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Dawn Register

Dawn Register TEP, Director, Tax Investigations team at BDO LLP, explains how the UK tax authorities have embraced mediation to resolve tax disputes.

As few people like paying tax, it is perhaps no surprise that disputes arise so frequently between taxpayers and HM Revenue & Customs. Most individual taxpayers find tax disputes very stressful and for businesses they are a disruptive distraction. Yet, taking an aggressive or uncooperative attitude will often make the dispute harder to resolve: in the tax world this often ends in litigation.

Dawn Register

Dawn Register

In 2012/13 there were nearly 27,000 tax disputes waiting to be heard by the First-tier Tax Tribunal and it takes an average of 70 weeks just to get to a hearing, locking up billions of pounds in uncollected tax. The UK Government sees mediation, using a process of alternative dispute resolution (ADR), as part of the answer. Happily, ADR also offers substantial benefits to taxpayers.

How it works

Where a tax dispute enquiry or investigation has reached general impasse with both sides sticking to entrenched positions it is worth checking if the case is suitable for ADR. There are clear criteria for applications for ADR being accepted. The case may involve:

  • facts which are capable of further clarification or misunderstandings of the information provided;
  • a dispute that could benefit from obtaining more suitable evidence; or
  • Situations where there is legitimate scope for one party to get a better understanding of the other’s arguments.

However, in all cases, the issues in dispute must be capable of mediation and settlement by agreement within the framework of HMRC’s Litigation and Settlements Strategy.  Cases that are not will be refused. Therefore, you cannot use ADR where there is a criminal investigation, the dispute involves issues linked to other appeals (i.e. stood behind cases) or it can only be resolved by HMRC changing its established policy on a technical issue.

Once ADR has been agreed, both sides take a few days or weeks to prepare themselves for mediation.

Mediations typically happen in a single day, thus concentrating both parties’ minds on clarifying the key issues as well as on ways to find a solution.

The mediator will be new to the dispute, bringing new impetus towards a settlement using facilitation skills to assist the parties to overcome any barriers but leaving the decision making with the parties. Each party’s key personnel attend the mediation, to provide critical clarity on the acceptable parameters for settlements and to ensure that the attendees have the authority to decide when to settle or whether to walk away.

Private meetings enable each party to have confidential, without prejudice, discussions with the mediator to explore concerns, issues and solutions. Parties feel more comfortable withdrawing from previously entrenched and, perhaps, mistaken views without losing face when they are able to consider it privately with a mediator, safe in the knowledge that he will neutrally convey such decisions to the other party when appropriate.

The relative strengths of technical arguments and the credibility of the information may be explored in joint meetings so that the parties can evaluate their chances of eventual success should a settlement prove impossible. The flexible process means that the proportion and number of private and joint meetings on the mediation day is adapted to suit the party’s needs and maintain momentum. You can watch a video case study of typical ADR mediation at 

The pros and cons

If there is a downside to ADR, it is that the taxpayer must ‘get real’ and face up to the reality of reaching an agreement, which may mean backing down on long argued points in the spirit of compromise. Furthermore using ADR does not guarantee that a dispute will be resolved, although even where the case does end up going to the Tax Tribunal, trying ADR first often enables the parties to home in on the core issues that they want the Tribunal to decide.

The fact that either party can withdraw from mediation at any point with no negative implications makes ADR a potentially risk-free strategy for taxpayers. Another important advantage is that the process is completely confidential and all discussions are on a ‘without prejudice’ basis. However, perhaps the most important advantage of using ADR lies in the nature of the mediation process itself: because it is less confrontational than conventional tax dispute resolution, it allows the parties time and space to reconsider their positions and reach compromises where appropriate. The imperative of reaching a cost-effective settlement also shifts HMRC’s objective away from maximising the tax yield – usually a plus for the taxpayer’s bank balance.

ADR videos

Prelude “To mediate, or not to mediate?”

Episode 1 “Meeting face to face”

Episode 2 “What lies beneath?”

Episode 3 “It’s crunch time”

Episode 4 “Everyone’s a winner”

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