Navigating tax disputes can be a complex and daunting process. This “need to know” series sheds light on the essential elements. In this note, we provide an overview of the position in relation to the recovery of legal costs in the tax tribunals.

The First Tier Tribunal (the FTT)

The general rule in the FTT is that neither party can recover their costs from the other party. Both you and HMRC will have to bear your own legal costs. 

There are three exceptions to this, where the Tribunal can make an order for costs.

• When it considers that a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings. 

Unreasonable conduct is that which is vexatious and designed to harass the other side rather than advance the resolution of the dispute. The acid test is whether the conduct permits of a reasonable explanation.

• When a party’s representative has caused the other party to incur costs unnecessarily (known as “wasted costs”). 

This costs order will be against the party’s representative, rather than the party itself, and should only be made in straightforward cases that can be dealt with summarily. As well as unreasonable conduct, it encompasses improper conduct and negligent conduct (although it is difficult to think of cases where improper conduct or negligent conduct would not also be unreasonable conduct). Applications for wasted costs against HMRC will usually only be relevant where they have instructed Counsel, as otherwise the representative will be an HMRC Officer, and any wasted costs order would simply be an order against HMRC.  

• When the case is complex. 

The FTT may categorise a case as complex if it considers that the case:

• will require voluminous or complex evidence or a lengthy hearing;
• involves a complex or important principle or issue; or
• involves a large financial sum.

In practice this means that a case will be categorised as complex if the hearing is expected to last more than five days or if it involves more than £750,000 of direct taxes or more than £2m of indirect taxes and duties.

You can opt out of the costs regime within 28 days of the date you receive notice that the case has been categorised as complex, by making a request to the Tribunal (to which HMRC should be copied in). 

If you have multiple tax appeals on similar issues, the FTT may decide to consolidate the appeals or hear them together (the difference being that with a consolidation there is just one appeal, but where appeals are heard together, they remain separate appeals). You should take care with opt out requests in either of these situations and ensure that, if you wish to opt out, there has been a timely request made in relation to all existing appeals. 

Subsequent appeals

The standard position in the Upper Tribunal is that the unsuccessful party will pay the legal costs of the successful party. Unlike in the FTT, you cannot opt out of the costs regime. 

If the case appealed to the Upper Tribunal was within the costs regime in the FTT, then the successful party in the Upper Tribunal will normally be entitled to their costs in the FTT as well.

The same is true of any further appeals to the Court of Appeal or Supreme Court – the successful party will normally be entitled to their costs in all lower courts. 

Applying for costs

Following a decision, the FTT may decide to award costs of their own accord, or (as is much more likely) a party can make an application for their costs within 28 days of the decision (or within one month in the Upper Tribunal). 

If you are successful and one of the above exceptions applies such that you may be entitled to your costs, you must provide a written application for costs and a schedule of costs to the Tribunal, to which HMRC will have the opportunity to respond. Similarly, if HMRC apply for their costs, you will be given an opportunity to make representations.  

If the hearing is no more than one day, the Tribunal will generally decide the costs by summary assessment, which means it will make a decision as to the quantum of the costs to be paid. If the hearing is longer, then you will usually apply for an order that you are paid your costs, to be assessed on a standard basis (which means the costs must be reasonable and proportionate) if not agreed. You will then have the opportunity to negotiate the quantum with HMRC, failing which you will need to apply for a detailed costs assessment, where a specialist costs judge will determine the quantum. This can incur significant further costs, and it is preferable to agree the costs, if at all possible.

Although it is usual for costs to be awarded on the standard basis, costs may also be awarded on the indemnity basis if there has been something that takes the case outside of the norm, such as unreasonableness in the conduct of the proceedings. Indemnity costs should result in a higher proportion of costs being paid, as the costs are not required to be proportionate, only reasonable. In practice, if you are awarded your costs on either a standard or indemnity basis, you will not recover the full amount. It depends very much on the facts of the case and the reasonableness of the costs, but if costs are awarded on a standard basis, it would be common to recover 60-70% of the costs incurred, and if costs are awarded on an indemnity basis, it would usually be closer to 80-90% of costs incurred.

Interest at a rate of 8% will automatically apply to the award of costs, and this begins to run from the date of the costs order.

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For expert advice on handling tax disputes, reach out to a Macfarlanes representative today. Visit our Tax Investigations and Disputes page for in-depth information, and bookmark our Need to know: tax disputes hub for ongoing insights and updates.