Market leading insight for tax experts
View online issue

ADR: facilitating the tax tribunal process

printer Mail
Speed read
First-tier Tribunal President Judge Sinfield has issued a statement under rule 3 of the tribunal rules spelling out the benefits of using alternative dispute resolution (ADR) in the management of tax disputes, both before litigation and after an appeal has been made to the tribunal. The statement clarifies that ADR can occur after HMRC has issued its statement of case or lists of documents and/or witness statement have been exchanged. All parties are encouraged using either the HMRC facilitator or jointly with the taxpayer’s mediator/facilitator to consider using ADR which the tribunal will facilitate with a 150 day stay; enough time to complete the ADR process.

Concern has been growing about the delay in the time it takes for a tax appeal to come before the tribunal, with recent criticism in the press (‘Concern grows over remote tax tribunal hearing delays’, Financial Times, 29 April 2020) that the problem has been exacerbated with stays in proceedings announced as a result of the Covid-19 pandemic.

In fact, though, such press reports do not tell the full story. As many as 60% of cases are stayed at any one time for a variety of reasons, such as awaiting a decision in another case. And tribunal working practices have been adjusted to accommodate the immediate pressure caused by Covid-19, so any further extension of the general stay beyond June is looking unlikely.

In addition, over the last few weeks, the president of the tax chamber of First-tier Tribunal, Judge Sinfield, and other tribunal judges have been actively examining both the continued and long term use of video hearings, and the suggestion that a joint statement of facts both agreed and not agreed should be produced at an early stage, before proceeding to witness statements. Possible adjustments to the proceedings timetable to shorten the time before a hearing date is set are also being considered.

All such measures will improve the efficiency of the litigation process and reduce delay.

The statement

Judge Sinfield has now identified another dispute resolution tool, hidden in full view for over a decade, to ease the pressures on the litigation process: it is alternative dispute resolution (ADR).

In a statement issued on 15 June 2020, Judge Sinfield brought attention to the tribunal’s obligation to facilitate the use of ADR, and he effectively activated the provisions of rule 3 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules, SI 2009/273, which states quite clearly that:

‘3(1) The Tribunal should seek, where appropriate –

'(a) to bring to the attention of the parties the availability of any appropriate alternative procedure for the resolution of the dispute; and

'(b) if the parties wish and provided that it is compatible with the overriding objective, to facilitate the use of the procedure.’

This statement is welcome, and some might say, long overdue. Not only is it a clear and positive endorsement of the role ADR can play in a tax dispute, but it also for the first time clarifies several practice points, as follows:

  • ADR can be used even after an appeal has been made to the tribunal.
  • ADR is possible at any stage of the proceedings, even after HMRC has served its statement of case or lists of documents and/or witness statements have been exchanged. HMRC has accepted this clarification and will amend the guidance on its website to include this point.
  • The tribunal will also facilitate the use of ADR by allowing a stay of 150 days where the parties have agreed to its use.
  • Where a hearing date has been set, however, the tribunal will only be willing to stay proceedings if the parties can satisfy it that the ADR process will be concluded in good time before that date to allow the appeal to go ahead in the event ADR does not completely resolve the issue.

The statement gives helpful and practical guidance on ADR. In particular, it states that ADR can help taxpayers to resolve disputes in a cost-efficient way; and that if it does not lead to a complete resolution, it can assist proceedings by securing agreement on the issues which need to be decided by the tribunal. It also sets out how to apply for ADR where an appeal has been made, referring to the HMRC website for guidance on this issue, as well as more generally suggesting that taxpayers could look for guidance from their professional advisers, including a mediation-trained specialist.

The statement makes the important observation that ADR can be used before an appeal has been made. This is a significant point that has been at the heart of HMRC’s collaborative guidance set out in its litigation and settlement strategy (LSS) commentary (last updated in October 2017).

The statement observes that the HMRC ADR service uses independent mediation-trained HMRC officers to facilitate the ADR process. Often, however, and particularly in large and complex cases, the taxpayer will also appoint an external mediation-trained professional (often independent of the client’s advisory firm) to provide guidance in the ADR process and work alongside the HMRC facilitator. In the writer’s experience, such a professional also often acts as a co-mediator or co-facilitator at the invitation of HMRC.

The statement is the product of an initiative suggested by the author and involving Judge Sinfield, senior members of HMRC’s ADR Unit and Solicitors Office, as well as other practitioners; it was a truly collaborative process and one that was completed in three weeks.

While it was prompted by the Covid-19 disruption, Judge Sinfield identified it as something that went beyond that immediate need and was required for the longer term to augment the tribunal process.

It is significant that the statement has the full support of HMRC’s ADR Unit and its Solicitors Office. There will be updates to HMRC’s ADR website; in particular, clarifying the fact that ADR is possible even after HMRC has served its statement of case.

The likely practical impact

Will it assist to significantly reduce the backlog of tribunal hearings and the number and length of cases that will require hearings in the future?

ADR is not a panacea for all tax disputes. The statement points out that only cases categorised by the tribunal as ‘standard’ or ‘complex’ under rule 23(2) will be eligible for ADR consideration after an appeal has been made, in line with HMRC’s guidance. This limitation is unlikely to impact the tribunal hearing workload, as the other two categories – ‘default’ and ‘basic’ – do not usually require a full hearing with documentary or witness evidence: ‘default’ hearings are used for appeals against late filings and late payment penalties; and ‘basic’ hearings are for appeals against other penalties and information notices, as well as applications for permission to bring a late appeal or closure notice. Such cases involve limited issues of fact and law, and perhaps for that reason are expressly excluded by HMRC from the ADR programme.

Further, some issues might be so binary that a judicial decision is the only way of resolving the dispute. Or a case might involve a technical issue on which HMRC’s current policy needs judicial clarification.

However, there are other cases that at first sight appear to be binary but which, as HMRC’s LSS commentary states, ‘after further review, discussion or testing, turn out not to be genuinely “all or nothing” [and involve] a range of possible figures for what might be the right tax’, or where there is a range of possible technical arguments deserving of fuller consideration.

This is the point at which a mediation-trained specialist can help by bringing a fresh and different perspective. The mediator will seek to disengage the parties from a classic dispute pattern and shift the focus to a more collegial and collaborative approach. By concentrating on their respective needs and wants, the mediator can unlock the most entrenched of positions and move the parties closer to a resolution.

What is ADR?

It is a flexible dispute resolution tool more usually associated with mediation or facilitation but including expert determination, binding or non-binding, and other techniques all aimed at helping the parties resolve disputes or reach key decision points in a cost-effective and efficient manner.

At the heart of ADR is a willingness, voluntarily, for both parties to engage together with a collaborative and positive mindset with the mediator’s task to achieve that engagement.

The Centre for Effective Dispute Resolution (CEDR), which has been responsible for training practitioners and HMRC personnel in mediation skills, defines mediation as: ‘A flexible process conducted confidentially in which a neutral person actively assists parties in working towards negotiated settlement of a dispute ... and the parties are in ultimate control of the decision to settle and the terms of resolution’.

The key elements are its confidentiality and the fact that, while the mediator controls the process, the parties control the outcome. It is not arbitration. The mediator does not sit in judgment.

The effectiveness of ADR

Questions have been asked about the effectiveness of ADR and how it is currently being operated by HMRC, especially in large and complex cases. The annual statistics published in HMRC’s annual reports tell a tale in two parts.

In the case of small and medium-sized and individual cases, ADR has been successful. In the 12 month period to April 2019, the number of applications for ADR exceeded 1,100 with a success rate of 88% for cases accepted into the ADR programme (with ‘success’ meaning a case had been either fully or partially resolved or clarified with all results producing some benefit to the parties).

However, the position could not be more different for large and complex cases. Only 11 cases were accepted into the ADR programme in the 18 month period up to April 2016 (the last time HMRC reported this statistic separately). It is understood that fewer than five cases were accepted in the 18 months period to April 2019.

While it could be that the LSS collaborative strategy has simply reduced the need for ADR in large and complex cases, it is more likely that there is a belief that the aim of ADR – to reach settlement in any case accepted into the programme – is simply too ambitious for such cases. That would be disappointing, as the LSS commentary itself points out that ADR can be used to cover individual elements in dispute (e.g. agreements on the facts), even if the parties are reconciled to a court hearing to get judicial clarification on a particular technical point.

In the author’s experience, a complex case can be suitable for ADR, especially if the facilitation is structured as a series of discussions over a period of time, rather than using the typical mediation model for which a single day is set aside to reach a resolution.

Another area of concern is whether the ADR process or some other form of ADR (‘ADR lite’) should be engaged at a much earlier point in the dispute’s ‘journey’ towards litigation.

The LSS commentary maps out the various stages in that journey and provides 14 pages of guidance on ‘handling disputes’ (section 5), including a useful section describing ‘collaborative working’. What it describes is an approach to working together: applying an ‘openness and early dialogue’ approach, jointly agreeing a timetable with key milestones and target dates for a variety of events such as establishing facts, providing information and documentation and their review, reaching decisions and testing conclusions with the provision of regular updates on progress towards these key milestones. 

More significantly, it encourages ‘discussing, sharing and testing the technical arguments to assess relative strengths and weaknesses in analysis’ establishing a decision tree approach to the discussion, as well as exploring ‘possible alternative interpretations of the facts and relevant law that might give a different outcome from those initially proposed by HMRC and the customer’.

Taxpayers and their advisers could do well to ask whether their engagement with HMRC is following, or has followed, that recommended way of working. If not, they could try to reset the relationship along those lines, possibly with the assistance of a facilitator.

Final thoughts

Judge Sinfield’s statement effectively invites both parties – not just the taxpayer – to consider their current position and examine whether all or any of the issues heading for litigation can really only be resolved through judicial determination. It helps to clarify and reduce some of the procedural issues that have impeded the use of ADR. The statement is therefore a timely reminder – even a ‘wake-up call’ – to all those involved in dispute resolution management that litigation does not have to be the inevitable result of disputes. A concerted effort to apply ADR, especially where a dispute has been languishing for several years or is fast-approaching the tribunal hearing, could produce welcome results for everyone.