HMRC Alternative Dispute Resolution – is it the right way to resolve your tax dispute?

HMRC ADR – what is it?

HMRC ADR is ostensibly sold as a mediation process.

Mediation is a form of ADR that has been widely used in the UK to resolve disputes since the late 1990’s.  It involves the appointment of an independent and impartial mediator, who is usually agreed between the parties and who acts as a “go-between” to listen to each side’s point of view, and assists them to understand their opponent’s perspective, objectives, and ultimately settlement proposals.

Traditional mediation is conducted on a confidential and without prejudice basis, meaning that all information and documents produced within that mediation remain confidential between the parties and the mediator, and cannot be shared with the court (or in the case of a tax dispute, the Tribunal).  The purpose of this is to encourage openness with a view to facilitating settlement; a “cards on the table” approach.

If all goes well at a mediation, a binding settlement agreement will be signed on the terms agreed.  If not, the dispute will continue.

How does HMRC ADR differ from a traditional mediation?

The first major difference is that the mediator will be an HMRC officer, rather than a traditional mediator.  The manual describes them as a “neutral third party” who is “independent of the case team”.  However, despite the manual offering these assurances, it still raises the question as to how independent they can be in circumstances where they are ultimately employed by one party to the dispute.

There is scope for the non-HMRC party to involve a professionally accredited mediator from outside HMRC, but this would be at the sole cost of that party, and the HMRC appointed mediator would retain final control over the mediation.

The second major difference is the treatment of information provided in the mediation.  Unlike a traditional mediation where all information provided during the course of the mediation is shielded from the court or Tribunal by without prejudice privilege, the position is not the same for HMRC ADR in so far as it concerns a “tax fact”.

A tax fact is “a fact which has legal and technical implications for a taxpayer’s liability” – and the manual expressly states that these facts are not capable of being without prejudice.  This includes any documents provided on a without prejudice basis, or marked as such, and means that where such a document contains a tax fact, the mediator will make it available to HMRC’s legal teams for the purposes of litigation if no settlement is reached.

What’s the problem?

If you find yourself in a dispute with HMRC, pursuing their ADR procedure could be a good option if you have no concerns about inadvertent disclosure of potentially adverse material.  The process is quick (the aim is for it be concluded within 4 months of a request/proposal to try ADR) and it can be conducted remotely or face-to-face.

However, the mandatory appointment of an HMRC officer as mediator, and the absence of a blanket application of confidentiality and without prejudice privilege to all discussions and documentation in the process raises concerns about the fairness and effectiveness of the process.

It is not without risks, but then nor is litigation.