Patrick Cannon looks at how mediation is gradually becoming the default method of resolving tax disputes with HMRC and also between taxpayers and their professional advisers when professional negligence is alleged.
This article was originally published on 12 March 2020 in Taxation Magazine.
For a long time, mediation, or as it is often known, alternative dispute resolution (ADR), has been the Cinderella of civil litigation. In some quarters, the view is still that mediation is for wimps, but its merits and value have been overlooked for too long. However, that view is now changing and professional advisers need to be aware of the growing encouragement, if not to say, compulsion, that is slowly being introduced into the tax and civil litigation landscape to persuade clients to mediate their tax disputes rather than litigate.
In fact, in tax and civil disputes, ADR is likely to replace litigation as the default in the medium to long term because of developments in two main areas:
- case law; and
- 2. government and judicial initiatives championing ADR.
We can look at these in turn.
1. Case law pressure to mediate
Case law already imposes strong pressure to mediate (or at least attempt in good faith to do so) through the costs system. Lawyers and accountants often pay lip service to the possibility of mediation and still think it is a soft alternative to having a dispute decided in a fully prepared adversarial hearing before the tribunal or court.
Certainly, the days spent in court and the preparation time needed will normally see the advisers involved remunerated far more handsomely than if the clients can resolve the matter in several hours of mediated discussions. For this reason, there is sometimes a bias against pursuing mediation seriously and clients should be alert to this.
However, in the tax context, the Court of Appeal has recently provided a reminder of the importance of pursuing and exhausting alternative dispute resolution remedies to try to resolve a dispute before going down the litigation path, and that failure to do so can have huge costs implications for clients.
The case is R (oao Mrs Archer) v HMRC  EWCA Civ 1021:
This involved a claim by Mrs Archer to recover the costs of her judicial review proceedings concerning an accelerated payment notice (APN) issued to her by HMRC in 2014. The APN required the payment of about £6m in tax in respect to an avoidance scheme she deployed to avoid tax on a capital gain of £15.3m in 2005-06.
Under the APN regime, there is no right to apply to HMRC or to the tax tribunal to postpone payment of the tax demanded. However, FA 2014, s.222 allows the taxpayer to make representations to HMRC objecting to the APN and/or the amount demanded if they believe that the statutory conditions for issuing the notice were not met or if the amount shown in it is incorrect.
Generally, payment of the tax demanded by an APN must be made within 90 days of its issue, but if representations are made under s.222, payment is postponed until 30 days after HMRC responds to the representations, assuming that the department then either confirms the amount specified in the APN or amends the notice to specify a different amount.
- Case law puts pressure on parties to mediate.
- The Archer case shows that hasty use of judicial review can be counter-productive.
- Several government and judicial initiatives have encouraged the use of alternative dispute resolution.
- There are constraints on what HMRC can agree to in a mediation.
- Mediation with HMRC will not take place on a ‘without prejudice’ basis.
- With delays in tribunals and courts, dispute resolution will be beneficial.
- There will also be a benefit in avoiding substantial court and litigation costs.
A rush to judgment?
Mrs Archer’s APN was issued on 4 November 2014 and the 90 days for payment of the tax ended on 5 February 2015. Yet, less than four weeks after the issue of the APN, the legal services department of KPMG wrote to HMRC stating that they would be applying for a judicial review and would be sending a copy of the sealed claim form when it had been issued by the Administrative Court.
In fact, the claim form was issued on the same day, although not served on HMRC until 2 December 2014. The statement of facts and detailed statement of grounds were settled by leading counsel. KPMG then made representations under s.222, but not until two weeks after service of the judicial review claim form.
On 22 December 2014, HMRC withdrew the APN, but its defence against the judicial review said that:
- KPMG’s letter had failed to comply with the pre-action protocol for judicial review and, in any event, was written on the date the claim form was issued; and
- the claim was premature because Mrs Archer had not exhausted her statutory remedy under s.222.
It was argued on behalf of Mrs Archer that HMRC should pay the whole cost of the judicial review because she was successful in her claim. Total costs were put at £601,552.20, including that of Mrs Archer’s husband who had faced a similar APN. This level of costs was described by the judge, hearing the original costs application, as extraordinary, particularly as there had been no detailed preparations at that stage for a trial.
Decision on the failure to pursue ADR, The Court of Appeal dismissed the taxpayer’s claim for costs. Henderson LJ held that parliament must have intended taxpayers to take advantage of s.222 before having to resort to judicial review. Judicial review is a remedy of last resort and the facility to make representations to HMRC under s.222 provides a relatively cheap and simple way for a taxpayer to challenge an APN without resorting to the Administrative Court.
Indeed, it was all but self-evident that s.222 was intended by parliament to provide the primary recourse for challenging an APN. The time for bringing a judicial review application should, in practice, not begin to run until the s.222 procedure had been completed.
The court said that no serious attempt was made by KPMG to comply with the pre-action protocol for judicial review. Indeed, HMRC was presented with a fait accompli on 24 November 2014 instead of being given time to respond.
Far from using judicial review as a last resort, the court said that KPMG had employed it as the first line of attack and the very substantial costs of preparing the proceedings had already been incurred. The lesson learned As long ago as 2001, in R (Cowl) v Plymouth City Council  EWCA Civ 1935, Lord Woolf LJ had given similar guidance:
“The importance of this appeal is that it illustrates that, even in disputes between public authorities and the members of the public for whom they are responsible, insufficient attention is paid to the paramount importance of avoiding litigation whenever this is possible. Particularly in the case of these disputes, both sides must by now be acutely conscious of the contribution alternative dispute resolution can make to resolving disputes in a manner which both meets the needs of the parties and the public and saves time, expense and stress.”
In the same judgment, he later added: “This case will have served some purpose if it makes it clear that the lawyers acting on both sides of a dispute of this sort are under a heavy obligation to resort to litigation only if it is really unavoidable. If they cannot resolve the whole of the dispute by the use of the complaints procedure, they should resolve the dispute as far as is practicable without involving litigation. At least in this way, some of the expense and delay will be avoided.”
The Archer case is a salutary reminder of the importance of this judicial guidance and that legal advisers should not use litigation as a first or concurrent line of attack. Further, in the interests of their clients, they should exhaust all alternative dispute resolution avenues, including mediation, first. The extraordinary irrecoverable costs bill run up in Archer illustrates the risk of failing to follow this principle.
“The Archer case is a salutary reminder of the importance of this judicial guidance.”
2. Government and judicial initiatives for ADR
The second driver towards using ADR first and litigation only in the event that ADR fails are the following assorted developments.
- Since 2014, an applicant to the family court must attend a mediation information and assessment meeting (MIAM) with a mediator in advance of the court application.
- The Joint Contracts Tribunal or JCT standard building contract requires each party to give serious consideration to a request by another party to use mediation.
- The Civil Justice Council (CJC) ADR report of November 2018 (tinyurl.com/uha7a6u) recommended that there should be a perception that formal ADR must be attempted before a trial can be made available.
- Other CJC reports, such as the boundary dispute working party (tinyurl.com/vslwpzj) and on fixed recoverable costs in low value clinical negligence claims (tinyurl.com/t3x682u), favour either implied or mandatory compulsion to use ADR.
- In Lomax v Lomax  EWCA Civ 1467, the Court of Appeal held in an inheritance dispute that because the Civil Procedure Rules do not contain an express requirement for the parties to consent before an early neutral evaluation (ENE) is ordered, an ENE by the judge should take place as soon as possible despite the defendant having refused to agree to this.
- HMRC has been open to a limited form of ADR for the past six years or so and this cheaper way of resolving tax appeals without a hearing can be attractive to taxpayers.
Limitations of HMRC ADR
As a non-departmental government agency whose job is to administer and enforce tax law and efficiently collect tax revenue, there are constraints on what HMRC can agree to in a mediation. A good mediator will be alive to these constraints and will use their ability to advise the parties in matters of process, as opposed to advising them on substantive matters. This should help the parties avoid the pitfalls that might result in the settlement agreement being unpicked by HMRC later on.
The constraints on an HMRC mediation were illustrated in The Serpentine Trust Limited (TC6719), which followed the partial settlement of a tax dispute with HMRC by mediation. In an agreement reached between the parties at the end of a mediation in July 2013, HMRC had agreed on the future VAT treatment of the trust’s charitable receipts.
However, no agreement could be reached on the VAT treatment for previous periods and, in respect of those periods, the trust later took its appeal to the tax tribunal and lost. In that appeal in 2014, the tribunal commented that although the parties had agreed the position for future periods this was ‘wrong in law’ and ‘inconsistent with [HMRC’s] published position’.
“This is a clear indication that ‘without prejudice’ does not apply in HMRC mediations.”
In 2015, HMRC then changed its view and resiled from the 2013 agreement for future periods by issuing assessments that differed from the basis on which the VAT treatment had been agreed previously. On the trust’s appeal to the tax tribunal against the assessments, the tribunal had to decide whether the 2013 agreement was in principle, a binding contract and, if so, whether it was void because of a mistake by HMRC or because it was wrong in law, and was therefore, outside the department’s powers to make it.
The tribunal decided that the 2013 agreement was a contract but, taking into account the Commissioners for Revenue and Customs Act 2005 and the relevant case law, what had been agreed by HMRC in 2013 was ‘wrong as a matter of law’ so that the contract was outside HMRC’s power to make and so was void.
What this shows is that HMRC can only enter into a legally binding contract that governs its future powers to collect tax in very restricted circumstances. The department has the legal duty to obtain the best return for the Treasury and to protect the revenue. This duty prevents it from entering into contracts that would stop it from taking into account future legal changes or to changes in the circumstances of taxpayers.
This means that agreements with HMRC cannot be binding for a specific future period or be irrevocable. The tribunal held that HMRC cannot legally put itself in a position that would stop it from enforcing a taxing provision except ‘in circumstances where the reason for that concession is for the purpose of HMRC’s overall task of collecting taxes’.
Are HMRC mediations ‘without prejudice’?
Any proper mediation is conducted ‘without prejudice’ for the obvious reason that it encourages a full and frank discussion between the participants. They are thus secure in the knowledge that they can reveal their full situation without risk of any inconvenient disclosures being used against them later if the mediation fails and the dispute proceeds to court or if there are other proceedings between them.
There is a common perception that this also applies in HMRC ADR proceedings, but it does not. Participants should not go into an HMRC ADR assuming they can reveal all without fear of it being used against them later by the department.
HMRC’s ADR fact sheet (tinyurl.com/rb6zb4y) states: ‘Discussions in mediation are confidential whether in joint or private session. But any new information or evidence disclosed by you that has an effect on the tax position will be on record.’ This is a clear indication that ‘without prejudice’ does not apply in HMRC mediations.
This limitation can sometimes be a problem in such discussions and it is surprising that HMRC maintains it, especially as other government agencies, such as NHS Resolution (previously known as the NHS Litigation Authority), are willing to participate in neutral mediations that are conducted ‘without prejudice’.
Although ADR discussions are confidential, they are not held on a ‘without prejudice’ basis. This means that new information or evidence disclosed by the taxpayer and which will affect the tax position will be on record and could be used by HMRC in any future litigation.
These developments, and others, show that ADR is now being promoted much more robustly in the context of tax and civil litigation. It is, in effect, a sort of creeping privatisation of the resolution of disputes and this is actually beneficial to litigants given the huge delays in the tribunals and courts and the enormous rise in court fees.
We are moving towards an environment where ADR is becoming the normal position, while litigation is the last resort and a mark of failure. Tax advisers and their clients are having to adapt to this and the smart clients should welcome this.
Find out more about Mediation from Patrick Cannon:
- Is Mediation Legally Binding?
- Judicial Review v Mediation
- How does Mediation Differ from Arbitration?
- The Benefits of Using Mediation Services for Conflict Resolution