Continuing Success of Tax Mediation in the U.K.

The latest alternative dispute resolution, or ADR, statistics in the recently published Annual Report from HM Revenue & Customs (HMRC) demonstrate resilience in the face of Covid-19 interruption.

When lockdown hit unexpectedly in March 2020, HMRC had to pivot 180 degrees with its mediation service offering. Social distancing restrictions meant an immediate cessation of face-to-face mediation. This was followed by a period of uncertainty in which it was unclear what the future held for ADR in the brave new world.

Within a few months, however, HMRC successfully handled the various IT constraints, upskilled its staff, and introduced new working practices for virtual mediation.

A Success Story

The ADR statistics tell a story of success under challenging circumstances, resulting in nearly 80% of cases being resolved by mediation in the year. This is not quite as high as the previous record, where 90% of cases were resolved by mediation, but it is still a strong testimony to the value of mediation for long-running or messy disputes with HMRC.

With resolution rates for ADR cases hovering between 78%—90% over recent years, it is not an exaggeration to say that mediation is the single most effective tool to accelerate tax dispute resolution. Given both its tremendous power and its broad relevance—ADR is potentially available to any U.K. taxpayer, in almost any tax dispute, and theoretically at any point—it is perhaps surprising that ADR is not more widely applied.

Why Is Mediation Not More Widely Applied?

There are a number of reasons for this that need to be properly addressed in the future in order to fully maximize the benefit of this resource for taxpayers and HMRC alike.

The first is that virtual mediations are a mixed blessing. Certainly, over lockdown and the period of ongoing social distancing restrictions, they offered a lifeline for those requiring mediation to resolve their disputes. The published numbers clearly demonstrate the effectiveness of virtual mediation as a resource to accelerate dispute resolutions.

The availability of virtual mediation introduced welcome accessibility to mediation. This can be particularly helpful where there are multiple stakeholders and geographic constraints. It can also be extremely positive for lower value disputes where the investment in a day’s mediation may be prohibitive.

Ultimately, however, my experience indicates that “virtual” is not a complete substitute for “face to face” and will suit some ongoing disputes more than others. Part of the “magic” of ADR is down to the psychological alchemy on the day. This chemistry cannot be completely replicated through virtual media. Difficult conversations and pragmatic solutions need the right environment to flourish.

Initial feedback from HMRC is that virtual mediation will be the default option going forward. It is hoped that once the social distancing restrictions are lifted, however, HMRC will revert back to offering face-to-face mediations when these are appropriate and necessary.

More generally, the under-utilization of ADR to date may stem from the fact that, paradoxically, ADR’s biggest strength—its simple process and widespread application—may be a contributory factor in the low take-up. ADR sits somewhat apart from the formal inquiry process. Again, this is perhaps both a blessing and curse.

ADR, unlike mediation in other contexts such as some family disputes, is currently not a prescribed prerequisite for taking matters forward to the Tax Tribunal. In addition, again unlike other processes, there are no statutory restrictions or limitations as to the timing of applications. This is in contrast, for example, to the 30-day time limit for accepting a statutory review of disputed decisions or making an appeal to the Tribunal.

What this means in practice is that the majority of taxpayers, and indeed HMRC inspectors, who have limited or no previous experience with ADR, may sometimes struggle to recognize the appropriateness of mediation to accelerate resolution without the necessary trigger. In practice, this results in numerous lost opportunities when ADR is not introduced early enough, or even at all, through lack of awareness or understanding.

Benefits of Alternative Dispute Resolution

In my experience of a decade of positive ADR interventions, it is never too early to introduce ADR into the conversation. At a minimum this can focus the engagement between the two parties, even if it is concluded that the dispute is not yet sufficiently mature to benefit from ADR.

Often the very commitment by the parties to a mediation day acts as a catalyst for investment by both sides, leading to robust and constructive conversations.

Key to obtaining maximum benefit from ADR is that the parties are mindful that the application for ADR needs to be couched in the language of collaboration, rather than wielded as an adversarial tool. An ADR application is not a threat.

Equally an ADR application is not a measure of last resort nor an admission of defeat.

It is also recognized that one huge benefit of ADR is its relatively informal process and accessibility. ADR itself is molded by the skills of the mediator and the mindsets of both parties. There is a broad framework comprising a digital application form, pre-day preparation and the one-day mediation itself. There are also a number of broad tenets underpinning ADR, including confidentiality, and its without-prejudice nature. However, the real beauty of ADR is that, beyond this, it is within the power of the parties to maximize the benefit for the purpose of their tax dispute resolution.

Finally, what the ADR statistics do not show is the number of facilitated conversations held by the HMRC dispute resolution mediators. Facilitated conversations, or “ADR lite” as I refer to it with my clients, is a powerful tool offered by HMRC, which—although not reflected in the ADR numbers—must not be underestimated.

“ADR lite” harnesses the tremendous benefits of having mediators review disputes and use their skills to unblock difficult conversations in circumstances where a full mediation may not be necessary or appropriate. Instead, the mediators in these instances will offer the parties a way to resume the conversation or perhaps signpost an alternative way to move forward constructively.

Going Forward

Ultimately, the message from the latest HMRC report is that ADR remains open for business even in the post-Covid world. In the right hands and with the right support, ADR can massively accelerate resolution of long-running tax disputes.

With few or no barriers to access, there is everything to gain and very little to lose for taxpayers by making ADR their preferred dispute resolution tool.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Talia Greenbaum is a partner in tax dispute resolution at BDO.

The author can be contacted at: talia.greenbaum@bdo.co.uk