ALTERNATIVE DISPUTE RESOLUTION RESOLVING TAX DISPUTES

ALTERNATIVE DISPUTE RESOLUTION RESOLVING TAX DISPUTES 2 ALTERNATIVE DISPUTE RESOLUTION | RESOLVING TAX DISPUTES WHAT IS IT AND WHY IS IT USEFUL? ...
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ALTERNATIVE DISPUTE RESOLUTION RESOLVING TAX DISPUTES

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ALTERNATIVE DISPUTE RESOLUTION | RESOLVING TAX DISPUTES

WHAT IS IT AND WHY IS IT USEFUL?

WHAT EXACTLY IS ADR? Alternative Dispute Resolution (ADR) is a mediation process that can facilitate the settlement of tax disputes.

WHAT ARE THE ADVANTAGES OF MEDIATION? •

It re-establishes communication





It is a confidential process and therefore avoids the risk and commercial sensitivities associated with public court hearings and reported decisions

Like commercial mediation, ADR follows a formalised process managed by a neutral mediator



Decision makers on both sides attend the day so an agreement in principle can be reached

WHICH TAXPAYERS CAN USE IT? It applies to all taxes and is available for all taxpayers (companies, businesses and individuals).



It can be used to narrow the issues in dispute between the parties so, if an agreement cannot be reached and litigation is needed, then it will be more focused



Unlike commercial mediation, the parameters of HMRC’s decision making are bound by a framework called the Litigation and Settlement Strategy (LSS)



It may allow both parties to withdraw from previously held views and move towards a workable and mutually acceptable solution



Agreement may be reached in principle on the day but it will need to go through HMRC governance before final settlement



It can accelerate resolution. The ADR process is structured and has a tight timetable. This can help focus the mind, enable the real reason for a dispute to be identified and allow a compromise to be reached through discussions facilitated by the mediator

WHAT MIGHT THE COST BE OF A MEDIATION?

WHAT TYPE OF TAX DISPUTE MAY BE SUITABLE FOR MEDIATION? Many types of tax disputes may be resolved by mediation including cases where: •

there is some uncertainty over the facts, the result might turn on oral evidence or it is felt that HMRC have not fully considered/understood the information presented to them;



the dispute has a range of possible outcomes or different valuations as there is limited documentary evidence or verifiable facts;



positions became entrenched based on early conclusions or assumptions and both sides are willing to compromise in order to reach a settlement;



litigation is unlikely to offer a cost effective or efficient resolution of the dispute, perhaps due to the facts/background or because it is unlikely to create a precedent;



there is a lack of understanding and/or articulation of the parties’ respective technical analyses and scope to explore them given the case’s circumstances; and/or



attempts to work collaboratively failed such that a facilitated process may help the parties work together to reach a mutually acceptable settlement.

HOW DOES ADR COMPARE TO MEDIATION?



There is no obligation on either side to settle if they are unhappy with what is on offer. The taxpayer and HMRC are the decision makers, not the mediator or a judge.



There is no special cost or formula for ADR fees and our time is charged on a time spent basis just like any other project. The beauty of ADR is that it is usually is held on just one day. The professional fees are therefore limited to our time on the day plus support both before and after. As a result, the costs vary depending on whether it is a simple dispute or a complex case where strategic and technical preparation is required in advance of the ADR day.

The ADR process worked well for us in that it enabled a long-running dispute with HMRC to be resolved on very favourable terms. The process itself worked very well and we are very satisfied with the result. BDO CORPORATE CLIENT



RESOLVING TAX DISPUTES | ALTERNATIVE DISPUTE RESOLUTION

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THE MEDIATION PROCESS

WHAT HAPPENS BEFORE THE MEDIATION DAY?

IS IT POSSIBLE TO USE A LESS FORMAL PROCESS?

Once HMRC accepts an application for ADR, a date for the mediation is agreed by the parties and a trained mediator (also called a facilitator) is appointed. A mediation agreement is also signed at this stage.



Both sides then prepare their evidence and strategies for the day itself so that they are ready to discuss the issues, tax at stake and the basis and quantum of any penalties as well as the terms of any time to pay agreement which may be needed.



On the day, the mediator will meet both parties in their own private rooms before convening a joint meeting. The mediator will begin the joint meeting by reminding everyone of the ground rules for the day before inviting both sides to make brief opening statements summarising the background to the case and the points to be resolved. Whilst the taxpayer needs to be there (or at least be available to join by conference call) on the day, their adviser usually makes the opening statement. After the joint meeting, the parties return to their own rooms. The process is fluid; the mediator will run the mediation in a way that suits the particular dispute and it may involve a mixture of private and joint meetings during the day whilst the issues and possibilities for settlement are explored. Tax or valuation specialists may be needed at specific points during the day, on both sides. Any agreement reached on the day can be documented in writing, even if it is agreed in principle.

In this case one HMRC mediator runs the meeting using mediation techniques with a view to reaching a mutually acceptable solution to conclude the dispute.



For straight-forward cases the mediator is usually an HMRC employee with mediation training for which there is no charge



For complex cases joint HMRC/agent mediators may be used with each side bearing their own costs



In limited circumstances, for particularly large, complicated cases the mediator may be an independent third party whose fee is jointly met by the two parties.

WHAT IS THE MEDIATOR’S ROLE? •

WHAT DOES MEDIATION ENTAIL? Both parties, the taxpayer with their advisers and HMRC, engage in a mediation process over one or two days which is led and facilitated by the mediator in a flexible and open way with a view to reaching a settlement.

In some cases, it may be appropriate for there to be one meeting attended by the HMRC team, taxpayer and the taxpayer’s advisers

WHO IS THE MEDIATOR?

The mediator is a neutral third party who has not been involved in the case to date

WHAT ARE THE BENEFITS OF HAVING JOINT MEDIATORS?



Their aim is to unlock the stalemate between the taxpayer and HMRC as well as to encourage both parties to agree terms to bring the dispute to an end



The mediators move together from room to room during the mediation and jointly make decisions on the next steps of the mediation process



Discussions with the mediator on the mediation day are confidential so that both parties have freedom to explore the issues and thoroughly consider potential parameters for settlement



Each mediator brings their own expertise and experience to helping the parties find a way to resolve the dispute. In complex disputes two heads can literally be better than one



The mediator usually cannot mention something discussed in a private meeting with out the express permission of the party concerned.



Joint mediators tend to mediate more complex disputes and are often both Centre for Effective Dispute Resolution (CEDR) Accredited Mediators.

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ALTERNATIVE DISPUTE RESOLUTION | RESOLVING TAX DISPUTES

CASE STUDIES

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CASE STUDY – INDIVIDUAL

Situation: HMRC enquired into the capital gains tax position on the sale of a property that had, at various times, been the client’s home or let to third parties. Gaps in the available documentation and uncertainties over facts meant that after 3 years of enquiries no agreement had been reached and relationships between the taxpayer and HMRC were strained.

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What we did: BDO’s team represented the client for the mediation which was facilitated by an HMRC mediator. We made constructive suggestions, evaluated HMRC’s comments/offers, successfully defended against a tax geared penalty and agreed a time to pay arrangement as part of the overall settlement. Outcome: The client was delighted with the settlement terms and also that they had a written agreement in principle with computations of tax and interest to take home with them.

CASE STUDY – COMPANY

Situation: Progress on HMRC’s long running enquiry into a company’s land remediation tax relief claim had stalled. What we did: We successfully applied to HMRC for mediation. Joint mediators (from HMRC and BDO) facilitated the mediation day. BDO also represented the client, whose Financial Director also attended the mediation.

Outcome: The mediation day did not result in a settlement but some facts and technical issues were clarified which led to HMRC withdrawing some of their arguments. The HMRC mediator continued to seek resolution of the case in the weeks following the mediation day. The clarification of facts and technical issues at the mediation led to HMRC presenting a new argument after the mediation. Consequently, the subsequent First Tier Tribunal hearing focussed on fewer issues and HMRC’s new technical argument.

Please note all settlements are subject to LSS compliance and appropriate governance as per page 2.

RESOLVING TAX DISPUTES | ALTERNATIVE DISPUTE RESOLUTION

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CASE STUDY – VAT

Situation: Rather than take the case to Tribunal, ADR was suggested to resolve an enquiry on which progress had ceased leaving two issues unresolved. How we helped: BDO represented the client during the mediation. BDO also provided one of the two mediators who facilitated the day.

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The two main issues of dispute were discussed at length on the day, both together and in private rooms, with the client present. Outcome: The basis for settlement was agreed on the mediation day and a final agreement was signed within 2 weeks. The client was happy with the outcome and found it a worthwhile use of time and money.

CASE STUDY – OWNER MANAGED BUSINESS

Situation: HMRC’s enquiries lasted for several years and included a business records check at the company’s premises. Both sides held entrenched views with no likelihood of resolution. The key issue was whether the remuneration paid to the Directors’ wives over several years was excessive and disallowable for corporation tax purposes.

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How we helped: BDO applied for ADR. BDO represented the client, who was also present, throughout the day. The mediation was facilitated by an HMRC mediator. Outcome: The Directors were relieved that a favourable settlement was reached with no penalties. Their frustration and sleepless nights were over at last.

CASE STUDY – COMPANY & INDIVIDUAL

Situation: The key issues remaining after 3 years of enquiries included whether the company was trading, whether expenses were private, deductibility of expenses, lack of evidence and changing explanations. What we did: We successfully applied for ADR. BDO represented the client on the mediation day, discussed the issues in private and joint meetings with the mediators and negotiated a settlement including tax, interest and penalties.

BDO also provided one of the joint mediators who, together with the HMRC mediator, facilitated the mediation. Outcome: The mediation enabled both sides to find out more about the other’s issues and evaluate their own position on each issue. A settlement in principle was reached of c£300k compared to a possible £1 million including tax, interest & penalties.

Please note all settlements are subject to LSS compliance and appropriate governance as per page 2.

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ALTERNATIVE DISPUTE RESOLUTION | RESOLVING TAX DISPUTES

POINTERS FOR A SUCCESSFUL MEDIATION



Be clear why mediation should resolve the dispute. This is a key component of the ADR application



Prepare thoroughly and ensure all evidence is to hand that may affect tax and penalties



Know your limits: what is the cost of not settling on the day and what scope is there for a monetary settlement?



Be clear what everyone’s role during the mediation



Get off to a positive start: first impressions count so be constructive and positive during the opening meeting



Trust the process: mediators are trained to use specific techniques to explore issues, consider alternatives for settlement, help parties consider the other side’s view and make constructive proposals to resolve the dispute



Give it time: being in too much of a hurry to close a deal may result in no solution at all



Document points agreed before leaving the mediation and follow up within 48 hours so that a formal solution is reached within 3-4 weeks to close the enquiry.

If you have an ongoing tax dispute that you believe may benefit from joint mediators or an independent third party mediator then please contact us to discuss the options available.

RESOLVING TAX DISPUTES | ALTERNATIVE DISPUTE RESOLUTION

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HOW CAN BDO HELP?

• Identify whether and why your case may benefit from the ADR process and advise whether the use of joint mediators is the best route • Hold a preliminary discussion with the caseworker about ADR • Make the application to HMRC for ADR • Provide an individual who can be one of the joint mediators for the mediation alongside the HMRC mediator • Provide a CEDR Accredited Mediator who can also act as independent third party mediator, subject to HMRC’s agreement • Assist your team to prepare effectively for the mediation • Help you understand the process and prepare a strategy in order to get the best from the day • Host the ADR day and manage the ‘ house-keeping’ required • Work with your team on the day to represent you and assist with negotiations • Work with HMRC to complete the paperwork to conclude the settlement.

“ “



I’m amazed at how powerful mediation can be.

BDO PRIVATE CLIENT

It’s a great relief to finally be able to put the dispute behind me. BDO PRIVATE CLIENT



FOR MORE INFORMATION: DAWN REGISTER +44 (0)20 7893 2653 [email protected]

ED DWAN +44 (0)161 817 7676 [email protected]

HELEN ADAMS +44 (0)20 7893 3447 [email protected]

TALIA GREENBAUM +44 (0)20 7893 3464 [email protected]

KARMJIT MADER +44 (0)20 7893 2634 [email protected]

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO LLP to discuss these matters in the context of your particular circumstances. BDO LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it. BDO LLP, a UK limited liability partnership registered in England and Wales under number OC305127, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. A list of members' names is open to inspection at our registered office, 55 Baker Street, London W1U 7EU. BDO LLP is authorised and regulated by the Financial Conduct Authority to conduct investment business. BDO is the brand name of the BDO network and for each of the BDO Member Firms. BDO Northern Ireland, a partnership formed in and under the laws of Northern Ireland, is licensed to operate within the international BDO network of independent member firms. © September 2016 BDO LLP. All rights reserved.

HB008397

www.bdo.co.uk

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