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In to mediate

30 August 2011 / Nigel Popplewell
Issue: 4319 / Categories: Comment & Analysis , Admin

NIGEL POPPLEWELL extols the virtues of settling tax disputes in a swift and low-cost manner


  • Mediation can be used to settle tax disputes.
  • The mediator is an independent person.
  • Most technical-based arguments will be suitable for mediation.
  • Costs may be shared between the taxpayer and HMRC.

HMRC’s ‘refreshed’ litigation and settlement strategy was published on 15 July and, together with the draft practical guidance (drafted on 27 June, but not published until 14 August), displays a real enthusiasm for collaborative dispute resolution of tax disputes through alternative dispute resolution, in particular, mediation.

The purpose of this article is to look at the benefits and practicalities of mediation and the circumstances in which it might be used to resolve tax disputes.

Mediation is likely to become a more mainstream strategy for resolving tax disputes, but it should not be seen in isolation. Litigation and direct negotiation, i.e. more traditional means of resolving tax disputes, will not be supplanted.

However, increasingly advisers will need to be able to explain the ins and outs of mediation to clients, identify its pros and cons, and consider its use as an additional tool to bring tax disputes to a swift and low-cost conclusion.

What is mediation?

A sensible working definition of mediation is that provided by the Centre for Effective Dispute Resolution which defines mediation as follows:

‘Mediation is a flexible process conducted confidentially in which a neutral person actively assists parties in working towards a negotiated agreement of a dispute or difference with the parties in ultimate control of the decision to settle and the terms of resolution’.

Some important points arise from this. Mediations are extremely flexible and both the identity of the mediator and the process is governed by the parties.

Mediators are trained to help assist the parties to break this deadlock. They are neutral; interestingly the Netherlands tax authorities provide employees to mediate tax disputes, although this is not something that I imagine will catch on in the UK.

Furthermore, the mediator has no stake in the outcome. He is neither expert nor adviser; he is not a judge. His role is very clear: it is to assist the parties in their negotiations.

Mediations are confidential. This means confidential from the outside world as well as the discussions which take place during the mediation being kept confidential from the other parties.

They are also conducted on a without prejudice basis, so nothing is binding until a settlement agreement has been signed, nor are admissions made during the process admissible should the matter proceed to litigation.

Why not negotiate?

Mediations are often used where negotiations have broken down or are deadlocked, and can provide the ‘day in court’ for the taxpayer. They usually last one day. This means that the process is relatively quick and cost effective. It is also very flexible.

The mediator provides a fresh pair of eyes and impetus, and helps the parties move from concentrating on the past, to focusing on the future. If, as commonly happens, the parties’ innate mistrust and misgivings about each other manifest themselves in the first couple of hours, the mediator can keep things going.

It is often the case that problems that seem intractable at 4pm are resolved at 5.30pm. In a face-to-face meeting, the parties would probably have walked away from each other after the first two hours and no benefit would have been gleaned.

Where there needs to be a continuing relationship between the parties, mediation can form the basis of that relationship. The work that is undertaken to prepare for the mediation is unlikely to be wasted. It will either result in a settlement, or if it does not, and the matter proceeds to court, the preparation for the mediation will have been a useful dry run.

A competent HMRC official should be present to sign the settlement agreement. The benefit of this, from the taxpayer’s point of view, is that there is someone on HMRC’s side with the authority to do a deal there and then. It may even give the taxpayer access to a specialist.

Finally, the parties ‘own’ the decision. It is not imposed on them by somebody else, so both parties can see the result as a win.

Even if a settlement is not reached, statistics show that the parties are very much more likely to settle subsequently than would have been the case had there been no mediation.

When is mediation appropriate?

In its draft guidance, HMRC identify a number of situations that might benefit from mediation. These include:

The parties want to reach a settlement but there is a misunderstanding about each other’s position or they are having difficulty focusing on the essential issues.

Collaborative working relationships appear to have broken down and mediation may help to restore them.

The point at issue appears to be ‘all or nothing’, but there is a possibility that a structured discussion might uncover an alternative approach which would enable HMRC to resolve the dispute in accordance with the LSS.

It might be possible to resolve the dispute by having a wide ranging discussion of the issues on a without prejudice basis.

Where the dispute is fact heavy, a narrowing or clarification of those facts or issues is necessary.

HMRC use as an example a large or complex case which involves place of supply and transfer pricing issues.

My rule of thumb is that anything that can be negotiated with HMRC can be the subject matter for mediation. The LSS identifies certain cases, for example taxpayer behaviour, where they will take proceedings to court on principle.

Apart from those, I find HMRC are as amenable as they have always been to come to a negotiated settlement, provided there is justification for them to do so.

Cases involving settled law, where the issue is the application of that law to the facts, are ripe for mediation. For examples, see Ripe for mediation.

These are just a smattering of some of the areas where it should be possible to negotiate a settlement with HMRC. The law is reasonably settled and mediation is an ideal forum for resolving disputes.

  • Disputes for deductions under the wholly and exclusively test.
  • Input tax deductions for VAT.
  • Status and IR35 disputes.
  • Salary sacrifice.
  • Employment related security disputes, where the issue is whether the securities have been devolved ‘by reason of’ employment.
  • Termination payments which should benefit from the £30,000 exemption.
  • AutoPILONs, i.e. termination payments made automatically by the employer, even though they are not specifically provided for in the employment contract.
  • Capital allowances where the issue concerns the definition of plant and machinery.
  • Cases involving trading in or with the UK.
  • The place of central management and control.
  • Withholding tax on UK source income.


Unsuitable for mediation

HMRC say that mediation is unlikely to be an appropriate method of dispute resolution where any of the following points apply:

  • The taxpayer does not work or wish to work with HMRC in a collaborative manner.
  • It will be more efficient to have an issue judicially clarified so the precedent gained can be applied to other cases.
  • Resolution can only be achieved by departure from an established HMRC view on a technical issue.
  • HMRC do not trust the taxpayer.
  • HMRC want to test the evidence.

The mediator’s skills

Mediators are trained in a variety of techniques designed to enable the parties to widen their perspective, reappraise their situation, identify opportunities and break deadlock; and they employ a range of strategies to help resolve disputes.

There are invariably a number of reasons why a dispute has arisen, and the mediator’s skill is to tease these out, ascertain what is important to the parties, and then assist them to come to their own settlement.

The mediation day

As already mentioned, mediations generally last one day. The mediator is appointed by agreement, and will have discussed the broad framework for the day with the parties beforehand.

He will also have read some background material, but will not want to get bogged down in detail. So over-detailed, pre-mediation submissions may not be productive use of professional time.

The day normally opens with a meeting where the mediator explains what is going to happen and what his role is, and each party sets out their position.

The taxpayer can be represented, as can HMRC, for example by somebody from the solicitor’s office or from the policy team.

The day then breaks down into individual (and perhaps also joint) meetings. The mediator explores with each party the past, present and future, commercial, legal and personal issues relevant to the dispute.

He does this in private. He tries to understand what the parties really need to get out of a settlement and will build up a rapport with each party.

By understanding the needs as opposed to the wants of the parties, the mediator is in a better position to assist in the bargaining phase of the mediation.

Mediators seek to assist the parties in moving from a positional to a principled basis of negotiation, attempting to depersonalise a problem, preserve dignity, save face, and make possible a co-operative approach to solving the problem.

He is more than a passive messenger shuttling from room to room conveying offers and counter offers between the parties.

Far from it. He will very often challenge the parties, sometimes in a robust way, to help them develop a greater insight into their own and the other parties position. He will look for non-financial solutions.

The goal in the mediation is to reach a settlement which is owned by the parties, and which is practicable and sustainable. Any agreement which is reached in principle is then recorded in the settlement agreement.

As is normal in any commercial transaction where agreement is reached in principle, much of the devil is in the detail, so when the settlement is being reduced to writing, issues usually arise which need further discussion and resolution.

The mediator will normally assist unrepresented parties to draw up the settlement agreement, but where the parties are represented, this would be drafted by the representatives.

The mediator may provide a draft settlement agreement as part of the pre-mediation discussion and may assist the representatives in the principles of the settlement.

The settlement agreement would also conventionally include confidentiality clauses, as well as settling any current litigation, and anything that might have been agreed regarding the future relationship.

Ideally, as mentioned above, the settlement agreement will be signed there and then. This provides certainty and prevents the parties having unhelpful second thoughts.


HMRC’s guidance suggests that professional mediators generally charge between £200 to £500 an hour. The mediator is likely to require between three to ten hours of preparation, and the mediation itself can last between four and 14 hours.

The costs of the mediator are likely to be shared equally between the parties, but each party will usually bear his own professional costs.

A taxpayer will usually want to be represented, and his representative is likely to charge not just for the day but also for the preparation. As mentioned above, however, this is unlikely to be wasted since it will be required for litigation.

The Netherlands experience

Courts in the Netherlands have referred tax disputes to mediation since 2005. Between then and the end of 2008, at least 630 tax disputes were referred to mediation, and more than 80% of these ended with a successful conclusion.

I doubt whether the same would have occurred if the courts had simply referred the parties back to continue negotiating across a table.

Mediation is an extremely flexible tool in resolving disputes between HMRC and taxpayers. It will become increasingly important for advisers to understand its advantages and disadvantages, and what is involved, so they can advise clients properly.

Issue: 4319 / Categories: Comment & Analysis , Admin
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