In 2012, HMRC published their Litigation and Settlement Strategy. This is its internal guidance on handling tax disputes and broadly states that, if an inspector considers that they have a 50% or greater chance of winning a case at a tax tribunal, that they should look to litigate.

Inevitably, this created a huge backlog of cases to be heard at tribunal so the Alternative Dispute Resolution (ADR) process was brought in to complement it, with a view to resolving disputes prior to the case being heard at an independent tribunal hearing.

The ADR aims to resolve disputes between HMRC and taxpayers. It is potentially available to any individual or business, regardless of whether or not an appealable tax decision or assessment has been raised by HMRC.

The ADR process involves a mediator working with the taxpayer and HMRC to mediate discussions, with the aim of reaching an agreement on a negotiated settlement figure. The mediator will usually be a specially trained, independent officer.

The ADR route can be very effective, especially in cases where the basic facts are in dispute or where the taxpayer feels that HMRC are making inaccurate assumptions or causal links.

The ADR process often helps both parties reach an agreement but, even if a successful settlement is not reached, the process can help clarify each party’s position. Furthermore, whilst any discussions are on a ‘without prejudice’ basis, co-operation with the process does demonstrate to HMRC that the taxpayer is committed to resolving the position.

Most importantly, entering into the ADR process will not affect the taxpayer’s existing review and appeal rights. If ADR does not result in a settlement, the next step is usually to take the case to tribunal.