as house prices in the area and tracking house price movement and RPI).

At this point in the proceedings, early afternoon, the facilitator came back with an offer from HMRC. Their figures demonstrated that HMRC was prepared to make significant concessions in order to arrive at a resolution.

The facilitator went backwards and forwards at this point between the client and HMRC to broker an agreement and was very professional, neutral and above all pragmatic in her approach.

Together BDO and HMRC successfully agreed on figures for each of the open issues giving an excellent result for the client and providing HMRC with a resolution to a costly and time consuming enquiry.

The penalty position a time to pay agreement had to be arranged before matters could be fully settled.

With regards to the penalty position, HMRC said initially that there was no room for movement. We felt very strongly that the client in this case was not at fault and under the old penalty regime he  should get full mitigation and a zero penalty. The facilitator represented our case to HMRC who quickly conceded the point and agreed a zero penalty.

With regards to the payment of tax, the client did not have sufficient funds to meet the balance of the liability. A time to pay arrangement was therefore included in the final settlement.

With all the issues resolved, a draft settlement agreement was prepared and signed by both the client representative and HMRC on the day.

Have you or are you considering using ADR? What do you think of the process as an alternative dispite resolution facility?

Replies (10)

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By leon0001
22nd Sep 2013 15:08

Not Horse Trading?

If it looks like a horse, neighs like a horse and trots like a horse....................

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By billgilcom
23rd Sep 2013 11:44

Question seems to be

Why couldn't that have happened without what seems to have been a long drawn out days work and as leon0001 says a horse trade - albeit a technical penalty? Why any penalty at all? Clearly it had/has to be founded on the mind of the client at the time that the tax return was submitted - of course I forgot HMRC would always think the client was neglectful if there was £100K at stake.

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By David Gordon FCCA
23rd Sep 2013 12:18

Yes but

 

 To avoid the Tribunal procedure I submitted a matter to the Alternative Disputes Procedure in February, last. There are no complicated issues therein, and it does not involve the penalty regime.

 Not having heard from them, in August I chased up a reply. The polite HMRC officer on the other end of the 'phone apologetically informed me that their office was only a "Small office with few staff". It would therefore be at least another few weeks before I might have a reply.

 I in my innocence had thought that HMRC would treat this system as being important, and would do all in their power to ensure it worked quickly and efficiently. This because of the clear benefit to all of (at last) a quick way to discuss technical issues.

 Not so, the HMRC officer's remark, with the delay in action,  suggests that yet again this will be a bone thrown to the professional dog, with no real intention to make it work as it should.

 Yet again HMRC's motto  turns out to be "Don't do as we do, do as we say"

 Yet, as I also found out this week, there are HMRC officers who not only know their stuff but understand it, so that without descending to horse-trading, honourable conclusions may be reached. The pity is these officers are not those driving the cart.

 

 

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By User deleted
23rd Sep 2013 12:52

There used to be ...

... a similar process, I think it was called "A Tax Inspector". These could be found within a few miles of every accountant. They used specialist premises called "Tax Offices" and where there was a stalemate the tax payer and the tax inspector met and settled the issue using a system which has long since fallen into disuse, I believe the system went under the name "common sense". 

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By ireallyshouldknowthisbut
23rd Sep 2013 13:50

.

@ OGA it does sound very much like the "old days".  You have a bit of fun with the junior staff poking holes, then the proper inspector rocks up, looks at the file, weighs the evidence, has a quiet word and you do a deal.

However as always there will be a huge gulf between the pilot and the watered down 'rolled out' version so will see what happens. No doubt the 'facilitator' will end up being remote and overworked, you will never get any of these people in your office and it will just end up as it is now - being passed from on numptie to the next each 10-12 weeks when they reply to the next round of letters by which point all continuity and knowledge of the case is lost. 

Quite why they sacked all the smart inspectors I will never know. 

 

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Replying to DJKL:
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By John MacDonald
23rd Sep 2013 14:41

To answer your last point - to save money.

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By johnjenkins
23rd Sep 2013 13:54

Here Here

OGA, "common sense" and "flexibility" replaced with "compliance and rigidity".

In those days I could actually phone our DI and ask what he thought about a sceanrio with the confidence that by the end of 10 minutes you would have a solution that was "right and fair" for everyone.

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By David Gordon FCCA
23rd Sep 2013 14:29

Thank you all

 I thought | was alone and eccentric.

 I am glad I am not alone.

 Does anyone above the rank of Private (Pioneer Corps),  in HMRC read Accounting Web?

 would be nice to know.

 

 

 

 

 

 

 

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By TMR
23rd Sep 2013 16:36

"ADR is a free service from

"ADR is a free service from HMRC and the only costs the client will incur are hourly charge rates of the accountancy firm and any representation they require on the day"

 

As a client I wouldn't necessarily dismiss this as the "only cost the client will incur". This comment suggests it is immaterial to the client- it can get very expensive simply to argue something you know full well is right just because HMRC follow procedure or look for some other unfair and inequitable means to raise Revenue. 

Having spent circa £20K on such costs and been proved to have been right all along, it's now virtually impossible to get HMRC to now recompense me. HMRC are well aware the costs can be very prohibitive and therefore horse trading has to be done just to prevent racking up legal costs, one sided horse trading never appeals.

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By David Gordon FCCA
24th Sep 2013 15:52

Time is the issue.

 

 That is the point at issue. ADR is a Free Service- my italics

 It is a definition of constructive dishonesty-

 HMRC when assessing the public cost of new systems, amendments, "Improvements to service", never takes into account the cost to the taxpayer Inclusive of professional services.

 HMRC dare not. This because if HMRC were to admit the professional service cost of the system, it would demonstrate the whole fib upon which "Self-Assessment is based.

 Namely- that the system is designed to enable the taxpayer to self-assess and deal easily with his or her tax affairs.

 95% of the so-called improvement in HMRC efficiency over the previous three decades has in reality been a shifting of work from that department to the cost of the taxpayer.

 The willful dereliction of duty by members of parliament in not directing HMRC  has enabled not so civil servants to devise a tax administrative system to suit themselves rather than the so called customer. An automobile without a steering wheel. (A client of mine had one of these. He turned right at London Bridge, but the car decided to keep going ahead!)

 When I sat my final tax exam there were two tax text books- which could nowadays fit into my laptop bag. I do not see any qualitative improvement despite today's tax shelf being heavy enough to give an elephant a hernia. (Goodness knows how heavy it would be, if I printed out all the manuals I have on CD)

 Of course we must not forget that HMRC in these hard times have provided much employment for CCH, Lexis, Wolters Kluwer, Sage, Digita, et al.- and whoever prints the tidal wave of HMRC explanatory leaflets and software..

 In fact if someone was clever enough to work out the number of Man-hours (Per taxpayer) taken up by our tax system, in 1973, including HMRC staff and professional time, compared to 2013, also including the man-hour equivalent of the computer power used- It would really demonstrate what a dog's dinner we have got ourselves into.

 

 

 

 

 

 

 

 

 

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