ADR meetings in tax disputes: trust the process or steer clear?

Generally, alternative dispute resolution (ADR) methods of disputes can  be an incredibly effective way for matters to be concluded without recourse to lengthy, and often expensive, litigation. When talking to other lawyers, particularly those who work in different forms of dispute resolution, they are mystified at the length of time that tax disputes can take to be resolved. There are horror stories of tax litigation taking a number of years across a number of different courts and tribunals before the matter is finally resolved (even though we can now ignore the possibility of matters being referred to the CJEU from the UK).The related time and fees incurred by taxpayers and advisors in respect of tax litigation is not insignificant and this was one of the many reasons alternative forms of dispute resolution in relation to tax should be popular. 

Although it hasn’t been plain sailing for ADR of tax matters, with even those familiar with other forms of mediation shocked at the framework in which tax disputes are resolved, broadly there have been a lot of positive comments about ADR with HMRC in general (including from this author; see ‘Road remains open’, Taxation, date). However, there is a fear that as a result of HMRC’s latest internal manual on ADR, there may now instead be more reason than ever to steer away from ADR. 

Before delving into the detail of the recent changes I thought it would be useful to take it back to basics to explain what is ADR specifically in relation to tax disputes and how it has impacted tribunal litigation. I then consider the proposed changes from HMRC’s perspective and consider the risks of such changes on tax ADR going forward, before concluding with what the future landscape may look like if there isn’t any wider consultation on how HMRC should use ADR. 

Back to basics

Even the most risk-adverse tax advisers will, at some pointor another, come across the situation where, for whatever reason, HMRC has taken a view which seems plainly incorrect. But what, ultimately, can the adviser or indeed the taxpayer do? Commit to tribunal litigation which ought to involve specialists in tax disputes, regardless of the costs and time it could take? Often the most sensible advisers and taxpayers do not want their day in court! Hence the use in tax disputes, and other areas of dispute resolution, of ADR. 

ADR in general covers a wide number of ways in which a dispute can be resolved without recourse to litigation before courts or tribunals. A specific type of ADR is mediation which  normally involves the parties discussing the dispute in question along with an independent mediator. There are benefits of such mediation for both parties. For taxpayers it is a cheaper way to deal with a dispute rather than having to take it to litigation at a tribunal. Equally, there is a benefit for confidentiality reasons especially in the modern age where any form of tax dispute is potentially loaded with reputational risks.

One of the other advantages of ADR is its lack of formality. Taxpayers are happy that their matters do not require detailed 20-page skeleton arguments, hearing bundles, or anything similar. Indeed, over the course of a two-page opening statement, the dispute could be boiled down to the key issues with a view to resolving them. 

Both parties also benefit from the fact that mediation can take place and be resolved much faster than litigation, where you may be at the tribunal’s and counsel’s mercy with regard to availability for a hearing. HMRC aims to resolve ADR matters within 90 days of a successful ADR application. One of the fundamental requirements of mediation is having an independent mediator so it is therefore surprising to the uninitiated that mediation involving HMRC has a mediator that works for HMRC. In reality, members of the – objectively excellent – ADR unit liaise with both parties and consider the issues (not just from an HMRC perspective) which has meant that in all of the experiences of the author and other commentators, the ADR unit has been great in its mediator role.

Taking a step back, if you were to ask non-tax disputes lawyers about mediation, one of the first comments that might come to mind is the ability to horse-trade (negotiate on the quantum involved). On the contrary, tax mediation specifically excludes the ability for horse-trading to take place. Indeed, any and all actions by HMRC in respect of mediation have to conform with its litigation and settlement strategy (LSS).

Released in 2011, the LSS sets out the framework in which HMRC must consider and deal with ADR of tax disputes. Brought in as a result of challenges to the way HMRC engaged in the settlement of tax disputes with some large corporates in the past, the idea behind the LSS was to make absolutely clear the boundaries for officers in dealing with settlements with taxpayers. Perhaps the starkest point is HMRC’s position that if the department thinks it is likely to succeed in litigation, it cannot settle for less than 100% of the tax due. HMRC cannot, and will not, factor in matters such as the time it might take them to recover the full amount of tax it thinks is owed nor the cost in trying to recover the total amount.

HMRC mediation is helpful for unlocking those disputes which may have meandered into a death spiral of correspondence between advisers and HMRC officers. Indeed, in many instances, a fairly straightforward dispute can veer towards situations where either party might feel embarrassed to back down such that the parties are then painted into a corner. HMRC mediation is a fantastic way to take stock of the actual issues in dispute and see whether any movement can take place. It should be noted that there can be, and has been, situations where a successful ADR can mean that although a dispute is not completely resolved, a number of the issues are narrowed before they get to litigation, thus saving time and costs in the long run.

Perhaps the most important aspect of mediation in other areas of dispute resolution is the fact that it would be normally ‘without prejudice’. This would mean that neither party could bring to the court or tribunal’s attention anything the other party said if it was in a genuine attempt to try and reach settlement. This encourages open discussions between the parties. Indeed, even the Upper Tribunal confirmed the ‘key aspect of ADR is that the discussions are without prejudice’ (R (on the applications of) Mukesh Sehgal and Promila Sehgal v CRC [2021] UKUT 0151 (TCC).

HMRC’s new ADR internal manual
Although the ADR internal manual is not legally binding (as with other HMRC guidance, unless stated otherwise), it does set out how officers are likely to treat ADR matters going forward. One of the distinctions the manual makes is between matters which are without prejudice as opposed to those which are off the record, clarifying that mediation is not off the record. See Keith Gordon’s article ‘Spot the difference’ (Taxation, 26 May 2022) for a more detailed discussion of this point.

The manual also considers that any ‘tax fact’ that is or may be disclosed in mediation can and will be relied on by HMRC. This could lead to assessments on the taxpayer in relation to other taxes going forward. Given the importance of such a distinction, it is noteworthy that there is no detailed explanation of what a tax fact actually is and how it can be distinguished from normal discussions throughout the course of a mediation. The guidance suggests that a tax fact is defined as a fact that has legal and technical implications for a taxpayer’s liability which therefore is ‘not capable of being without prejudice’. Many commentators have also noted that there could indeed be greater disputes going forward coming out of mediation as to how the tax tribunal should deal with tax facts or, more importantly, what would happen in a situation where HMRC considers something to be a tax fact but the taxpayer and its advisers do not agree. Is HMRC therefore potentially creating more litigation when the point of mediation is to take matters away from the courts and tribunals?

Future improvement
Naturally tax mediations had to cope with the onset of Covid-19 as did the rest of the world. The pandemic meant, among other things, that tax ADRs had to take place remotely. While it had always been incredibly helpful to have both parties and the mediator (and the respective decision-makers) in the same room to thrash out misunderstandings of facts which may go back some years, there was naturally a greater degree of difficulty to do this and establish any sort of rapport through a screen.

It is noteworthy that even with the greater emphasis on returning to offices, ADR meetings are still taking place via video platforms and it is submitted that this should only take place in exceptional situations.

One of the most useful aspects of ADR is the ability to see officers and taxpayers in the flesh and get a real feel for some of the misunderstandings which may have taken place. The author is a great exponent of the use of ADR. The ability to sit across the table with someone with whom you may have been in dispute with for a number of months (if not years) is one of the most useful aspects of it (compare a two minute conversation with a colleague or client against endless emails trying to understand what can be a very simple point). Therefore, it is hoped that more ADRs take place in person rather than remotely as, prior to the release of the new internal manual, it was one of the obvious areas for improvement.

Risks for taxpayers
There is a concern that with the ambiguity from the internal guidance, many will advise their clients to avoid committing to ADR. In matters which can cover a number of years, there is a lot of scope for touching on topics which HMRC may (perhaps incorrectly) consider to be a tax fact. It would not be a good outcome to go into a mediation with HMRC to try and resolve one issue and come out of it having opened up additional lines of enquiries for HMRC. This simply would not be a risk if a matter was going to a tribunal. Therefore, although there might be the allure of being able to resolve matters sooner and with less cost, many may take the view it is simply not worth the risk going to mediation.

This would be a great shame as ADR, particularly over the past five or so years, has been an incredibly useful tool in resolving tax disputes. Matters of all shapes and sizes involving all forms of misunderstandings can be clarified, sometimes in the course of a couple of hours in person. This is invaluable and a great way for taxpayers to understand that although it may not seem it, assessments or similar enquiries are rarely personal. There is a worry that if HMRC pushes on and uses the internal manual without wider consultation, this will lead to a drop in use of ADR and then naturally an increase of matters that head to tribunal.

It is unlikely that the tax tribunal will be delighted with such news given the number of cases that already make their way through the system. It should be noted that previously HMRC tried to take the position that it would not entertain ADR applications after a statement of case had been filed. This was a contentious point because it was often that a taxpayer and their adviser would only really know the issues in dispute once the statement of case had been filed.

Fortunately, as a result of some suggestions from judges in individual cases along with widespread pushback, this internal practice was reversed such that now technically ADR applications can be made at any stage of a dispute, once an appeal has been lodged. It would therefore be an even greater shame that this new internal manual could also cause many to reconsider adopting ADRs.

Trust the process?
Whether it is as a result of HMRC’s increased compliance checks in certain areas or other issues, it is inevitable that there is going to be an increase in the number of tax matters that end up in disputes. It is widely accepted that HMRC is under-resourced and under-funded for the job it has to do. Making it work in accordance with manuals that will not help it resolve matters quickly but instead push disputes towards litigation, which can take many years and eat up the lives of many officers along the way, doesn’t seem to appease anyone.

It is hoped there will either be some amendments to the internal manual or some wider consultation with regard to how it should be implemented and acted upon in practice. Otherwise, we might find taxpayers, HMRC officers, and indeed the tribunal not best pleased with the new normal.

The ADR process and the tax disputes process are at an interesting and crucial pinch point and it is hoped for the sake of all of the vested parties, not least the taxpayer body at large who would be interested in getting back tax where it is due as quickly as possible, that any ways in which this can be expedited should not be made to be a riskier alternative to litigation. 

Key points

• Tax litigation can be costly, time consuming and stressful.
• Alternative dispute resolution can be a good way to resolve tax disputes and it is generally favoured by HMRC.
• Will changes to HMRC’s approach to ADR make it a less attractive proposition?
• HMRC’s new manual distinguishes between matters which are without prejudice (as opposed to those which are off the record) and it considers that any ‘tax fact’ that is or may be disclosed in mediation can and will be relied upon by HMRC.
• There is a concern that with the ambiguity from the internal guidance, many will advise their clients to avoid committing to ADR.

This article was first published in Taxation on 24th April 2023. 

FURTHER INFORMATION

For further information on the issues raised in this blog, please contact Waqar Shah or any member of the Dispute Resolution team. 

about the author 

Waqar Shah is a Partner in the Dispute Resolution department, focusing on the resolution of complex tax matters. He acts for high net worth individuals and corporate clients across all sectors in respect of HMRC disputes and investigations across the full range of taxes. This typically includes VAT disputes, employment tax matters (including 'IR35'/off-payroll working), customs/excise duty issues, tax fraud investigations, and more recently, National Minimum Wage enquiries.