Four leading professionals took part in a recent Tax Journal roundtable discussion on the role of mediation in resolving tax disputes. The discussion covered the origins of mediation; potential benefits for HMRC and taxpayers alike; key features of the mediation process; HMRC’s ADR pilots, next steps and its approach to encouraging collaborative working more generally. The discussion was chaired by Jonathan Levy, Head of RPC’s Tax Disputes Group.
Jonathan Levy (JL) Mediation seems to have arrived in the UK with a bang, but I understand it had a long gestation period. How did it all start?
Graham Massie (GM) Like many things, mediation wasn’t an overnight success. Mediation really started with the formation of CEDR, the Centre for Effective Dispute Resolution, just over 20 years ago; at that time, there was no alternative dispute resolution in the UK market at all. The founders of CEDR had come across mediation in the United States and were interested in developing the model here to resolve disputes more effectively while also avoiding some of the worst excesses of the American legal system. The real driver for growth was the publication of the Woolf report (Access to Justice (Lord Woolf) 1996) and the resultant reform of the Civil Procedure Rules. Further endorsement came from the government’s pledge, in 2001, that in future departments would only go to court as a last resort, and that mediation and other forms of non-litigious dispute resolution would be used in all suitable cases, wherever the other party accepted it.
Mediation has gone from strength to strength since that time, with CEDR now handling about 700 mainstream commercial cases a year; the average value is in excess of £1m. About 70–75% of those cases are settled on the day of the mediation.
Val Hennelly (VH) From HMRC’s point of view, it's always good to reach resolution by agreement with our customers. Less than 1% of our disputes end up at going to the tribunal, but resolving that 1% can still be a time-consuming exercise.
At the moment we have around 8,000 cases on our books with our solicitors – this is a significant number in terms of resource, uncertainty for customers and cashflow for the Exchequer. Some of those may well need to be litigated, some may be waiting on decisions in other cases, but many of them may be amenable to alternative dispute resolution. Alternative dispute resolution can help maximise the cash flow to the exchequer; make the most effective use of our resources; and improve the customer experience. It ticks all the corners of that ‘virtuous triangle’. And that’s why we’re currently conducting pilots to see how we can build ADR into our business-as-usual model as being one of the tools to help resolve the tranche of cases that aren’t settled in the normal way of working.
JL From a practitioner’s point of view, Geoff, do you agree that ADR is a good thing?
Geoff Lloyd (GL) It’s in everyone’s interest to sort out tax disputes as efficiently as possible, so any route to effective tax dispute resolution is a good thing. Mediation for tax is very much a logical progression of the fact that a vast majority of tax disputes are already settled by negotiation. What mediation adds, though, is a framework within which that negotiation can take place. In fact, it adds more than that; mediation is a fantastic way of enabling both parties to retain control, both of costs and of the length of time it can take to bring parties together where they are negotiating bilaterally.
JL Why is it that mediation can help, often in disputes between longstanding litigants? Where’s the magic, Graham?
GM The magic of mediation is in involving a third party neutral who changes the dynamics of the negotiation. The third party can act as a buffer, if there’s a relationship issue. He or she can act as a process manager, the person who asks the tough questions and sometimes makes the practical suggestions to, for instance, identify missing information. Sometimes it’s just a question of needing a third pair of eyes to steer the communication process between the parties. Without getting overly Freudian, individually we’re not always very good at conflict. When we go head-to-head, it can become personal. We’re not always very good at mutually taking a step back and trying to do some problem solving. That’s where a trained mediation professional can help.
GL It is possible to inject dynamism into bilateral negotiations, but a mediator can act as a bridge to create trust between both parties, and he or she is able to bring that extra degree of dynamism towards a resolution of the dispute that might not otherwise be there.
JL I think that leads quite conveniently into what actually mediation involves ...
GM In the UK, the main form of ADR is the consensual mediation process, involving a trained neutral who facilitates the negotiation. He or she is the manager of the process but not the decision-maker; the outcome remains to be agreed between the parties.
The other main feature of mediation is that normally it’s conducted in a confidential environment. So you can see how both of those factors – the trained neutral and the confidential environment – change the dynamic to create a safe negotiating environment.
GL It's human nature for the two parties not to want to put all their arguments on the table, or to expose weaknesses which the other side may not have thought of. The safe environment that the mediator brings enables the parties to explore those arguments, or to reality check or ‘stress test’ different arguments that a party might not otherwise feel comfortable raising.
JL Let’s talk about the role of a neutral, third party in the mediation process. Do you think that someone within HMRC’s culture can mediate effectively, or is it always essential for the mediator to be truly independent of both parties?
GM For most significant cases, I believe that clients will want to source their mediator from an established ADR provider such as CEDR. However, there’s no doubt that properly trained HMRC personnel can mediate effectively provided that they are accepted by both parties and are respected as being neutral. There are precedents for this, for example, in the employment arena where often the relatively low value of HR disputes means that it isn't financially justifiable to involve a third party. As a result, many large organisations and government bodies have trained up their HR officials to act as internal mediators.
JL What level of tax expertise do you think should be required for mediating tax disputes? Would your preferred mediator be a tax QC or would you favour someone with less tax expertise but more mediation experience?
GM I’d definitely favour someone with a lot of mediation skill. Every mediation is different and, while there may be some standard elements, an experienced mediator really can design a process that suits the needs for the parties in that particular case. The mediator does, of course, need to understand what everybody is talking about, but he doesn’t need to be an expert because it’s not his job to give them the answer or his view.
GL I agree. The real prerequisite is skills in mediation to assist the parties in unearthing what it is they’re concerned about. Of course, there needs to be an understanding of the tax issues, but where the mediator needs to be so expert in the tax issues that they would be in a position to decide the dispute, then I think you’re in the realms of something that probably ought to be going to court.
JL Judges are mediators sometimes. I've seen one who was good at giving out little hints throughout the day that helped focus peoples’ minds …
GM Some members of the judiciary have, after training, turned out to be very effective mediators. I’m less convinced, though, by the judicial aspects of the hint because, for me, mediation is about the clients taking responsibility for the process. There is already an established mechanism if they want an expert view.
GL In my experience – and I’ve seen it time and time again – disputes are often difficult to resolve because people are talking at cross purposes. Mediation can help bring a better understanding of where the other party is coming from. Disputes are not failing to be resolved because of a paucity of legal advice.
JL Do you agree with that, Val?
VH I do, and I’d be interested in your view, Graham, on the issue of trust and how the mediator builds a relationship of trust with both parties. I ask because HMRC has been experimenting with a couple of different approaches to dispute resolution. For our smaller end areas of business, we’ve been using our own internally trained third pair of eyes to act as a mediator and a process manager. For the larger businesses, we’ve been looking at a range of options at the moment; these range from engaging a truly neutral third party whose appointment was agreed between the parties at the mediation stage to dipping our toes in the water with a dual mediator model, using a trained mediator from HMRC alongside a mediator from the professional firm. The idea here is to resolve any concerns over trust that there might be with a single mediator from HMRC.
GM I think there’s a risk of confusing matters if we use the label of mediator for a wide range of different roles. Having said that, all of the approaches that Val describes have something to offer. We all benefit from the input of a colleague for time to time, and I am sure there will be times when a trained HMRC manager can help move matters along. The idea of designated negotiation specialists from both sides working together is also an interesting suggestion that is worth exploring further. Ultimately, of course, whether or not a mediator is trusted is for the parties to decide – who we are is part of the answer, but equally important is that we need to earn trust through the way we conduct ourselves.
JL Val, can you talk us through HMRC’s initiatives to date?
VH In 2010 HMRC started two pilots concerning alternative dispute resolution. We are still in pilot phases at the moment.
One of those pilots affected what we call our mass market customer base, ie, small to medium enterprise businesses. Small to medium enterprises are those with a turnover of no more than £30m and no more than 250 employees, although the majority of cases in the pilot typically involved two-man bands with a turnover of less than £1m. Here, we used a series of internally trained facilitators. Although those facilitators had no formal mediation training themselves, they were trained by a mediator at HMRC who had CEDR training.
For this pilot, we examined 250 cases, of which we identified 150 suitable for carrying forward to the pilot stage. These were all cases which had been through our internal review process and which would otherwise have headed to the First-tier Tribunal. We were very clear about the type of cases to select for the pilot. It was a focused selection where there had been a breakdown in the relationship between both parties, and we were careful to exclude any cases involving fraud or technical issues.
We found that using internal facilitative mediators, we were resolving cases in around 14 hours of their allocated time. All the cases were settled within the parameters of the LSS [Litigation and Settlements Strategy], and the time taken compares very favourably with the 120 hours that are typically required to take a case to the tribunal, never mind all the other costs.
The pilot was overseen by the Compliance Reform Forum, which comprises a group of external professionals and representatives for the professional bodies – and I’m pleased to report that they said they’ve been impressed at the even-handedness of HMRC personnel.
The second pilot was for large businesses or taxpayers with complex tax affairs. This was a smaller scale pilot which includes the option of involvement of a third-party accredited mediator. By December 2011, 14 cases had been selected, out of a total of over 50 considered. These included ten disputes relating to VAT, and four relating to various direct taxes.
Each dispute was brought into an ADR process governed by an ADR agreement setting out the steps and timetable, the individuals to be involved from each party, and the ground rules for the process. The ground rules included a commitment to work collaboratively to resolve the dispute, through the joint appointment of a mediator, should that prove necessary.
For the majority of the cases, rather than going straight to mediation, the ADR process has involved preliminary facilitated structured discussions to see if the parties can resolve the dispute without a mediator, or at least better prepare for mediation, by ensuring they fully understand their respective arguments and the points of agreement and disagreement.
The structured discussions in these cases have been facilitated by members of the parties’ own teams and have been conducted expressly on equal terms, recognising the dispute as a shared issue which the parties have a shared interest in resolving.
By December 2011, two cases had been resolved in a mediation, with one case undergoing a dual mediation, another case undergoing a neutral evaluation and a further case on the point of going to mediation. Three cases in the pilot had been resolved through the structured discussions, with a further one or two cases on the point of being resolved bilaterally. The remaining four cases are at various stages in the facilitated structured discussion process.
Of the cases in which a third party accredited mediator has been appointed, one has involved facilitative mediation (where the mediator remains neutral throughout and tries to bring the parties together), one has involved evaluative mediation (where the mediator is a tax specialist and, while trying to bring the parties together, may also provide his/her view on the matter), and two involve non-binding expert determination (where a chosen expert reviews, considers and provides a view on a non-tax issue relevant to the tax dispute, such as a valuation, and the expectation is that the parties will settle in accordance with that view).
The cases in large business pilot have been resource intensive, but we still estimate that considerable savings have been made compared with resolving the relevant disputes through litigation.
The dispute resolution team have also advised on a dozen or so cases, where the cases were not at a stage to be taken into the pilot, but advice has helped move them forward, and a formal ADR agreement might be appropriate in the future if they are not resolved.
JL I recently attended a seminar given by David James of HMRC Specialist Investigations and his colleagues. As an outside speaker, I was asked to attend and share some outside knowledge of the ADR process from a practitioner’s perspective. The attendees at the workshop were team leaders from across Specialist Investigations and Local Compliance. David discussed ways of trying to embed mediation practice into the investigative process and to develop a more collaberative way of working between HMRC and taxpayers. I think it’s fair to say that there was a good lively debate, but also perhaps a certain amount of scepticism in the room among seasoned HMRC officers as to the benefits of mediation. Do you think that there are wider lessons for HMRC here?
VH In terms of collaborative working, there is a wider application for HMRC and I think there is a culture change challenge here. My team have been rolling out those events that you attended, Jonathan, in partnership with our enforcement and compliance teams.
The events consider application of the LSS, and use a worked example to bring out elements of the LSS and to ensure our people are familiar with the key aspects of getting all the facts of the case; understanding the customers’ point of view; understanding what the issues are; ensuring that there is good dialogue between HMRC and the customer, and making sure there is good dialogue all the way through the process.
We’re also looking at what we can do through our own internal training products. We’ll be launching some tax professional qualifications that look at managing disputes; these cover the technical issues, such as a good understanding of our information powers, through to the softer skills of managing a case.
In addition to these internal initiatives, we’re also engaging externally. Our customer teams are drawing up a training event for the Working Together groups aimed at the smaller firms of tax agents.
GL There’s still a question in my mind as to whether this goes far enough. Is there a case for bringing in a third party even earlier than we’ve done to date, given the vast number of cases that are stacked up? Looking at the tribunal statistics the other day for the first quarter of 2011, I noticed that there were 19,200 cases outstanding in the First-tier tribunal, which is up 10,000 on the year before. Given the volume of cases we’re talking about, is there scope for bringing in a third party earlier? Is there a role for a mediator perhaps to act as a coach in an initial session between the parties, and then leave them to get on with it for a while and see whether they can actually resolve it or come in again later if necessary?
JL Parachuting a mediator in at an earlier stage, perhaps for bigger cases?
GM I have a lot of sympathy for this approach. In my experience across a range of fields, parties all too often burn their bridges before bringing in a mediator. We can do a good job as a rescue service of last resort, but a lot of cost and angst could be avoided by bringing a conflict expert into the equation at a far earlier stage in proceedings.
VH I think it’s a good challenge. We’ve recently announced an extension to the ADR trial. Again, we’re focusing on the SME population and we’re inviting customer taxpayers to approach HMRC if they want to use an HMRC-trained facilitator to progress issues where a tax issue is in dispute, but before an appealable tax decision or assessment has been made by HMRC. Initially this stage of the trial is limited to customers based in North Wales and North West England, and then we’ll look at rolling it out across other parts of the country.
We are also continuing with the large and complex ADR pilot. We started with the aim of settling 11 of those by 31 March 2012. I’m looking at working up plans for what happens after 31 March, and potentially expanding that service.
We have a pool of people who were trained by the CEDR last June. They’re dotted around our organisation. We haven’t really made full use of those skills yet, so I’m working with our operational and advisory directorates to see how we might turn them into an advisory network for cases that might go to dispute resolution at an early stage.
In this way we’re also going to be looking at expanding capacity in the large and complex ADR pilot using this network of people to provide advice and direction to manage appropriate cases and this potentially increases the number of cases which can be handled.
We’ve been under a lot of scrutiny on governance and clearly it’s important that we give customers and Parliament assurance that there’s nothing going amiss in that area. It needs to be clear that the LSS and the governance therein applies to decisions reached using ADR. But my view is if we set out clear criteria as to when decisions are made through either a pre-mediation or formal mediation process, then we want to make sure we have the capacity to deal with those cases where ADR may be an effective route to resolution.
GL The extension of the SME pilot in this way is good news. Similarly, the fact that the large and complex pilot is to persist makes a huge amount of sense, given the benefits that we’ve seen.
I suppose one question here is, given the undoubted benefits, whether we should not be looking to use mediation more and to use it better. ‘More’ simply because of the sheer volume of cases. ‘Better’ because the current model relies on the parties going through various stages of discussions and then bringing in a mediator, and I wonder whether there should be a presumption that a mediator will be brought in if their case hasn’t been resolved within that particular period of time.
JL Would HMRC think of enshrining this in the LSS?
VH I don’t think so because the LSS is more about resolving disputes through collaborative working and effective working of an enquiry through negotiation and what I’d say are normal relationships. The LSS makes reference to dispute resolution being an alternative for those cases that don’t resolve in the business as usual structure.
JL Would it help to have an external panel of accredited mediators?
GL You certainly want to have mediators who are accredited …
JL But HMRC approved?
VH From HMRC’s point of view, if the mediation practitioners want to form themselves into panels, then that is fine. HMRC’s approach to appointing mediators has, to date, been for the customer to suggest a mediator and then it is for HMRC to ratify that decision. I think there would always be issues around HMRC endorsing this panel because we haven’t got the skill set to make that judgment; that would be for somebody like CEDR.
JL Since you mentioned governance, recent events, accompanied by widespread press coverage, do clearly impact on the public consciousness of how HMRC approaches settlements with larger corporates. Do you think that’s made it harder for mediation, particularly for the big corporates, or has it in some ways offered opportunities?
VH There may be challenges around peoples’ perception of governance and there may be a need for more communication around how that governance works. But that aside, I think the basic infrastructure is in place for the cases being dealt with within our mass market and large and complex pilots.
We have the Contentious Issues Panels which oversee decisions within personal tax and business tax. We have the Anti-Avoidance Board which oversees the strategic approach towards avoidance. And we have the High Risk Corporates Programme and Managing Complex Risks Programme which deal with the very large cases that may have a series of issues requiring settlement. The governance of those boards is articulated in the LSS guidance. So, while I think there are communications challenges around governance, the governance itself is already there.
JL Thank you all. That’s been very helpful.
Val Hennelly, Head of the Dispute Resolution Unit, HMRC
Jonathan Levy, Head of Tax Disputes Group, RPC
Geoff Lloyd, Executive Director, Ernst & Young
Graham Massie, Director, Centre for Effective Dispute Resolution
For HMRC guidance on LSS and ADR, including how to contact HMRC’s team, visit www.hmrc.gov.uk/practitioners/lss-intro.htm.
