Mediation for UK tax disputes: HMRC publishes new ADR guidance

HMRC has published a new manual providing detailed guidance on its approach to alternative dispute resolution (ADR) for tax disputes. The guidance captures existing practice and builds upon the more limited existing guidance covering ADR. It nevertheless provides a welcome degree of transparency regarding HMRC's approach, the process involved, and which sort of cases are suitable for mediation (and which are not).

Established and beneficial

ADR is an established part of the tax dispute resolution landscape. HMRC has long recognised the benefits of resolving tax disputes through ADR, whether formal litigation has commenced or not. ADR with HMRC does have some differences with ADR in ordinary civil disputes, however. Perhaps the starkest illustration of this is HMRC's insistence that the mediator be an HMRC officer (albeit one who is independent of those involved in the case). HMRC will usually agree to an additional co-mediator being appointed by the taxpayer if they wish, at the taxpayer's expense. There are also differences in the general approach to settling – notably the parameters outlined in HMRC's litigation and settlement strategy (see below). This is not specific to ADR but inevitably permeates HMRC's approach and can often limit both HMRC's and the taxpayers' room for manoeuvre in negotiating a settlement. 

Process versus flexibility

While flexibility is a key hallmark of mediation in general (and the word itself is prominent throughout the guidance), the manual places a fair amount of emphasis on the process and procedures to be applied to any ADR with HMRC. Some of the points of note include:

• HMRC's aim to conclude the ADR within four months of the taxpayer's request for ADR. This is a welcome feature which will help maintain momentum in settlement discussions and also limit potential disruption to any ongoing tribunal or court proceedings. 
• External co-mediators appointed by the taxpayer will be required to agree to HMRC's terms and conditions governing the process. Although not stated in the guidance, it is likely that this will include confirmation that the external co-mediator will not subsequently act in relation to the proceedings should the ADR fail to lead to a settlement.
• The taxpayer should be available for the mediation within 90 days;
• The default will be for mediations to take place remotely rather than face to face. Exceptions can be made but there is no detail of the criteria HMRC will apply on agreeing to face-to-face mediations. Remote mediations with HMRC have of course been commonplace since the pandemic, there is a convenience benefit in not travelling but some of the key communication and energy advantages of "being in the room" on the day are lost. 
• The mediation will typically involve an exchange of opening statements, followed by a series of separate and joint sessions while the parties explore potential routes to settlement. This is broadly in line with a typical commercial mediation.

Unsuitable cases

HMRC will not agree to ADR in certain cases, including:

• Criminal cases.
• Complaints and disputes about HMRC delays in using information or giving misleading advice.
• Debt recovery or payment issues.
• Automatic late payment or late filing penalties.
• Extra-statutory concessions.
• Pension liberation schemes.
• Accelerated payments and follower notices.

HMRC are also keen to point out that ADR should not be used as a stalling tactic during tribunal proceedings. The First-tier Tribunal is generally sympathetic to staying proceedings if it will facilitate ADR  but much will depend on what stage the proceedings have reached and the extent of any prior delays in the proceedings. Ultimately the decision on any stay will rest with the tribunal but clearly it is helpful if the taxpayer and HMRC both agree that a stay is desirable.

Information shared

Taxpayers should pay particular attention to HMRC's view on the scope of without prejudice privilege in relation to ADR proceedings. HMRC consider that "'without prejudice' means that the parties are able to propose and explore possible solutions to the dispute under consideration without having to worry that their discussions will in some way be regarded as an admission should the parties not reach an agreement."

While this is unlikely to be controversial, HMRC go on to state that "tax facts" disclosed during the mediation are not without prejudice. A tax fact is a fact which has legal and technical implications for a taxpayer’s liability. The examples given in the manual are the receipt of a payment, the making of a supply, the identity of a customer or the place of supply.

On the face of it, this is a narrow interpretation of the without prejudice principles and is likely driven by HMRC's position as a public body with a duty to the wider population to collect the right amount of tax. In practice, any relevant facts and information are likely to have been disclosed to HMRC already as part of required disclosures to HMRC under their information gathering powers. Taxpayers should nevertheless take care to ensure that any new information they put forward as part of a negotiating position is not open to misinterpretation by HMRC, in order to avoid subsequent disputes about disclosure should the dispute not be resolved at the mediation.

ADR subject to LSS

Taxpayers should also be aware that HMRC's litigation and settlement strategy (LSS) continues to apply to all disputes including those considered at ADR. The LSS does limit HMRC's flexibility when it comes to settlement – for example, they will not simply split the difference in arriving at a settlement figure. Instead, there must be a credible legal rationale underpinning the agreed outcome.

This is typically easier to do with some types of dispute than others. For example, disputes that turn on disagreements about pricing or valuations, like VAT partial exemption cases or certain capital gains disputes, are typically more amenable to settlement under the LSS; it is much more difficult, however, where the dispute centres on a difference of statutory interpretation which will often have a binary, "all or nothing" outcome.

Osborne Clarke comment

Taxpayers should also be aware that in certain cases, especially larger and more complex disputes, it is possible that whatever is agreed on the day will still need approval from HMRC's internal governance teams, such as the Dispute Resolution Board. If there is any doubt as to whether further governance approval will be required after the mediation, it is important to establish the position with HMRC beforehand.

HMRC's continued commitment to ADR is to be welcomed, but the need for flexibility both in respect of the mediation process and the underlying approach to settlement is as pressing as ever.