Mediation – Alternative Dispute Resolution

Alan Pink

You and the Revenue

Who will mediate the mediators themselves?

With due apologies to the Roman poet, Juvenal, this phase is called to mind by HMRC’s way of “mediating” disputes with taxpayers, for reasons which will become apparent.

These days everything has to come with its acronym, and we are talking here about ADR, or Alternative Dispute Resolution. This is a trendy, but often very effective, way of taking the heat out of arguments and avoiding them dragging expensively through a court of law. Outside the fantasy world of HM Revenue & Customs, mediation (which is a form of ADR) works like this:

The two disputing parties both attend the same offices, usually those of one of the solicitors. They have appointed an entirely independent mediator, who is often a practicing barrister. The meeting starts in the same room, where the mediator introduces himself and explains the rules of the game. Both sides make a brief statement of their position, and then they split up into two separate rooms and the mediator whizzes between the two rooms trying to find a compromise solution to the dispute. The mediation isn’t binding on either side, and neither side can use whatever is said, or has been offered, in evidence in any court proceedings which might follow.

We believe that the evidence is that, in commercial disputes, mediation is very often highly effective in resolving what would otherwise have been potentially ruinous litigation. One might say “well done the legal profession” for coming up with this idea, but of course you have to bear in mind that the whole reason why it is a good idea is because the legal profession has made litigation such an enormously cumbersome and expensive process in the first place!

As far as our experience is concerned, though, we enter an entirely new, and bizarre world, when entering the Revenue’s version of an ADR process.

The wackiest part of HMRC “mediation” meetings is that the mediator him or herself works for HMRC! Second, HMRC wouldn’t be HMRC without imposing strict and onerous rules from the outset, including, often, impossibly short timescales to set out one’s position on what can be highly complex areas of fact.

Here are two real life case histories to illustrate the Revenue’s interpretation of the initials ADR. The names, of course, and some inessential facts, have been changed:


Greased Lightning Limited

This company makes grease guns, which it sells to a wide range of wholesale and retail customers. Acting on malicious information, the Revenue started an enquiry, and claimed that a lot of cash was going through the business and not being accounted for as income. The allegation was based on an examination of the main director’s personal bank statements, which showed lodgements which, after the usual long interval of years, he couldn’t identify or explain. The Revenue also claimed that he was making a lower gross profit percentage on his grease guns than other manufacturers of similar equipment. So, a pretty complex case for the taxpayer to answer.

The tax inspector suggested, in the face of near deadlock on these points, that the case be submitted for ADR. This seemed like a good idea.

So a very formidable lady at HMRC wrote to the taxpayer’s accountants, saying that she wanted a full statement of their position within 10 days. The accountant’s reaction was to thank the stars for at least one good laugh that day. There was no way a sensible case could be made up in that short time. Expecting the usual accommodating attitude which, to do them justice, tax inspectors usually show in the face of practical issues like this, the accountant wrote to the mediator asking for more time.

This was abruptly refused and the ADR process unceremoniously terminated. The accountant and his client found themselves staring each other, blinking with disbelief. (The interesting postscript to this story is that the Revenue subsequently withdrew most of their allegations anyway!)


Quick Fire Solutions Limited

This company specialised in executive travel, and its managing director made what turned out to be a serious mistake in firing the chief book-keeper, who was either incompetent or positively dishonest.

Shortly afterwards, he received a letter from the Revenue under the so called “COP9” procedure, basically asking him to own up to having committed serious tax fraud, and saying, as is common in COP9 enquiries, that he would be immune from prosecution if he agreed to accept this point. The reason for the Revenue coming in with all guns blazing in this way wasn’t difficult to speculate on. The taxman was claiming specifically that he paid for his own holidays out of the company, and work on the company’s office was really work on the director’s house etc, etc. These were highly targeted accusations, and, in the course of this enquiry, the taxman said he wanted to see all of the managing director’s personal bank statements for the last six years.

At this point the tax advisory profession stepped in and appealed against the requirement to produce personal statements. There were basically two grounds of appeal, which were firstly that the statements were not needed for the purpose of checking the company’s tax position; and secondly that they were not “statutory records” which are within the scope of a formal demand for information. This second is a technical point on which the tax advisory profession and HMRC are still in dispute, and the advisers were looking forward with professional interest to it being aired at the tribunal.

Again, mediation was suggested, and this time the process wasn’t cut off by an impossibly short timescale, probably because the issues at stake were much simpler.

So a meeting took place, in which two tax inspectors, two “mediators” working for the Revenue, the taxpayer, and two of his professional advisers, were present. A pretty heavyweight meeting, and it lasted for over four hours.

It soon became apparent that only one of the two “mediators” was in any way trying to adopt an unbiased approach. The other, who had been brought in because of his experience of “COP9” enquiries, was neither more nor less than an additional gun firing on the side of the tax inspectors. Repeated injunctions were made by this so called mediator, to the taxpayer, to take the COP9 process seriously – as if anybody, receiving a letter from the Revenue accusing them of serious fraud, tosses this off with a light laugh!

The taxpayer, in the spirit of mediation, and with his advisers approval, put forward a compromise solution of disclosing some of the bank statements, but only on condition that they would be used for specific purposes.

The HMRC reaction? The compromise solution was briefly rejected, and no compromise on the part of HMRC was suggested. Indeed, on being asked whether they would compromise, they made it quite clear that no compromise was on the table.

You might ask how this went on for four hours? A more pertinent question, though, would be why?


Should I try ADR?

If you are in a long running dispute with HMRC, the above case histories can hardly encourage you to try the Revenue’s distorted version of the mediation process. Any meeting with HMRC can be a traumatic experience, even for the more hard bitten of business people, and, if there’s no hope of getting any kind of compromise out of the other side, its difficult to see why anyone should subject themselves to it.

However, these two examples could, conceivably, not be representative of the experience of taxpayers as a whole, and we would be very interested to hear from any readers who have had a better (or indeed worse) experience. So it might be worth agreeing to a mediation meeting subject to clearly understood rules, not just the rules imposed by HMRC unilaterally, but rules set by the taxpayer and his advisers. For example, the duration of the meeting could be strictly limited, which might concentrate the minds of the more prolix inspectors, who are very keen on using meetings to browbeat their victims.

Secondly, it could be made a condition of holding a meeting that HMRC are willing at least in principle to arrive at a compromise solution (unlike the Quick Fire case described above). Thirdly, any mediator who shows any signs of bias in favour of HMRC should be asked to leave the meeting immediately and permanently. Fourthly, the process which applies in commercial mediations should be followed, under which the taxpayer and the Revenue are not asked to share the same room at any point in the day except for a brief initial introduction.

Despite the discouraging start for ADR in the context of tax disputes, then, it could still be worth persevering with them if the HMRC mediator will accept these clearly defined rules of the game in advance of the meeting.

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