At this precise moment, there will be people in the middle of a tax dispute with HMRC. Not only are they concerned about the outcome of any dispute in normal times, the situation is worsened further by the unpredictable impact of the current economic environment.

From practical experience, it can take up to 12 months to get a hearing before the Tax Tribunal where a dispute is heading for litigation. Some suggest that litigation is an inevitable consequence of HMRC’s published Litigation and Settlement Strategy (LSS), which the tax authority must operate within. It is argued that this strategy limits the scope for a negotiated settlement with HMRC.

Those who specialise in dealing with tax disputes know ongoing disputes leave businesses and taxpayers with financial uncertainties both in terms of tax liabilities and indeed professional costs. At a time when the economy is heading into a downturn, the last thing businesses and individuals need is this uncertainty, especially when a large proportion of businesses and taxpayers will need to focus on rebuilding what is being lost due to the Covid-19 outbreak. Many will need to preserve cash to survive the coming months. 

The government have proactively offered solutions to assist taxpayers in the financial crisis with initiatives such as government-backed business loans, business grants, VAT deferral reliefs, self-assessment payment on account relief and improved time-to-pay arrangements to name a few. HMRC also put a temporary pause on current enquiries, which has now been lifted.

While this help is a welcome relief, it is only a temporary solution. In the current and future economic environment HMRC will face even more pressure than ever to plug the tax gap and generate much needed funds for the government.

Accelerate resolution

Accelerating the resolution of disputes now can allow taxpayers to focus their energies on their businesses and free up cash, potentially set aside on contingent tax liabilities and unknown professional costs, to rebuild once the economic shock starts to subside. HMRC is also recognising the need to support taxpayers with time-to-pay arrangements, and this can include dispute settlements.

Alternative Dispute Resolution (ADR) is a key tool to effectively accelerate dispute resolution. Taxpayers must give this facility serious consideration in the current environment.

ADR has been available for a number of years but to date many consider it to be underutilised. The current environment will force taxpayers and their advisers to think more proactively about the tools available for effective dispute resolution.

ADR is an independent mediation process facilitated by a trained HMRC mediator, though taxpayers do have the option to appoint an independent joint mediator. It allows all parties to come together in a working forum to discuss the key areas of the ongoing dispute with the goal of resolution in mind.

ADR can be used at any time in an enquiry or the litigation process and is used to facilitate tax disputes where the following commonly arises:

• communications have broken down between the taxpayer and HMRC
• there are disputes about the facts
• a dispute appears to be a result of a misunderstanding
• positions have become entrenched and there is an unwillingness to shift
• the taxpayer wants clarity on why HMRC has not agreed evidence given by them
• the taxpayer is not clear what information HMRC has used, and thinks HMRC may have made wrong assumptions
• HMRC needs to explain why it needs more information from the taxpayer

The trained mediator is key to facilitating discussions. Importantly, the mediator’s role is not to give any opinions or decide the substantive points or areas of dispute – this is the role of the professional advisers and HMRC team.

Unlock dispute

The role of the mediators is to facilitate these discussions ensuring all parties understand the other’s position and conclusions. Often, this is key to unlocking a dispute.

In addition to this and importantly, the HMRC mediator is trained in helping to resolve the dispute within the LSS framework. As noted earlier, this is often cursed as being a barrier to a negotiated settlement. ADR will work within the LSS framework to look for solutions without the need for litigation.

HMRC’s ADR unit has confirmed it is business as usual, even in today’s environment. It is still reviewing and actively taking on new applications for ADR. While the traditional ADR would bring all parties together in one room, the adapted process is working virtually from remote locations to emulate all the characteristics of an ADR.  

As professional advisers, we have an obligation to consider and exhaust all cost-effective options in the interests of our clients. In the current environment, this may mean using ADR rather than continue down the track of litigation or protracted enquiry correspondence.

At a time of uncertainty and with clients feeling the financial pinch, ADR is an effective option that often leads to a relatively speedy resolution of tax disputes.

About the authors

Karmjit Mader is a senior manager and Talia Greenbaum a director in BDO’s  tax dispute resolution team