HMRC yield from ADR drops by 40% to £27m

HMRC is making less use of mediation to settle tax disputes, forcing taxpayers into litigation, says City law firm RPC

According to RPC, the tax that HMRC has raised by resolving tax disputes through Alternative Dispute Resolution (ADR) has dropped by 40% in the last year from £44.5m to £26.6m.

The number of applications for mediation fell by 4% from 1,114 to 1,066 last year.

RPC says the use of ADR has fallen, in part, because HMRC imposed strict criteria on when an application for ADR could be made, refusing any application which was made after they had formally set out their position in relation to the case to the tax tribunal. This gave taxpayers a limited window in which to apply for ADR.

ADR involves HMRC mediators working collaboratively with taxpayers and their advisers to facilitate a settlement of the taxpayer's dispute.

HMRC clarified that 'we no longer measure yield as a success in ADR. We are a demand led business (ie, it is the customer who has to apply for mediation) so we have no control over the amount of tax at stake in their disputes. We measure success by the percentage of mediations we successfully resolve. In 2019-20 we reached a form of resolution in 90% of cases and resolved 89% within 120 days of acceptance. The latest TAC report did not publish yield for the reasons given'.

The number of cases resolved through ADR (90%) equates to the number of cases resolved by agreement as a percentage of the total number of ADR cases closed during the year. In financial year 2019 to 2020, there were 1,066 ADR applications made through the online system, a fall of 6.8% on the previous year, HMRC confirmed. 

An HMRC spokesperson said: ‘Alternative Dispute Resolution (ADR) provides a way for taxpayers to resolve disagreements with HMRC through a mediator.

‘Applications have increased in recent years and the service continues to be used successfully by many customers.’

RPC says, following a recent statement issued by the tax tribunal making it clear that ADR can be explored at any point in the appeals process, there should be no barrier to entering into ADR solely because HMRC has already submitted their arguments to the tax tribunal. HMRC has since changed their policy and removed this self-imposed barrier to agreeing to ADR.

Adam Craggs, partner at RPC says: ‘This new policy allows taxpayers to apply for ADR at any stage in a dispute, both before they have appealed a decision of HMRC and after an appeal has been lodged with the tax tribunal, giving more time and opportunity for meaningful discussions between HMRC and the taxpayer.

‘ADR is a relatively inexpensive tool which enables taxpayers and HMRC to discuss their dispute in a collaborative manner and reach an agreement without having to pursue formal litigation before the tax tribunal.

‘It is therefore surprising that HMRC appear to be reluctant to use ADR, with applications for ADR going down rather than up.’

Constantine Christofi, senior associate at RPC says: ‘ADR is usually a much quicker and less expensive process than formal litigation. Even if a settlement is not reached with HMRC, it is likely that the issues between the parties will have been narrowed during the ADR process. Given these efficiencies, it is concerning that uptake is declining.

‘It will be interesting to see whether this new practice direction will encourage more taxpayers to apply for ADR but, more importantly, whether HMRC accepts more applications.’

RPC is a professional services firm offering both legal and consultancy advice to a range of sectors. The law firm is made up of 101 partners and over 700 people in total. The firm is a member of TerraLex, the worldwide network of independent law firms.

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