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Mediation: international perspective

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SPEED READ Does the Australian and US mediation experience offer any lessons for the UK? Although there is a paucity of empirical evidence, the experience of both jurisdictions suggest that tax mediation could be successfully used in the UK as a quick and relatively inexpensive method to resolve tax disputes. However, mediation will only succeed in the UK if there is a genuine commitment to the process on the part of both taxpayers and HMRC alike. As long as there remains the right to resolve disputes with HMRC before an independent judicial body at a later stage, there is no good reason why, in appropriate circumstances, taxpayers should not embrace mediation.

Although, following the introduction of the Civil Procedure Rules 1998, mediation has slowly but surely entered the mainstream of civil litigation practice in the UK, the use of mediation to settle tax disputes is a relatively new concept.

Although Rule 3 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules, SI 2009/273, obliges the Tribunal to bring to the attention of the parties and to facilitate the use of alternative dispute resolution (ADR) (subject to this being compatible with the overriding objective of the Tribunal to deal with cases fairly and justly), there is at present no such procedure available.

This may be about to change as mediation has become something of a 'hot topic' since it became known that HMRC is actively considering the effectiveness of mediation to resolve tax disputes and is planning to launch a pilot scheme involving third-party mediators. In light of HMRC's new found appetite for mediation, it is worth considering mediation systems operated in other jurisdictions. This article examines tax mediation in two such jurisdictions and comments on how effective it has been.

What is mediation?

Mediation is a form of ADR. It is a confidential process of negotiation which is facilitated by an independent and impartial third person called a mediator. Unlike a judge or arbitrator, a mediator has no powers to make a final decision which is binding on the parties. The mediator's role is to facilitate agreement between the parties.

This takes us to the all important issue of choosing a suitable mediator. Many people prefer to choose a mediator who has technical knowledge or experience connected with the underlying dispute. While such technical knowledge is useful it is the mediation skills of the individual that are important.

Mediators are not regulated in this country and the parties will wish to ensure that their chosen mediator has undergone appropriate specialist training and follows a code of conduct. Solicitor mediators will follow the Law Society's Code of Practice for mediators. The parties will also require appropriate representation at a mediation if a satisfactory outcome is to be achieved.


Part IVC of the Taxation Administration Act 1953 provides a dual pathway to litigating tax disputes. A taxpayer dissatisfied with an assessment can request the Commissioner to amend it. The Commissioner considers the request and may allow it in whole, in part, or disallow it.

A dissatisfied taxpayer then has two options – he can request that the Commissioner's decision be reviewed de novo (that is considered afresh in the light of evidence presented) by the Administrative Appeals Tribunal (AAT), which is an independent body, or he can go on appeal to the Australian Federal Court.

The AAT reviews the decision in the light of any evidence presented. It may affirm the decision under review, vary it, set it aside, or remit the matter back to the Commissioner for reconsideration. The Court is concerned only with whether the decision was made according to law.

At first instance, the Court will hear evidence but on appeal from the AAT it will adopt their findings of fact unless an error of law occurred in the process.

The AAT is governed by the Administrative Appeals Tribunal Act 1975, which provides for matters to be referred to ADR. The Federal Court also has the power to refer any matters to ADR.

Practice Statement Law Administration PSLA 2007/23 (which provides instructions to Australian Tax Office staff when attempting to resolve disputes by means of ADR) states:

'5. Commonwealth agencies and their legal services providers have an obligation under Appendix B to the Attorney General's Legal Services Directions 2005 to act as model litigants in the conduct of litigation and in the alternative dispute resolution process.

The model litigant obligation requires agencies to endeavour where possible to avoid, prevent and limit the scope of legal proceedings including by giving consideration in all cases to ADR before initiating legal proceedings and by participating in ADR where appropriate.

The requirement to consider alternative methods of dispute resolution is a continuing obligation from the time litigation is contemplated and throughout the course of litigation … however participation in good faith does not require a party to act other than in their self-interest.

‘9. By way of general observation the following are hallmarks of when ADR may be appropriate:

  • There must be issues that are able to be negotiated;
  • The Tax Office has something to give;
  • The taxpayer/other party has something to give;
  • The dispute is capable of being settled within existing settlement policies and practices; and
  • Settlement must be preferable to judicial determination …

11. ADR may not be appropriate where for example:

  • It would be in the public interest to have judicial clarification of the issues in dispute and the dispute is a suitable vehicle to test the issues;
  • Resolution can only be achieved by departure from an established 'ATO view' on a technical issue; and
  • The dispute is of a kind where the state of the relationship between the parties is such that any proposed ADR is unlikely to be successful.'

Mediation is not mandatory but is available at the request of the parties. In the AAT, the process may be conducted by a member or officer of the AAT or an independent third party. There is no charge for the former, but if the parties wish to use their own mediator, they will be responsible for his fees.

How effective has the Australian mediation programme been? There is little doubt that the Australian authorities have put a great deal of effort into trying to enshrine mediation as an essential part of the tax settlement process.

PSLA 2007/23 is a detailed document and contains binding statements of practice. This guidance encompasses the potential use of all types of ADR in the different courts and tribunals in Australia.

However, the National Alternative Dispute Resolution Advisory Council (NADRAC) has expressed a note of caution. In a recent report on the state of mediation in Australia it stated: 'In the years since NADRAC was established, ADR has expanded into a large, highly diverse and innovative field. Consumers, lawyers and other stakeholders have greatly improved, although still imperfect, appreciation of the benefits of ADR…It was also evident that while there are numerous ADR innovations, ADR remains significantly unutilised in many areas and its overall use can be patchy and idiosyncratic.

There is still very limited knowledge of ADR among the broader Australian community. Even where there is awareness of ADR, there appears to be a limited appreciation of how different ADR processes, which is demonstrated by significant inconsistencies in how processes are described and understood'.

It is also apparent from published statistics that the mediation option has not featured significantly in the AAT's dispute resolution procedures (Administrative Appeals Tribunal Annual Report 2008-09).


The Internal Revenue Service (IRS) permits taxpayers to participate in a post-appeal mediation programme. The IRS appeals division (Appeals) is independent of any other IRS office and functions as an administrative forum for taxpayers who have a dispute with the IRS.

Internal Revenue Bulletin 2009–40 (Revenue Procedure 2009-44), issued on 5 October 2009, sets out the mediation procedure for cases in the Appeals administrative process.

Section 7123(b)(1) of the Internal Revenue Code, as enacted by s 3465 of the Internal Revenue Service Restructuring and Reform Act 1998, provides the statutory authority for the Appeals mediation programme. It was formally established on 1 July 2002. Mediation is available for both factual and legal issues.

As with the Australian system, mediation is optional and is limited to cases after Appeals settlement discussions have been unsuccessful and generally when all other issues are resolved but for the issue(s) for which mediation is being requested.

According to the IRS: 'Fact-based cases lend themselves more readily to mediation. Accordingly, mediation is generally appropriate for cases involving factual issues.

Mediation should generally not be used for any industry-wide issues, Appeals Co-ordinated Issues or for cases or issues designated for litigation since the settlements of these issues have been circumscribed by other procedures.

Except in extraordinary circumstances, mediation should not be available where it has already been made available to the taxpayer or tried once without success, e.g. at the appeals level.' (Internal Revenue Manual 35.5.5)

Either the taxpayer or Appeals may request mediation. The request will be reviewed by an Appeals Team Manager. Upon approval of the request to mediate, the taxpayer and Appeals will enter into a written agreement to mediate.

Typical features of the mediation agreement include who should attend and who will have decision-making authority, early withdrawal, payment of the costs of mediation, confidentiality and the issue, once the mediation has been completed, of a report by the mediator.

The parties must select a trained mediator who is an Appeals employee and the costs of the mediator will be met by the IRS. The taxpayer may appoint an additional non-IRS co-mediator at his own expense.

Should agreement not be reached on an issue being mediated, the parties can request arbitration for the issue provided the mediation issue meets the requirements for arbitration (Revenue Procedure 2006-44, 2006-2 CB 800). If arbitration is not requested and approved, Appeals will not reconsider the mediated issue(s).

How effective is this mediation process? It is difficult to find meaningful statistics applicable to the whole of the jurisdiction to indicate whether mediation and ADR are effective in resolving tax disputes in the US. Certainly the trend seems to be encouraging.

For example, the New York State Bureau of Conciliation and Mediation Services (BCMS) in its annual report 2008-2009, reports a 75% success rate in agreement successfully reached (90% of the BCMS's caseload was personal income tax and sales tax). It certainly appears to have been successful in smaller and less complex tax cases. However, one has to question the impartiality of a system where the 'neutral' mediator is also an IRS employee!

Application to the UK

Does the Australian and US mediation experience offer any lessons for the UK? Overall, despite the paucity of empirical evidence, it does seem that mediation can be successfully used as a quick and relatively inexpensive method to resolve tax disputes.

However, any mediation procedure in the UK will have to take place against the backdrop of HMRC's Litigation and Settlement Strategy (LSS). The LSS sets out a number of general principles for HMRC officers. The two main principles being that each dispute should be dealt with on its own merits, 'package deals' should not be entered into, and those disputes which have an all-or-nothing character should be settled on an all-or-nothing basis.

The interplay between the LSS and mediation is an interesting one. In theory, the LSS should preclude mediation in many cases, but it seems that a formal mediation process might offer HMRC a route whereby it can escape the straight-jacket of the LSS.


Until relatively recently, the notion of mediation in the context of tax disputes would have been considered anathema to those charged with administering the UK fiscal system. It is now being explored with some enthusiasm, but mediation will only succeed if there is genuine commitment to the process on the part of HMRC and taxpayers alike.

It is also vital that those with the necessary skills and expertise are involved in the process if a satisfactory outcome is to be achieved.
In the jurisdictions considered above, there does appear to be real interest and commitment to the mediation process from both government and taxpayers.

Mediation would be a welcome addition to HMRC's own internal review process which, certainly for the smaller and less complex cases, has been used with some success to bring cases that would otherwise have gone to appeal to an early conclusion. However, it is difficult to see how a mediation process can apply to those cases where there are a number of taxpayers who have the same issue and who require judicial clarification of the issues in dispute.

It is here that the differences between government and private commercial mediations may be most keenly felt. There is also a risk that HMRC may offer mediation on a selective basis with the criteria for the selection of such cases being uncertain. The criteria for the selection of suitable cases for mediation should be transparent so that all taxpayers in similar circumstances are treated the same.

The pressure to increase the speed and reduce the costs of tax dispute resolution, both for political and commercial reasons, is unlikely to lessen.

As long as the right to have disputes with HMRC resolved before an independent judicial body at a later stage remains, there seems no good reason why, in appropriate circumstances, taxpayers should not embrace mediation.



Adam Craggs is a Partner in the Tax Disputes Resolution team at Reynolds Porter Chamberlain LLP. Email:; tel: 020 3060 6421.


Jonathan Wood is Head of International Arbitration at Reynolds Porter Chamberlain LLP, with substantial expertise in arbitration and mediation. Email:; tel: 020 3060 6562.