Navigating tax disputes can be a complex and daunting process. This "need to know" series sheds light on the essential elements. In this note, we provide an overview of HMRC's approach to settling tax disputes and the process of alternative dispute resolution (ADR) available to taxpayers when a dispute has arisen.
HMRC's approach - the Litigation and Settlement Strategy
HMRC's published approach to dispute resolution and settlement has the stated aim of ensuring fairness, efficiency and compliance with the law.
At the heart of HMRC's approach to resolving tax disputes is the Litigation and Settlement Strategy (the LSS). This strategy provides a formal framework governing how HMRC handles disputes, whether they are resolved through agreement with the taxpayer or through litigation. Some key elements of the LSS are as follows.
Handling disputes
- HMRC aims to apply tax laws fairly and consistently to ensure the best practicable return for the Exchequer. This means that HMRC will not "do deals" that would compromise HMRC's view of the law.
- HMRC will not usually persist with a tax dispute unless HMRC believes the case would be successful in litigation (meaning generally that there is a more than 50% chance of success).
- HMRC will seek to handle disputes non-confrontationally and to work collaboratively with taxpayers to understand the relevant facts to enable the law to be applied correctly to the dispute at hand. Notwithstanding that, HMRC will not be deterred from using its formal information gathering powers and other means of dispute resolution if collaboration is not forthcoming.
Resolution by agreement
- Resolving a tax dispute by agreement will in most cases be a more efficient and cost-effective way to settle than by litigation, and, according to HMRC, the majority of tax disputes are in fact resolved by agreement between HMRC and the taxpayer.
- Where there is a range of possible outcomes, HMRC will not settle by agreement for less than it would reasonably expect to obtain from litigation.
- In relation to a dispute which is genuinely of an "all or
nothing" nature:
- where HMRC considers it is likely to succeed in litigation, HMRC will not reach an out of court settlement for less than 100% of the tax, interest, and penalties (where appropriate) at stake if it believes it is likely to succeed in litigation and that litigation would be both effective and efficient;
- where HMRC considers that it is unlikely to succeed in litigation, it will, in the majority of cases, concede the issue. There are exceptions to this position where there is, for example, (i) a very large amount of tax at stake, or (ii) a fundamental point of principle or behaviour at issue; and
- HMRC will not "split the difference" and settle for an amount between the all or nothing outcomes.
- Any resolution must be in accordance with the law, which applies both to the amount of tax ultimately agreed to be due, but also to the rationale in law as to why and when that tax is due. Difficulties may therefore arise in seeking to reach resolution by agreement if HMRC consider the position or rationale to be inconsistent with HMRC's view of the law
No package deals
HMRC will consider each individual dispute on its own merits. This means that they will not enter into "package deals" with a taxpayer whereby multiple disputes are traded off against one another. That is not to say, however, that HMRC will not work to resolve different but related matters concurrently where possible.
ADR in the tax disputes context
ADR is a flexible mediation process that can help taxpayers to resolve disputes without going to court.
A consultation was published on 28 April 2025 in relation to improving HMRC's approach to dispute resolution, which closed on 7 July 2025 and for which responses have not yet been published. This included the proposal of a single process for ADR in direct and indirect tax cases.
What does ADR involve in practice?
- ADR involves an HMRC mediator who is independent of the case team and who is there to help both parties (HMRC and the taxpayer) work towards resolving the dispute. Taxpayers may also involve an external mediator at their own cost.
- The mediator does not make decisions but facilitates discussions to try to find a mutually acceptable solution.
- The ADR process follows three stages:
- Application: either HMRC or the taxpayer can apply to propose ADR, which involves completing an online form.
- Suitability check: the mediator decides within 30 days whether the case is suitable for ADR. Some cases may be out of scope if a legal precedent is likely to be set or if HMRC has no discretion to amend the decision reached initially.
- Mediation: if ADR is deemed suitable, the mediator works with both parties to try to resolve the dispute. The process aims to conclude within four months.
ADR mediations are undertaken on a "without prejudice" basis but certain documentation disclosed during the process may be referred to in litigation if the dispute proceeds to court so it is important to understand the parameters.
When can you use ADR?
ADR can be used at any stage in a tax enquiry or tribunal proceedings. The position is slightly more complicated in the period between HRMC making a decision and any tribunal proceedings, as there are different rules for direct and indirect cases (although these processes could become more aligned depending on the outcome of the consultation). In direct tax cases ADR is possible between the issue of a decision and the review process, but in indirect tax cases, HMRC will not usually accept an application for ADR after a decision is issued (although, in some circumstances they may allow an extension of time for accepting the offer of a review to allow an application to be made). Examples of situations appropriate for ADR are provided in HMRC's guidance:
- communications have broken down between the taxpayer and HMRC;
- there are disputes about the facts;
- a dispute appears to be the result of a misunderstanding;
- the taxpayer wants to know why HMRC has not agreed with evidence provided, and why HMRC want other evidence to be provided;
- the taxpayer is not clear what information HMRC has used in reaching their decision, and thinks they may have made incorrect assumptions; or
- the taxpayer wants HMRC to explain why they need more information.
Potential benefits of ADR
- Particularly for cases that have been long-running, ADR can offer both sides the opportunity to step back and look at the dispute with the benefit of a fresh perspective from an impartial third party (or more than one if the taxpayer also appoints a mediator). This can be hugely beneficial: HMRC's statistics cite ADR as having a positive impact on over 80% of cases, either by fully resolving the dispute, partially resolving it, or clarifying the issues so that both sides can make informed decisions on how to proceed.
- ADR can be considered at any stage of a compliance check, not just after a decision has been made and appealed. This makes it a versatile tool for potentially resolving disputes early on in the enquiry process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
