Alternative dispute resolution (ADR) is a useful route to resolving disputes with HMRC, particularly as it can help avoid protracted and expensive litigation. Where ADR is successful, the process ends with an ADR agreement between the taxpayer and HMRC. However, the parties do not always agree on the interpretation of that agreement, in which case they have the option to refer it to the Tribunal to decide on its enforceability.

The recent judgment of the First-tier Tribunal (Tax Chamber) in Andrew Quay Hull LLP v HMRC [2024] UKFTT 842 (TC) considers a point regarding the interpretation of an ADR agreement that any taxpayer engaging in mediation should be aware of. Anastasia Nourescu, senior associate in our Tax Litigation and Resolution team, reviews the case in brief here.

Background

The taxpayer (Andrew Quay Hull LLP) and HMRC engaged in ADR in respect of several issues, including VAT and penalty assessments. The parties came to an agreement through “shuttle mediation”, where the parties did not communicate directly; instead, the mediator shuttled between the parties in separate rooms, conveying proposals to resolve the dispute. The ADR agreement provided that the taxpayer withdraw its appeals against the VAT assessment and penalty determination, and that HMRC reverse the output tax due.

HMRC subsequently took the view that, on the wording of the agreement, the penalty (in the amount of £472,500) was still due. This was on the grounds that the taxpayer had agreed to withdraw its appeal against the penalty, but HMRC had not agreed to withdraw the penalty itself. The taxpayer had understood that HMRC intended to withdraw the penalty, as it would not have agreed to pay it if there was no VAT due. To resolve this disagreement, HMRC applied to the Tribunal to enforce the ADR agreement.

Issues in dispute

The Tribunal’s decision hinged on a matter of contractual interpretation. In considering HMRC’s application, the FTT set out two main principles derived from case law that apply to interpreting ADR (and other) agreements:

• The ultimate aim of interpreting a provision in a contract is to determine what the parties meant by the language used. This involves ascertaining what a reasonable person would have understood the parties to have meant.
• A mistake by one party of which the other knew or should reasonably have known may displace the agreement.

The Tribunal held that the ADR agreement was clear and explicit, and its meaning would have been clear to a reasonable person in the taxpayer’s position. The taxpayer’s mistake in this case would not reasonably have been apparent to HMRC, so it did not displace the ADR agreement, which was held to be valid.

Conclusions

The Tribunal’s decision may seem harsh, especially given the amount of the penalty, but it reinforces the need for both parties to be absolutely clear on what they are agreeing and make sure that is reflected in writing.

This decision also highlights the potential dangers of “shuttle mediation”. It is common practice for the parties to take time apart to discuss and reflect on the proposals, but concluding matters in the same room will help avoid future confusion.

Parties in tax disputes may also want to retain notes taken during ADR (rather than destroying them, as happened in this case). While ADR meetings are conducted without prejudice, there is no requirement for the parties to immediately destroy their notes, and they may need to refer to them later.

You can find further information regarding our expertise, experience and team on our Tax Litigation and Resolution page.

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