Improving HMRC’s Approach to Dispute Resolution

19 June 2025. Published by Adam Craggs, Partner and Liam McKay, Of Counsel

The government has launched a consultation aimed at modernising HMRC’s approach to resolving tax disputes. The consultation, amongst other things, seeks to raise taxpayer awareness of the available dispute resolution options and enhance access to alternative dispute resolution.

This blog is based on an article written by Adam Craggs and Liam McKay that was published in Tax Journal on 28 May 2025.

Background

The government has recently announced a consultation on modernising and improving HMRC’s approach to dispute resolution. The consultation follows an HMRC call for evidence in February 2024, that sought views on aspects of the tax administration framework relating to tax compliance, including dispute resolution. A summary of responses to the call for evidence was published at the 2024 Autumn Budget, and the government committed to consulting on how to raise awareness of the dispute resolution processes, improve access to alternative dispute resolution (ADR) and statutory review, and improve taxpayers’ knowledge to help them make the right choices for their circumstances.

The consultation is open until 7 July 2025, and seeks views on options for simplifying, modernising and reforming HMRC’s approach to dispute resolution, focussing on the ease of access and use of HMRC’s ADR and statutory review processes.

The consultation

The consultation explains that, wherever possible, HMRC will look to resolve disagreements without it being necessary to use formal dispute resolution mechanisms and observes that the vast majority of tax compliance interventions conclude without dispute. 

Respondents to the 2024 call for evidence widely agreed that improving access to ADR and statutory review is essential. Those mechanisms are currently underutilised, largely due to limited public awareness and concerns about their independence. As a result, many taxpayers opt to escalate disputes to the First-tier Tribunal (FTT), which is a more costly and time-consuming route for both parties. External research, referred to in the consultation document, also highlighted key barriers to the uptake of statutory review, including a lack of understanding of the process and its advantages, as well as a perception that it is not impartial.

A majority of respondents to the 2024 call for evidence, also supported aligning appeal processes across direct and indirect taxes. In that regard, respondents favoured the approach used in direct taxes, including the ability to apply to HMRC to postpone the payment of the tax owed (as opposed to the indirect tax approach, which requires upfront payment in order to appeal to the FTT, unless hardship can be established).

In light of the above, the consultation highlights two key objectives:

  1. to make it easier to resolve disagreements before the end of a compliance intervention, supporting taxpayers to pay the right tax, through simplification and alignment of processes across different taxes; and
  2. to make it easier for taxpayers to understand their options once an enquiry has concluded so that, if a dispute does remain, taxpayers can identify and access the quickest and most appropriate method of dispute resolution for their circumstances.

To that end, the consultation is focussed on opportunities for improvement at various points in the "taxpayer journey", both during and after a compliance intervention has closed. 

Potential reforms

The consultation proposes, and seeks stakeholder views on potential reforms to HMRC's dispute resolution process in the following areas. 

Improving support and guidance

HMRC is considering a number of improvements to the support and guidance for taxpayers during a compliance intervention, noting that taxpayers may not have prior knowledge of their rights and obligations, especially where they do not have access to professional representation. To that end, in 2023 HMRC published the Compliance Professional Standards, which set out how HMRC should apply its Charter and the Civil Service Code in its compliance activity and which the consultation notes will be a key component of HMRC’s approach to improving dispute resolution.

As part of the consultation, HMRC is exploring the scope for streamlining the online process for applying for dispute resolution, such as ADR or statutory review, to make it more accessible. The consultation notes that streamlining the online application process and integrating it with digital systems, such as customer tax accounts, could improve taxpayer trust, increase transparency in the system, and lead to better user engagement.

Simplifying and aligning processes

The consultation is also exploring the benefits of a more simplified and aligned approach for appeals that would combine the benefits of both indirect and direct taxes approaches. At present, the direct tax process generally requires the taxpayer to have appealed an appealable decision to HMRC, before the statutory review process can be engaged. For indirect taxes, HMRC can provide an initial "pre-decision" letter to explain its position before issuing a formal decision which can then be appealed.  

The majority of respondents to the 2024 call for evidence supported aligning the direct and indirect appeals processes, specifically favouring the approach used in direct taxes, as it allowed for more opportunities to use ADR before and after an appealable decision was issued. Accordingly, the consultation suggests that the direct and indirect tax processes could be aligned into a single model as follows:

  • If appropriate, HMRC issues a pre-decision letter prior to the formal decision letter. This would allow a taxpayer to query or clarify any details prior to a formal decision being issued, and provide an opportunity to reach a settlement that is compliant with HMRC's Litigation and Settlement Strategy (LSS). ADR could be used at this stage, if appropriate.
  • If an early settlement is not reached, HMRC would issue its formal decision and make an offer of statutory review.
  • The taxpayer could accept the formal decision. Alternatively, the taxpayer would have 30 days to accept or decline the offer of a statutory review, in line with current statutory time limits, or they could choose to appeal to the FTT instead.
  • ADR would continue to be available after receiving an appealable decision.
  • After the statutory review or ADR is concluded, the right to appeal to the FTT would remain in line with current statutory time limits.
  • Currently, a taxpayer can appeal to the FTT without considering ADR. However, the consultation notes that HMRC could implement a requirement for the taxpayer to consider ADR for suitable cases, prior to an FTT appeal.

A number of legislative changes would be required to implement the above model, most notably the removal of the requirement for an initial appeal to HMRC in direct tax cases. The consultation notes that a simplified and aligned model of this nature could be helpful in improving understanding of the appeals process and reduce the possibility for error, with a focus on suitable resolutions that provide taxpayers with certainty.

However, the consultation also recognises that there are a number of challenges in aligning the appeals processes. In particular:

  • A risk of oversimplification.
  • Potential impacts on the ability to access appropriate resource and level of technical input within HMRC noting, for example, that pre-decision letters can require the input of technical leads with s sufficient level of expertise.
  • For automated decisions, there would continue to be no opportunity for early dispute resolution prior to statutory review. However, HMRC is interested in views on whether a more informal consideration stage might be appropriate in these circumstances to allow for a taxpayer to provide additional information or ask questions.

Improving access to ADR

The consultation recognises that ADR can be of significant benefit in resolving disputes with HMRC (noting that 84% of cases entering ADR in 2023-2024 were resolved) but acknowledges that a significant number of applications for ADR are rejected (approximately 61% of applications in 2023-2024). Part of the reason ADR applications can be rejected is the requirement for appeals to the FTT to be acknowledged and categorised before they can be accepted into the ADR process, and the exclusion of "paper" and "basic" appeals from ADR.

The consultation states that feedback from a recent HMRC review of its ADR exclusion list has highlighted that the current list is too restrictive and creates barriers in accessing ADR. As a result, HMRC is developing a "principle-based approach" for cases entering the ADR process to widen the scope of cases accepted into ADR and help resolve more disputes at the appropriate stage. The consultation proposes the following reforms:

  • More active promotion of ADR by HMRC during a compliance intervention.
  • Potentially making it a requirement for both taxpayers and HMRC to have considered ADR prior to appealing to the FTT. This would not be a requirement to have participated in ADR where it was not suitable, but rather a requirement for both parties to have given it due consideration prior to an appeal.

Next Steps

The consultation is being conducted in accordance with the Tax Consultation Framework and is open until 7 July 2027. A list of the specific questions being considered by the consultation can be found here and interested stakeholders can submit their views by way of email to tafrcompliance@hmrc.gov.uk

While there are no timeframes given beyond the consultation, in accordance with the Tax Consultation Framework, the next steps will be:

  • Stage 2: Determining the best option and developing a framework for implementation, including detailed policy design.
  • Stage 3: Drafting legislation to effect the proposed change.
  • Stage 4: Implementing and monitoring the change.
  • Stage 5: Reviewing and evaluating the change.

Comment

Tax practitioners will be familiar with the challenges of resolving disputes with HMRC and the considerable strain the current process places on their clients. Long delays, difficulty in reaching suitably skilled HMRC personnel, a lack of transparency in explaining decisions, frequent personnel changes, and the growing scope and complexity of tax legislation and policy, all create major obstacles to resolving even the most straightforward disputes in a timely and cost-effective way. These issues not only frustrate taxpayers but also lead to significant financial and emotional cost. While the consultation falls short of addressing all of these problems, any steps to improve the dispute resolution process are to be welcomed.

In terms of the specific proposals, efforts to streamline processes and increase the availability of information for taxpayers are undoubtedly positive. While the ADR application process is relatively straightforward and not overly burdensome, our experience suggests that many taxpayers are unaware of its existence, or are sceptical of its effectiveness. Providing clearer, more accessible information about taxpayer rights and the available options, is likely to enhance both awareness and participation in the ADR process as a means of resolving disputes with HMRC.

Similarly, aligning the appeal processes for direct and indirect taxes is also a logical and long overdue step. Taxpayers are often tripped up by unnecessary differences between the two processes, despite there being no sound policy rationale for treating direct and indirect taxes differently. One of the most significant and long-standing concerns is the requirement to pay disputed tax upfront in indirect tax cases – which can act as a barrier to access to justice. It is difficult to justify a system where, for example, a billionaire contesting an income tax assessment can appeal to the FTT without paying a penny of the tax claimed in advance of their appeal, while a small business owner disputing a VAT demand must pay the disputed VAT first in order to be able to exercise their right to have their appeal determined by an independent tribunal. This disparity is not only unfair, it undermines confidence in the accessibility and equality of the tax system.

The proposal to introduce pre-decision letters is also potentially a step in the right direction. While HMRC enquiries can drag on for substantial periods of time, decisions, once made, often trigger a rapid escalation that can force taxpayers into premature litigation simply in order to preserve their position. Allowing for a pause to consider HMRC's position, free from the pressure of litigation deadlines, is a sensible step that could lead to more disputes being resolved without recourse to the FTT. However, in order for the pre-decision process to be effective, HMRC must commit to greater transparency. Taxpayers need sufficient detail to understand the case against them and the underlying legal analysis before they can make informed decisions about their position. This would mark a significant shift in HMRC’s usual approach, and practitioners will recognise HMRC’s general reluctance to fully disclose its reasoning, which can impede constructive dialogue and early resolution of a dispute. In this context, the consultation is also correct to emphasise the importance of involving technical leads with the appropriate specialist expertise early in the process. Their input will be essential in ensuring that HMRC’s position is clearly and accurately set out in pre-decision letters. Given the variable quality of HMRC correspondence in recent years, there may be understandable scepticism about whether HMRC can meet this challenge in practice.

However, while proposals to enhance taxpayer information and streamline the appeals processes are commendable, the expansion of access to ADR is likely to attract the most attention from tax practitioners. With litigation becoming increasingly costly and time-consuming – further compounded by mounting pressure on tribunal and court resources – there is a pressing need for more effective and accessible alternatives for resolving tax disputes. In that regard, the revised Practice Statement on Alternative Dispute Resolution in Tax Disputes, recently issued by the FTT, confirms the judiciary’s recognition of ADR as an effective tool for resolving tax disputes.   

The consultation rightly recognises that while taxpayers generally welcome the option of engaging in ADR with HMRC, the current system has too often limited access to ADR rather than promote it. This has been to the detriment of both taxpayers and HMRC, frequently leading to avoidable and time-consuming litigation. Proposals to expand access to ADR are therefore positive and a much-needed development.

A central concern for both taxpayers and practitioners alike, and one acknowledged by the consultation, is the perceived lack of independence in HMRC’s current ADR process. Beyond the initial decision to engage in ADR, the process remains entirely within HMRC’s control. HMRC determines which cases qualify, who gains access, how the process is conducted, and even appoints the mediator, who will be an HMRC employee. In effect, HMRC acts as both gatekeeper and judge, setting the rules and overseeing disputes relating to its own decisions. This arrangement undermines confidence in the process and raises serious concerns about impartiality and fairness. Crucially, the consultation’s failure to explore how greater independence could be introduced into the ADR process, including by the use of independent external mediators, represents a missed opportunity to enhance confidence in the system and ensure a more balanced approach to tax dispute resolution.

Overall, the consultation offers a valuable opportunity for practitioners, taxpayers, and other stakeholders to influence how HMRC might approach dispute resolution in the future and to help shape a fairer and more effective system. Practitioners, in particular, are well positioned to contribute meaningful insights, drawing on their day-to-day experience and deep understanding of the current system’s strengths and weaknesses. Their contribution is likely to be critical in ensuring that any reforms address the real-world challenges faced by many taxpayers when a dispute arises with HMRC. It is therefore important that there is meaningful engagement in this consultation process, especially by those on the front line who deal with tax disputes on a regular basis.

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