It is not all about economic growth – The hole in the public finances = £40 Billion. Uncollected tax (i.e. frozen in legal disputes) = £36 Billion, i.e. 5%+ of the total annual tax take. ‘In 2019/20, the corporation tax gap was estimated at 7.2% … The overall tax gap was estimated at 5.2% of total tax liabilities.’ [Unpaid taxes: the ‘tax gap’ – House of Lords Library (parliament.uk)].
What can the Government do to enhance the use of Mediation in order to: (i) unfreeze and collect unpaid tax locked in legal disputes; and (ii) avoid the incurrence of continuing and exponential litigation risks and costs (ultimately funded by all taxpayers)?
The 1st and 2nd Parts of a 3 Part article I have been commissioned by Taxation (Tolley) to write entitled, ‘Follow the Yellow Brick Road – Off to Mediation with HMRC’, was submitted to my editor on Friday for publication over Christmas and New Year. Mediation is available in almost any kind of tax dispute and HMRC are keen to encourage tax-payers to enter into the process. ADR in tax disputes may not be perfect but it works. The number of cases resolved through ADR was 78% in 2020/2021. However, the total number of tax disputes that entered into Mediation was only around 1000, which is a fraction of the total number of tax disputes that remain unresolved and could benefit from ADR.
In the 1st Part, I discuss what the Mediation process involves in the context and dimension of a tax dispute, and HMRC’s ‘ground-rules’ for the conduct of a Mediation. In the 2nd Part, I discuss what happens during the process. In the 3rd Part, to be written in 2023, I will focus on Mediator ‘challenges’ and ‘tools’.
In order to make taxpayers more aware and comfortable about how the process works, and thereby to increase the use of Mediation, the author understands that in the New Year, HMRC are planning to publish a new Factsheet about ADR and updated internal guidance. These developments in the ongoing evolution of Mediation in tax disputes will be discussed in Part 3.
The use of Mediation in tax disputes is also linked to the possible development of a hybrid form of ADR which involves a combination of ‘Early Neutral Evaluation’/’Expert Determination’ and Mediation which I will devlop as a concept and discuss in Part 3, i.e. as method for breaking ‘deadlock’ where HMRC adopts a rigid stance about a technical tax issue, i.e. because until the FTT decides otherwise, HMRC are under a compulsion to be fair to all taxpayers, and in following the LSS, HMRC conclude that they cannot deviate.
I understand there has been a recent initiative by Government Ministers to increase Mediation, and evaluation of possible ‘mandatory’ or ‘automatic’ Mediation in tax cases. The reduction of the £40 Billion hole in public finances using Mediation to collect £35 Billion in unpaid tax ought therefore be high up on the agenda of the Government. However it does not appear to be on the radar of politicians and political journalists. Why?
What ‘systemic’, i.e.’ institutional’, ‘policy’ and ‘management’ changes, need to be made to enhance the collection of unpaid tax through Mediation? To catalyse debate and test the institutional resilience of the ‘system’, I pose two questions.
(i) While the contents of the Record (which is not a minute of meeting and is essentially a summary of: (a) issues that have been agreed; (b) issues which remain to be agreed; and (c) proposals for continuing the Mediation conversation going forward toward final overall resolution), must be agreed, what legal justification is there for any concern by a TP or their legal representatives, that anything said in the course of Mediation may subsequently be relied upon by HMRC as being a new and significant tax fact.
(ii) What contract terms need to be agreed by a COM with a TP in order to both comply with HMRC’s overriding ‘Principles,’ and the:
(a) Code of Professional Conduct of the COM’s professional regulator.
(b) Code of Ethics, of any Mediation organisation, to which the COM belongs.
(c) Terms of the COM’s professional indemnity cover.