When can ADR be used to resolve a tax dispute?

ADR in a nutshell

The name says it all: alternative dispute resolution (ADR) is another way to settle a deadlocked dispute with HMRC without involving a tax tribunal. However, a change of stance by HMRC means that ADR can be used in conjunction with the First-tier Tribunal (FTT).

Following the Statement of Practice issued by HM Courts & Tribunals Service (HMCTS) in June 2020, HMRC now accepts that ADR can be used at any stage after an appeal has been made even if HMRC has formally stated its case to HMCTS. This means you can ask the FTT to hear your appeal as a backstop in case ADR doesn’t give you the result you want.

When can you use ADR?

HMRC says that ADR is suitable in any of the following situations: communications have broken down between you and HMRC; there are disputed facts; you believe there’s a misunderstanding of your argument; you want an explanation for why HMRC has not accepted evidence you’ve provided; or you want HMRC to explain why it needs more information from you to settle a dispute. But there are situations where HMRC won’t agree to ADR.

Will HMRC negotiate?

Whilst HMRC doesn’t have to agree to your request for ADR, it’s been reported that it’s now more likely to. This is most likely because unresolved enquiries and other disputes use HMRC’s resources which have notoriously been spread very thin of late.

What are the advantages of ADR?

There are several reasons why you might want to use ADR.

Money. Probably top of the list is that ADR is usually less expensive than the FTT. The more informal nature means that less preparation work is needed for the ADR meeting with HMRC. This reduces the work of your accountant and corresponding fees.

Time.An HMRC enquiry usually lasts several months and often more than a year and may still end up at the FTT resulting in further delays. ADR gives you and HMRC a chance of settling a dispute in weeks.

Privacy. Unlike the FTT, ADR is always behind closed doors (tribunals can be but usually aren’t). Only you, your advisors and HMRC are involved. Also, unlike the FTT the details of the dispute are not published. This might be important to you or your business if sensitive information is involved or reputations might be damaged.

Flexibility. ADR is a more flexible process compared with the FTT. The latter follows presentation of facts and arguments from each side in a set order and manner. While you’ll need an agenda with ADR to avoid a free-for-all, the debate can be more open with greater opportunity to counter HMRC’s arguments along the way. Importantly, you have the right not to accept the outcome of ADR whereas with the FTT you’ll have to accept its ruling unless you appeal to a higher court.