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HMRC’s ADR Procedure

HMRC Investigations Handbook 2018/19


Alternative Dispute Resolution (ADR) is available to facilitate a mediated settlement with HMRC and is open to all taxpayers, including individuals, small businesses, trusts, estates and large corporates. It covers all direct and indirect taxes.



The background is quite straightforward in that an alternative to taking cases to Tribunal is desperately needed. This is largely due to the backlog of cases listed for the First-tier Tribunal, which HMRC’s Annual Report and Accounts state is nearly 27,000 as at 2016/17, which is almost triple the cases awaiting tribunal five years ago. HMRC estimates that it takes an average of 18 months just to get to a hearing date. With pressure from the Treasury to collect tax, unresolved disputes are locking up billions of pounds in uncollected tax. ADR is seen as part of the answer to both raise tax revenues and reduce the backlog of listed cases for Tribunal, but it can also benefit taxpayers and their advisers.

It may sound advantageous to have a tax bill that is not yet paid, but HMRC certainly does not think so and this led to the development of accelerated payment notices (see Chapter 8). However, concerned taxpayers will often keep funds in reserve for tax in dispute so there is no real cash flow advantage. The late payment interest will also mount up during a dispute and many people want certainty about their debts and available capital. The ADR process can speed up a tax resolution and is therefore welcomed by many taxpayers, as well as the tax authority.


ADR can help to manage the psychological cost of being in dispute with HMRC, and this should never be underestimated. Most taxpayers find a tax enquiry is stressful and distracting. As in divorce cases, an aggressive or uncooperative attitude will often make the dispute harder to resolve as time passes. Once the dispute reaches a time period of over one year there are often entrenched positions and a gradual slide towards litigation. Mistrust of the other side builds and communication will become increasingly difficult the longer the case continues. Mounting professional costs will also add to the pressure of a long-running dispute with HMRC. It is for this reason that most professional fee insurers welcome ADR as an alternative to expensive litigation.


The ADR route is voluntary and non-statutory so any party can withdraw at any point with no negative implications, making ADR a potentially risk-free strategy if well managed. The nature of the mediation process itself is less confrontational than conventional tax dispute resolution, such as bringing a case to the Tribunal. HMRC’s objective for ADR is generally to reach a cost-effective settlement, although as we will see below, this must be within the boundaries of the litigation and settlement strategy.

For many private clients, trustees and executors, the real attraction of ADR is that the process is completely confidential, and all discussions will be on a ‘without prejudice’ basis (these principles are explored below in more detail). In contrast, for all cases that go to Tax Tribunal the decisions are published in the public domain, which can often lead to unwanted publicity or breaches of privacy.


ADR, in the context of tax disputes, is currently only mediation. HMRC worked closely with the Centre for Effective Dispute Resolution (see to develop mediation for tax disputes. It is therefore helpful to refer to the CEDR definition of what the process means:

‘Mediation is a flexible process conducted confidentially in which a neutral person actively assists parties in working toward a negotiated agreement of a dispute or difference with the parties in ultimate control of the decision to settle and the terms of resolution.’

The objective of mediation is to reach a settlement which is owned by the parties, and which is practical and sustainable. Any agreement which is reached in principle is then recorded in a settlement agreement; with HMRC this is usually a contract settlement to close an open enquiry. For settlements were the tax at stake is over £5 million and the decision could have a far-reaching impact on HMRC policy, any settlement proposal may be required to go through the Governance panel before it can be formally accepted by HMRC.


HMRC will offer to provide a facilitator for the ADR process without charge. This provides taxpayers with the option of having someone who has not been involved in the dispute to work with the two parties. The independence of the facilitator or mediator is a point that HMRC is keen to emphasise; although many practitioners may be skeptical of the independence of the HMRC mediator, this will be borne out by experience.

The person leading the mediation will act as a neutral third party mediator. They do not take responsibility for the outcome of the dispute: the decision making remains with the two parties. However, the mediator or facilitator will work with both sides to explore ways of resolving the dispute through meetings and telephone conversations. They will help the parties to focus on the areas that need to be resolved and, if required, will help re-establish dialogue. In some cases, HMRC and the taxpayer may both agree to jointly pay for a professional independent mediator, for example, from CEDR or another professional firm.


Unlike the appeals process, a taxpayer can request ADR at any point during the enquiry process provided that the dispute is sufficiently mature ie, the taxpayer has provided the relevant facts and the areas of dispute are identified. ADR can therefore take place before a formal assessment has been issued and a decision is made by HMRC.

It is important for a taxpayer to understand that if a formal assessment has been issued and final decision made by HMRC, they must continue with an appeal or ask for an internal review as well as asking for ADR, because the ADR process is outside of statute and a taxpayer should preserve his legal rights.

Even if a case is not closed via mediation, most parties will find the work and time involved is beneficial as preparation for a Tribunal hearing.


Mediation is often misunderstood, so it is important to remember and explain to taxpayers what it is not. Mediation is not:

  • adversarial;
  • arbitration;
  • a bar to litigation (a listing for the Tribunal can run in parallel);
  • a sign of weakness;
  • compromising.

Learning from the ADR feedback to date


HMRC ran a two-year pilot of ADR before it became a permanent offering in 2013. Since then ADR has been ‘business as usual’ at HMRC. The view of tax practitioners who have used ADR is that, ‘carried out properly, ADR has a valuable role to play in dispute resolution involving tax matters’.

The latest HMRC statistics demonstrate that ADR uptake continues to grow with the number of applications in 2017/18 about 2.5 times the level of 2015/16. HMRC consider that the increase in applications is a consequence of them offering ADR to a wider group of taxpayers. In 2017/18 they began trialling ADR in disputes where there were binary, multiple and complex issues. In these cases, taxpayers were offered the opportunity to explore and explain facts to a greater extent than was previously available.

The statistics also show is that the vast majority of applications are accepted into ADR. In the last couple of years there has been a cultural shift within HMRC whereby the default position is now that cases should be accepted into ADR unless there is a specific reason why ADR is not appropriate. Many of the cases rejected for ADR in 2015/16 were rejected either because there was no ‘live’ dispute (ie no appeal had been made), or the case was stayed behind a lead case or the dispute related to a policy ‘red line’ matter.

The speed in which HMRC deals with applications is also encouraging with 92% of applications turned around within the 30-day target. The most interesting statistic for taxpayers with long-running disputes is that 85% of cases are closed within 120 days. For cases that have been open in excess of 550 days this is a significant benefit. Feedback supports the statistics and indicate that ADR invariably adds value to cases that have been ongoing for at least 18 months. Whilst ADR doesn’t guarantee resolution, it can certainly turbo charge the process.

HMRC statistics for SMEi ADRs show that new evidence or education of the taxpayer or the HMRC decision maker was the key to mediating a settlement in 80% of cases. However, 20% of cases were resolved simply because both sides started communicating again. It is also noted that trust and estate disputes with HMRC can be mediated using the SME and individual route.


Whilst feedback from both HMRC and taxpayers alike has been very positive, it is important to remember that ADR in tax is still in its relative infancy. In order to build on this strong base and continue to grow in relevance and application, HMRC are seeking to learn from the common themes emerging post completion of ADR days.

The following are a summary of the key issues arising:

  • Lack of communication in respect of policy ‘red lines’ in advance of the day. Unwillingness or inability to consider alternative interpretations in these instances.
  • Correct identification of the real ‘decision maker’ in advance of the ADR day. Ensuring that they attend in person on the day or as a minimum on the phone.
  • Lack of preparation on the part of the HMRC case worker or indeed the taxpayer or their advisor.
  • HMRC’s governance position not made clear to the taxpayer or their advisors in advance so that it becomes apparent only on the day itself that there is an additional step that needs to be taken on HMRC’s side before settlement can be concluded.

An awareness of the common ADR pit-falls can help taxpayers and their advisors avoid encountering similar hurdles in the future.


The latest statistics indicate that ADR is used far less frequently in large and complex disputes. The lessons learnt in respect of these type of cases is that they lend themselves more to facilitated discussions rather than one day mediations.

Looking beyond the statistics the more general feedback suggests that, in some tax disputes, simply requesting ADR appears to have motivated the parties to resolve the dispute themselves, without intervention from a mediator.


Feedback from taxpayers taking part in ADR showed that doubts expressed about the neutrality of facilitators recruited from within HMRC proved unfounded. The general experience was that facilitators are experienced and senior HMRC personnel who tend to have a refreshingly pragmatic approach.

Despite the findings above, both HMRC mediators and taxpayers have indicated that dual mediation can be more effective in more complex mediations. The concept of ‘two heads are better than one’ is particularly relevant in the context of the mediator role on an ADR day which requires both skill and stamina.

The ADR process itself is a free service provided by HMRC, so paying for a second mediator may be an option that taxpayers are prepared to consider, especially where the tax at stake is, say, in excess of £50,000–£100,000. Preparing for a mediation day in practice should still be cheaper than preparing for a court case.

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