The first indication a taxpayer may receive that they are the subject of a tax enquiry or investigation is a letter from HMRC, often headed ‘Notice of enquiry under Section 9A TMA 1970’ and including an initial request for information or supporting documentation.

HMRC generally has 12 months from the filing date of a self-assessment return to open an enquiry. However, investigations may extend to earlier tax years where HMRC suspects loss of tax. The applicable assessment time limits depend on the behaviour involved, described as innocent error, careless behaviour or deliberate conduct.

Alternative dispute resolution

Tax disputes can escalate quickly. Formal appeals are often time-consuming, expensive and adversarial for both the taxpayer and HMRC. To address this, HMRC introduced an alternative dispute resolution (ADR) process designed to provide a more practical and collaborative route to resolution.

Under ADR, a trained HMRC mediator, independent of the initial case team assists both parties in working towards a resolution without formal litigation. ADR is intended to operate alongside, rather than replace, the statutory appeal process and is most suitable for disputes involving misunderstandings, factual disagreements or communication breakdowns.

ADR meetings are generally conducted on a confidential basis and may take place remotely, making the process more flexible and accessible for smaller businesses and individual taxpayers. However, ADR is not intended to force a compromise where there is a fundamental disagreement over the interpretation of tax law, and taxpayers should still ensure that statutory appeal deadlines are carefully protected throughout the process.

Cases excluded from ADR

HMRC states that ADR is generally not available for:

• debt recovery or payment disputes, including Time to Pay arrangements;

• automatic late filing or late payment penalties;

• disputes concerning default surcharges;

• cases categorised by the tribunal as ‘paper’ or ‘basic’; or

• disputes based entirely on legal interpretation where there is no factual disagreement.

In such circumstances, the appropriate route is usually via an HMRC statutory review or a direct appeal to the First-tier Tribunal (FTT).

‘Paper’ or ‘basic’ cases are cases where a detailed and thorough review of the documents delivered can be undertaken. The FTT generally makes a decision based on the documents supplied so a formal hearing is not required.

Method of application

A taxpayer seeking ADR at an early stage should also lodge an appeal or request a statutory review in order to preserve their legal rights. Where proceedings have already commenced before the FTT, ADR remains available provided that a stay of proceedings is requested at the same time.

Applications are made online through HMRC’s ADR application process on GOV.UK and require the consent of both parties. HMRC’s ADR team will then assess whether the dispute is suitable for mediation, typically within 14 to 28 days.

Timing is important. An application submitted before the issues are clearly defined is unlikely to result in productive mediation. Conversely, if ADR is sought too late, HMRC may already have committed to a firm legal position, reducing the scope for compromise. ADR is generally most effective once the relevant facts and points of disagreement have been identified, but before either party becomes fully committed to litigation.

Effectiveness of ADR

HMRC reported that 84% of cases entering ADR during 2023/24 were resolved successfully. However, approximately 61% of ADR applications were rejected during the same period. One reason for rejection is that appeals before the FTT must generally be acknowledged and categorised before ADR can proceed.

If no agreement is reached

Not every ADR process results in settlement. Where mediation is unsuccessful, taxpayers may still:

• continue with their appeal before the FTT;

• request a statutory review by an HMRC officer not previously involved in the matter (usually within 30 days of the decision); or

• reapply for ADR later if circumstances change or earlier procedural issues are resolved.

Practical point – Potential expansion of ADR

Last year the government ran a consultation requesting comments on modernising and improving HMRC’s approach to dispute resolution, including the possible expansion of ADR procedures. The intention is to encourage earlier resolution of disputes, reduce costs for both taxpayers and HMRC, and ease pressure on the tribunal system. The results of the consultation are still being analysed.