Receiving a letter from HMRC announcing a tax enquiry can be stressful.
For many business owners, the first sign of a problem is a formal notice requesting information or supporting documents. From that point, what starts as a routine enquiry can sometimes develop into a lengthy dispute.
The good news is that going to tribunal isn’t always the only option.
Alternative Dispute Resolution (ADR) offers a way for taxpayers and HMRC to work towards resolving disagreements without the cost, stress and time involved in formal litigation.
What is Alternative Dispute Resolution?
Alternative Dispute Resolution, often known as ADR, is a mediation process designed to help taxpayers and HMRC resolve disputes more collaboratively.
The process involves a specially trained HMRC mediator who is independent of the original case team.
Their role isn’t to decide who is right or wrong. Instead, they help both sides identify the issues, improve communication and explore possible solutions.
ADR works alongside the normal appeals process rather than replacing it.
When can ADR be useful?
ADR is often most effective where disputes arise because of:
- Misunderstandings
- Communication problems
- Disagreements over facts
- Differing interpretations of evidence
For many small businesses and individual taxpayers, these types of disputes can become frustrating and expensive if left unresolved.
ADR provides an opportunity to address issues before they escalate further.
How does the ADR process work?
ADR meetings are generally confidential and can often be held remotely.
This makes the process more flexible and accessible, particularly for smaller businesses and busy taxpayers.
The aim is to help both parties reach an agreement without needing a tribunal hearing.
However, it’s important to understand that ADR is not designed to resolve disputes where the disagreement is purely about the interpretation of tax law.
In those cases, a formal appeal may still be necessary.
Are there any cases where ADR isn’t available?
Yes.
HMRC generally excludes certain types of disputes from the ADR process, including:
- Debt recovery disputes
- Time to Pay arrangements
- Automatic late filing penalties
- Automatic late payment penalties
- Default surcharges
- Certain tribunal cases categorised as “paper” or “basic” cases
- Disputes based entirely on legal interpretation
In these situations, the usual route is either a statutory review by HMRC or an appeal to the First-tier Tribunal.
Why is timing important?
One of the key factors in making ADR successful is applying at the right time.
Apply too early and the issues may not be clearly defined.
Apply too late and both parties may already be committed to a particular position, making agreement more difficult.
ADR tends to work best when the facts have been established and the areas of disagreement are understood, but before formal litigation becomes the primary focus.
How do you apply for ADR?
Applications are made online through HMRC’s ADR service.
Importantly, taxpayers should still protect their appeal rights by lodging an appeal or requesting a statutory review where appropriate.
If tribunal proceedings have already started, ADR may still be available if a stay of proceedings is requested.
HMRC will then assess whether the case is suitable for ADR, typically within a few weeks.
Does ADR actually work?
In many cases, yes.
According to HMRC, 84% of cases entering ADR during 2023/24 were resolved successfully.
However, not every application is accepted. During the same period, around 61% of applications were rejected because they did not meet the criteria or were not at the right stage of the process.
This highlights the importance of seeking advice before applying.
What happens if ADR doesn’t resolve the dispute?
ADR isn’t always successful.
If an agreement can’t be reached, taxpayers still have several options available.
These include:
- Continuing with an appeal before the First-tier Tribunal
- Requesting a statutory review by a different HMRC officer
- Applying for ADR again later if circumstances change
In other words, attempting ADR does not remove your right to pursue other routes.
Could ADR become more widely used?
The Government recently consulted on ways to modernise and improve HMRC’s dispute resolution processes.
Part of that consultation considered expanding the use of ADR to encourage earlier settlements, reduce costs and ease pressure on the tribunal system.
The results are still being reviewed, but many advisers believe ADR could play an increasingly important role in resolving tax disputes in the future.
Facing an HMRC enquiry or investigation?
If you’ve received a letter from HMRC or you’re involved in a tax dispute, it’s important to understand your options from the outset.
The right strategy can often save time, money and unnecessary stress.
If you’d like advice on an HMRC enquiry, appeal or Alternative Dispute Resolution application, contact Jon or the team at Jon Davies Accountants.
We’ll help you understand your position, protect your rights and work towards the best possible outcome.
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Any questions?
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