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Worrying decline in use of HMRC mediation to settle tax disputes

Published on 20 December 2019

HMRC figures show a worrying decline in use of mediation to settle tax disputes in the past year, with the number of cases entering mediation falling 25% from 553 in 2017/18 to just 417 in 2018/19*, says City-headquartered law firm RPC.

  • Only 417 cases mediated last year, down 25% in a year
  • Underutilised tool only yields £45m in additional tax

RPC says that fewer taxpayers are applying to use Alternative Dispute Resolution (ADR) to settle with HMRC because the tax authority refuses to mediate in far too many cases. 

Requests to use mediation fell 19% from 1,411 in 2017/18 to 1,144 in 2018/19. The firm says that this is forcing too many cases into time-consuming litigation through the Tax Tribunal system.

Robert Waterson, Partner in the Tax Disputes practice at RPC, explains that HMRC refuses requests for mediation from taxpayers who have filed an appeal with the Tax Tribunal if HMRC has provided a full breakdown of how it calculated the disputed tax**. Without this information, it is difficult for a taxpayer to know what HMRC's position is and prepare for ADR.

Only £45m in additional tax was brought in by HMRC though ADR in 2018/19. RPC says that this figure could be much higher if HMRC were open to using it in more cases.

Alternative Dispute Resolution in tax disputes typically involves HMRC mediators who work with the taxpayer and HMRC to facilitate a settlement of the dispute. The aim is to reach an agreed settlement of the dispute without the need for the case to proceed through litigation before the Tax Tribunal.

Says Robert Waterson: “It is a concern that ADR is still so under-utilised, as it can work very well when HMRC agrees to it. Far too often, however, HMRC refuses to actually sit down at the table with taxpayers and discuss a sensible compromise.”

“HMRC can be very inflexible – in most disputes, you can have full information on its case or you can have mediation, but not both.”

“That leaves some taxpayers having to enter ADR without full knowledge of HMRC’s actual position.”

“If HMRC took a more sensible approach to mediation, it could bring in a lot more tax and avoid formal litigation before the Tax Tribunal.” 

RPC explains that ADR is particularly appropriate for cases where:

  • communication has broken down between HMRC and the taxpayer
  • the taxpayer believes HMRC has made incorrect assumptions or misunderstood the correct position
  • the issue in dispute is over the facts of a case or a misunderstanding

The process is advantageous to HMRC as ADR agreements do not set legal precedents that can be used by taxpayers in other disputes.

*Year end March 31 2019. In 2017/18, 455 cases were resolved successfully, and a further 98 went to litigation. These figures fell to 367 and 50 respectively in 2018/19. Source: HMRC

** Known as a ‘statement of case’