Practice Note: Settling up – how tax mediation can help resolve disputes

In this Practice Note, we look at mediation and the circumstances in which it may be helpful in resolving tax disputes.


What is mediation?

Traditionally tax disputes have been settled either by litigation or, in the majority of cases, by out of court agreement often following protracted discussions between the two parties. This can be a lengthy and expensive process for the business/individual concerned.


Alternative dispute resolution (ADR) occurs when a third party is brought in with the agreement of both parties to a dispute either to determine the outcome as an arbitrator or to ‘facilitate agreement’ as a mediator. In principle, ADR can be used to resolve disputes relating to any taxes and for a range of taxpayers including small and medium-sized enterprises (SMEs), and large and complex cases. The form of ADR most commonly used for tax disputes is facilitated mediation.


Increasing use of ADR

ADR is becoming more popular: HMRC’s records show that that total applications for ADR had increased from 581 in 2015-16 to 1,265 in 2016-17, with a success rate for resolving cases through ADR  79.39%.  However, most ADR takes place at the lower level of individuals and small to medium size companies, not inn larger and complex disputes.  A major reason for this is HMRC’s Litigation and Settlements Strategy (“LSS”) which may be found at  This makes clear that when HMRC believes that it is ‘likely to succeed in litigation ‘and that litigation would be both effective and efficient,’ it will not reach an out of court settlement for less than 100% of the tax, interest and penalties (where appropriate) at stake.  If, therefore, HMRC believes that it is right in a dispute with a large corporate and the dispute cannot be settled, it is unlikely that HMRC will agree to mediation because most mediations lead to a compromise which inevitably involve HMRC agreeing to forgo some or all of the tax.


Where mediation can help

HMRC have developed internal mediation training with the aim of having at least one facilitator in each of its regional centres who will be able to discuss with decision-makers the suitability of cases for mediation. HMRC have also issued guidance which sets out clearly where they will consider the use of mediation and where mediation will not be entertained


The guidance states as follows:


When ADR might help

ADR can be useful if:

  • you and HMRC have different views on exactly what’s happened – the facts
  • communication between you and HMRC has broken down
  • you need to know why HMRC haven’t agreed evidence that you’ve given them and why they want to use other evidence
  • HMRC need to explain why they need more information from you
  • you’re not clear what information HMRC has used and think they may have made wrong assumptions


Disputes not suitable for ADR

ADR isn’t right for disputes about:

  • requests for time to pay or similar issues
  • fixed penalties on the grounds of reasonable excuse
  • tax credits
  • PAYE coding
  • HMRC delays in using information
  • cases that HMRC’s criminal investigators are dealing with
  • default surcharges


The scope for mediation is, therefore, very wide and it is perhaps surprising that mediation has not hitherto been applied to the often protracted, long running and complex disputes between HMRC and the large corporates.


 The mediation process

An external mediator may be appointed by agreement between the parties, or HMRC may supply an internal person with the relevant experience.   Generally, the taxpayer will prepare a ‘position paper,’ giving an outline summary of the facts, legal issues and the taxpayer’s initial negotiating position.  The position paper should be as succinct as possible.  HMRC should also be asked to identify who the ultimate decision maker is on their side.


On the day

Generally, the day will start with the parties and the mediator sitting down together around the table for a preliminary session.  This session will give the parties a chance to set out their position in brief and raise any specific points that they wish the mediator and/or the other party to take into consideration.  The mediator will generally make an opening statement. This outlines the role of the participants and demonstrates the mediator’s neutrality. Some mediators will make comments about what they see as the key issues. The parties then retire to separate rooms and the mediator then shuttles between the parties.  A skilled mediator will assess the strengths and weaknesses of each party’s case and use this and his private conversations with the parties to enable both sides to take a more independent and realistic view of their prospects of success should the matter have to be litigated.  The mediator will also attempt to defuse any resentment or ill feeling between the parties which may have been built up during the course of their previous dealings.


A successful mediation is concluded when common ground is reached and both parties agree to settle the dispute.



The advantages of mediation are as follows:

  • It offers a more cost-effective solution to a dispute that traditional litigation;
  • Even if the matter cannot be settled, the issues may conveniently be clarified, thus removing the costs of litigating unnecessary issues of fact or law;
  • Mediation can be conducted without prejudice to the arguments put forward at a tribunal;
  • The mediation settlement is entirely confidential, whereas a hearing before the Tribunals is in public;
  • Mediation is encouraged by the Tribunal.


In our experience, tax meditation can be surprisingly effective particularly in ‘non-tax avoidance’ cases and where small or medium sized companies and individuals are concerned.  Certainly, mediation is worth a try.


Levy and Levy – the tax resolution specialists