Business Law & Compliance

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Alternative dispute resolution for SMEs: What you need to know

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The ADR service was launched by HMRC on 2 September 2013 following the conclusion of a successful two-year pilot run by HMRC to test its effectiveness. It is available to all SMEs and individual taxpayers whose tax affairs are handled by Local Compliance SME, Local Compliance Individuals, Public Bodies business units, or those who are involved in a dispute with HMRC which relates to either direct tax or VAT.

What is ADR?

ADR is a voluntary, non-binding, informal process in which a neutral person assists the parties to resolve their dispute and reach a negotiated settlement through means of facilitated, confidential discussions. The facilitator is an impartial and independent trained mediator from HMRC, who has had no prior involvement in or knowledge of the dispute. The facilitator is not an adviser to either of the parties and it is not his/her role to tell the parties how they should resolve the dispute. Rather, the process relies on the ability of the parties to reach a voluntary agreement and it is the role of the facilitator to work with the parties to set out the framework and process for the facilitated negotiation and to assist them to try and reach an agreement.  

Which cases are suitable for ADR?

Although not all cases will be suitable for ADR, SMEs should consider taking advantage of the ADR service in all disputes with HMRC where the parties are seeking to work collaboratively but appear to have reached deadlock in their negotiations, or where the relationship between the parties has broken down. 

ADR may be particularly appropriate in disputes which involve:

  • Facts which are capable of further clarification;
  • Evidential difficulties for either party; and/or
  • Some misunderstanding or disagreement between the parties over how the facts or legal issues and there is legitimate scope for any party to obtain a better understanding of the other’s arguments.

However, where the legal issue in dispute is considered by HMRC to require clarification in the wider public interest, or the case could only be resolved were HMRC to depart from its established policy or technical view, or is at an advanced stage before the Tribunal, ADR will not be appropriate.

A real opportunity for SMEs

The benefits of ADR are significant. SMEs who engage in ADR will save considerable time, effort and costs when compared with litigation. The timescale for resolving a dispute by way of ADR is substantially shorter than the timescale for litigation.  

There are other advantages too. ADR preserves and, in some instances, even enhances the relationship between the taxpayer and HMRC by resolving a dispute in a constructive way. Both parties retain control of both the process and the outcome of the facilitated discussions, without being subject to a Tribunal’s determination. In addition, the ADR proceedings are entirely confidential and and without prejudice to any ensuing litigation.

There is no downside for SMEs to use the ADR service where appropriate. ADR is not a costly or unduly time-consuming exercise for the taxpayer. Nor does it affect a taxpayer’s right to appeal. Therefore, even if ADR is unsuccessful insofar as the parties do not reach agreement, the taxpayer is still able to pursue an appeal to Tribunal. 

In such circumstances, the Tribunal hearing is likely to be shorter (and, therefore, less time-consuming and expensive in terms of preparation) than it would have been had ADR not been undertaken: ADR  very often leads to a clarification and narrowing of the issues in dispute and both parties will have a better understanding of the other’s arguments.

Overall, the launch of the ADR facility is to be welcomed. It marks a real opportunity for SMEs to maintain constructive and collaborative relationships with HMRC and to resolve disputes efficiently with clear cost and time savings, which should not be missed.

Kate Ison is an associate of contentious tax at Berwin Leighton Paisner.

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