Alternative Dispute Resolution – ADR

Alternative dispute resolution or ADR has been a very successful process for me on two cases in the last year. In both cases extremely favourable and fair settlements were reached after protracted enquiries resulting in largely a stalemate situation.

In both cases there were cash trades involved and the additional profits that HMRC sought to assess, were negotiable and there were many issues that I felt had been ignored in the normal enquiry process and therefore we requested an intermediary to try to breach the gap between both sides’ settlement requirements.

There are numerous hoops to jump through to arrive at the ADR meeting with the client. In no cases was there a point of law at stake, it was a second view that was required face-to-face with the client in order to reach a mutually acceptable settlement on the day.

1. ADR Meeting with HMRC

The first case had already been dealt with by another accountant for around two years and they had already undertaken an ADR meeting with HMRC’s representative but had not fully understood the process or fully explained it to the client.

At an ADR meeting the officer will ask many questions will review and summarise the case to date and discuss it with the clients.

They will try to come to their own conclusions and make an offer over the table to the client on that day.

It is therefore up to a specialist advisor to ensure that as many new factors are brought into the equation as possible. In this case the gross profit rates were not properly addressed and quantified and there were other cash amounts that have been wrongly treated as sales.

In the ADR meeting with the old adviser present they made an offer which the client when sitting there assumed was just the tax due.

They have misconstrued things discussed and had not been fully availed of the facts by the agent. The global offer put to her by HMRC comprised not only the tax due, but the national insurance, the large amount of interest arising and a penalty charge arriving at a global settlement of around £48,000.

The client not understanding thought that this was merely the tax due and knew that this was far more than what she had it been expecting to pay in tax alone.

She therefore refused the offer not knowing that it would be withdrawn immediately after the meeting ended.

ADR is an opportunity to air the views of both sides fully and frankly and with a well-versed advisor arrive at a settlement that will normally be far less than what you would have been offered by the caseworker and will involve compromise by the revenue in most cases.

They would not take on the case and turn up for what can be a whole day’s meeting without knowing that they must listen and compromise where necessary.

Therefore, this case ended with the matter going back to the original assessments issued which were around £100,000.

Once the debt collectors started pursuing the debt the client panicked and passed the case to me. Luckily, I was very familiar with the local caseworker who had been involved in the original case and she very kindly offered to reopen the case.

She was not able to settle it in such a low figure as offered by the ADA inspector. However, she reworked her figures in the light of many new points that I brought forward in preparation for the case and agreed to settle in the sum of around £52,000.

The client was over the moon as realised this comprised the whole settlement and the tax element itself was only about £25,000.

When she saw the full breakdown of all of this, she fully understood it and accepted it.

It is a lesson learned that clients only hear what they want to hear. They do not all understand the finer details of tax, national insurance, and penalty charges.

There are various ways in which to ensure that a client fully understands how a case is going and how it is settled throughout the process, and they should be involved in it from day one. A settlement should never be a surprise but should be one that they can fully understand and hopefully accept.

2. Eastern European hand car wash company

The second case involved and Eastern European hand car wash company in London that had been subject to 3 tax investigations almost back-to-back. The latter one dragged on for over two years with many changes of inspector at HMRC’s end.

As we were at an impasse with the inspector, who then took redundancy, we had nowhere to turn and no one in the revenue was listening to the client.

We therefore approached them and requested ADR. Another revenue officer reviewed the case and came along with his colleague to a face-to-face meeting with the client at the accountants’ offices. It ended up being an eight-hour day.

I represented the client. The new advisor saw the wood for the trees of the case and arrived at a much more acceptable figure of additional profits.

During the day we adjusted computations and spreadsheets many times and made the client aware throughout of what we were doing.

We finally arrived at something that was mutually acceptable. Due to the case having dragged on and there having been errors on HMRC’s part the penalty was reduced down to the absolute minimal. This alone saved the client £80,000.

In the end the case was settled and a two-year time to pay arrangement agreed which has been adhered to.

Many changes had to be made to the bookkeeping and recordkeeping of the client and going forward he has now got a profitable and more streamlined business, which he is paying a lot more attention to and gaining more enjoyment from. All we can hope for is that the fourth investigation will never transpire!