UK Wants Simpler, Modernized Approach to Resolving Tax Disputes

The expression “alternative dispute resolution,” commonly abbreviated to ADR, covers a number of potential options for resolving disputes. What they all have in common is the avoidance of matters being played out in the English courts.

The three most common forms are arbitration, mediation, and expert determination. Each has its own benefits and difficulties and might have different appeals to either taxpayers or the UK tax authority, HM Revenue & Customs.

Earlier this year, HMRC launched a consultation seeking views on options for simplifying, modernizing, and reforming its approach to dispute resolution. The consultation focused on the ease of access and use of HMRC’s ADR and statutory review processes.

While arbitration remains a key part of the ADR landscape in England and Wales, in the context of issues between HMRC and taxpayers, ADR refers specifically to mediation.

In the words of the HMRC consultation, ADR “involves a trained and externally accredited HMRC mediator who works with the taxpayer, their representative, and the HMRC caseworker to help address any breakdown in communication or allow exploration of points that may have been misunderstood.”

Taxpayers will likely be pleased to see HMRC taking further steps to embrace ADR in the form of mediation—a quicker, cheaper, and private way to help resolve disputes between taxpayers and HMRC. It’s still unclear whether there will be material changes to the current approach that will encourage parties to adopt this option.

The consultation states that the taxpayer or HMRC can request ADR and that it can take place at any point during a compliance check, both before and after a decision has been issued. The mediator will have had no prior involvement in the case.

Mediation

A mediation can occur early in HMRC’s compliance-checking process, allowing taxpayers to resolve their disputes more quickly, cheaply, and privately. HMRC’s consultation focuses on improving access to ADR and potentially removing barriers that may delay use of the process.

Although speed and cost are important considerations, privacy is perhaps the most appealing aspect of mediation to taxpayers. However, this could also be the area that generates the most controversy. Mediation is a creature of contract. It isn’t a process administered by the state. As such, there is no requirement that this form of justice take place in public.

There is an obvious benefit to this for taxpayers—the opportunity to resolve their disputes with HMRC in private, away from the glare of publicity is very attractive.

As the recent publicity around the jockey Frankie Dettori’s bankruptcy and issues with HMRC shows, high-profile individuals who wish to remain anonymous in their dealings with the tax authority may not always be successful, given the presumption that the vast majority of court proceedings in England and Wales take place in public.

There will be reservations from both HMRC and wider civil society groups about tax matters being resolved behind closed doors. First, HMRC itself may wish to use proceedings to “make an example” of individuals or otherwise to show that certain types of structure or approach will no longer be tolerated.

Second, there is a broader concern around big business and celebrities resolving tax disputes without the glare of publicity. Whether there will be tolerance for justice being done, but not being seen to be done, remains to be seen.

For mediation at least, one could argue that the position that tax matters are generally private is merely being preserved. The parties are in essence reaching an agreement about the position. This is perhaps no different to HMRC raising inquiries and addressing them in correspondence, which is never public. Mediation can be seen simply as an extension of that process.

But parties ought to bear in mind that there is no guarantee of a mediation reaching an outcome. The mediator doesn’t make a determination; they simply facilitate agreement between the taxpayer and HMRC. A failed mediation may well serve only to add to delay and increase costs—the very opposite of what is intended.

Arbitration

Arbitration is a well-established process, with a statutory basis in the Arbitration Act 1996 and with a strong supporting infrastructure within the English legal profession. Broadly, it’s analogous to a court proceeding—being adversarial and following a similar procedure. But as a creature of contract between the parties, it’s completely private.

There is no suggestion in the consultation that HMRC is looking to embrace arbitration as an alternative to the Tax Tribunal. This is perhaps unsurprising, given that the Tax Tribunal’s expertise negates one of the main appeals of arbitration to many parties—being able to choose subject matter experts as arbitrators.

The potential for tabloid headlines about “secret courts” is probably enough on its own to consign this idea to the back burner at best.

Expert Determination

Expert determination is an alternative process, involving a subject matter expert deciding a dispute based on submissions on paper, without a hearing. The process leads to a binding determination, akin to an arbitration and unlike a mediation, which sees the mediator seeking to guide parties to reach an agreement rather than determine matters themselves.

The paper-based process is inevitably quicker and cheaper than those that involve hearings or in person-meetings. While there don’t appear to be plans for a process akin to expert determination to be used by HMRC at the moment, it may be usefully considered in the future.

Simplified Process

Many, including ICAS, hope to see this consultation lead to a simplified, aligned appeals process that encourages more use of ADR and statutory review, given the aim of quicker resolution of tax disputes to the benefits of all parties.

Taxpayers and their advisers will be hoping to see positive news as HMRC consider the fruits of the consultation later this year.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Richard Coopey is partner at Grosvenor Law.

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