HMRC consult on changes to dispute resolution

On 28 April 2025, HMRC published a consultation on "Improving HMRC’s approach to dispute resolution" (which is currently accessible here). The consultation seeks views on potential reform options, including aligning the dispute processes for direct and indirect taxes, and improving access to alternative dispute resolution ("ADR") and statutory reviews.

The consultation follows HMRC's 2024 call for evidence regarding the tax administration framework.  The summary of responses to that call for evidence was published alongside the 2024 Autumn Budget, which highlighted the need to reduce the volume of cases going through the tribunals. 

Current dispute resolution framework

The current appeal process differs as between disputes relating to direct and indirect tax.

Direct tax cases

• A taxpayer has 30 days to appeal to HMRC against a disputed decision.
• If such an appeal is made, there is no time limit for either party to offer or request a statutory review or (in the absence of such a review) for the taxpayer to notify the appeal to the Tribunal.  (Once the statutory review process has been engaged, the taxpayer will come up against time limits for notifying their appeal to the Tribunal.)
• If a taxpayer does wish to notify their appeal to the Tribunal (whether or not there has been a statutory review), it is usual for collection of the disputed tax to be postponed pending the outcome of that appeal.
• ADR is available at any stage of the process (albeit, once an appeal has been notified to the Tribunal, any request for ADR will be rejected unless and until the appeal is categorised by the Tribunal as "standard" or "complex").

Indirect cases

• HMRC may provide a pre-decision letter, setting out their view of the relevant matter before a formal decision is issued.
• When a formal, appealable decision is communicated to the taxpayer, HMRC will have to offer the taxpayer a statutory appeal at the same time.  This will engage time limits for the taxpayer to notify any appeal against the decision to the Tribunal.
• In most cases (save where it would cause hardship) the disputed tax must be paid to HMRC pending resolution of the dispute.
• ADR is not available until the relevant decision has been made by HMRC and appealed by the taxpayer.

Proposed reforms

The consultation sets out a proposed aligned process for direct and indirect taxes.

• The first stage of that aligned process is a "pre-decision stage".  At that stage, if appropriate, HMRC would issue a pre-decision letter before issuing a formal decision letter. The intention would be to allow the taxpayer to query or clarify matters and to provide an opportunity for the taxpayer and HMRC to reach a Litigation and Settlement Strategy ("LSS") compliant settlement. Aligned with the existing direct tax approach, ADR would be available at this pre-decision stage.
• The second stage is a "formal decision stage".  This stage would align the process with the current approach in indirect cases – removing the requirement for an initial appeal to HMRC (before the Tribunal) and engaging automatically the statutory review process (and thereby engaging time limits for notifying appeals to the Tribunal).
• The third and final stage is the "Tribunal appeal stage".  This would follow essentially the existing framework (with its existing time limits) in cases where matters are not resolved during or before the statutory review. 

As regards ADR, the consultation notes that HMRC are considering whether to make it mandatory for the parties to have considered ADR prior to an appeal to the Tribunal.  More generally, the consultation makes clear an intention to better promote and remove barriers to the use of ADR at all stages of a dispute.

In response to the 2024 call for evidence, there was support from respondents for aligning payments process for indirect tax cases with direct tax cases.  (As noted above, in direct tax cases, it usually possible for the taxpayer to postpone payment of tax in dispute.) However, HMRC has made clear that the consultation will not consider alignment of payment processes (given that the focus of the consultations is "on processes [and] aligning payment requirements… would require detailed and separate consideration").

Comments

At a high level, procedural alignment can be welcomed as offering simplification and familiarity of process for taxpayers and their advisers.  Moreover, introduction of a "formal" pre-appeal stage in direct tax cases seems likely to be beneficial as an opportunity for exploration and negotiation (whether through ADR or less formally).  It should also guard against the risk that the removal of the initial appeal to HMRC (which, currently, doesn't trigger any time limits for notifying the appeal to the Tribunal) will lead to the inexorable progression of disputes to the Tribunal (with associated escalation of cost and tension).

Greater focus on the use of ADR at all stages of a dispute is also to be welcomed: 

• There is little justification (in indirect cases) to countenancing ADR only once a formal decision has been appealed by the taxpayer. 
• More generally, our experience of ADR has been very positive, with HMRC case teams participating genuinely and constructively;  HMRC mediators acting impartially and co-operatively with taxpayer appointed co-mediators (to great effect); and cases being resolved justly without the need for the time and expense of an appeal to the Tribunal.

That said, HMRC's approach to ADR is not without imperfection.

• HMRC continue to insist that without prejudice privilege does not and cannot apply to a so-called "tax fact" (being "a fact which has legal and technical implications for a taxpayer's liability").  This is a view which is not consistent with caselaw on the subject and should be revisited as it risks damaging taxpayer confidence in the process.
• HMRC's internal governance arrangements for resolving disputes mean that in all but the most straight forward of cases, HMRC will be unable to commit to a settlement at the end of the mediation day (or days).  This can be frustrating for taxpayers (particularly those who are used to mediation in commercial settings).

Whilst a mandatory obligation to engage in ADR would be objectionable (given that it is unlikely to be useful – hence is likely to increase cost and delay unnecessarily – in some cases, particularly those where there is a genuinely binary disagreement on a point of law), a requirement to consider the use of ADR does not seem so unreasonable.  Indeed, it could be positively useful in cases where the taxpayer can see the potential utility of ADR but where HMRC (whether on the basis of existing policy or otherwise) are resistant.  However, views in this regard may turn on the nature of any proposed sanctions for non-compliance (which could conceivably range from costs consequence, to staying or even striking out proceedings at the extreme end of the spectrum).