Out-Law Guide 5 min. read
22 Sep 2022, 4:38 pm
The rules as to when you can recover your costs and when you may have to pay the costs of HMRC differ in the tax tribunals (the First-tier Tax Tribunal and the Upper Tribunal) from the rules which apply generally to other types of court or arbitration proceedings.
In the First-tier Tax Tribunal (FTT) the general rule is that each party will generally bear its own costs. This means that you will not be liable to pay the costs of HMRC if you are unsuccessful and HMRC will not be liable to pay your costs if you succeed. However, there are exceptions to the general rule.
The first exception is for 'complex' cases. Tax disputes are allocated to a 'track' in the FTT. More complicated cases - those which will require lengthy or complex evidence or a lengthy hearing, involve a complex or important principle or issue, or involve a large financial sum - may be allocated to the Complex track.
If your case is allocated to the Complex track either you or HMRC may seek an award of costs, which will typically follow the general rules set out below, unless you opt for the proceedings to be excluded from potential liability for HMRC’s costs. The opt out must be made within 28 days of receiving notice that the case has been allocated to the Complex category.
The tribunal must generally accept an in-time application by the taxpayer for opting out unless, exceptionally, it considers it it in the interests of justice to refuse the application. Equally, HMRC does not need to agree to or be consulted on a taxpayer's opt out. HMRC does not have the opportunity to opt out.
If you opt out of costs recovery, you cannot recover costs from HMRC if you are successful.
Even if your case is not allocated to the Complex track, the FTT has discretion to allow costs recovery in two further circumstances. It may make a ‘wasted costs’ order or an order for costs against a party if that party has acted unreasonably in bringing, defending or conducting the proceedings.
A wasted costs order is made against a party's legal or other representative where the actions (or omissions) of the representative are improper, unreasonable or negligent and this behaviour has given rise to costs to a party that it is not reasonable for them to bear. An example might be a party's representative not attending a hearing without good reason or failing to exchange documents on a timely basis (where the failure is due to the representative and not the party).
An unreasonable behaviour order is made against one of the parties. These are more common than wasted costs orders, but still unusual. Examples include a party withdrawing from an appeal very late, in circumstances where all the information was available to them much earlier and the other party has incurred unnecessary expense in preparing for an appeal to be heard.
HMRC may agree to apply the 'Rees practice' where it agrees not to seek costs and/or to share in bearing some of the taxpayer’s costs where, for example, there would be financial hardship on the taxpayer or the point is of significant interest to taxpayers as a body.
There are important time limits for making applications for costs orders.
In the Upper Tribunal, a party that loses an application, whose appeal is dismissed or discontinued or where HMRC’s appeal is allowed will normally be ordered to pay costs.
As mentioned above, there is no recovery of costs for earlier FTT proceedings if the case was not allocated to the Complex track or if it was a Complex case and you opted out of costs. There are no equivalent 'opt out' provisions in the Upper Tribunal. However, a taxpayer who won at the FTT may apply to the Upper Tribunal for a protective costs order in some circumstances.
The Rees practice may also be applied by HMRC in the Upper Tribunal.
The Upper Tribunal has full discretion as to what costs order to make in respect of both entitlement and amount. Factors which may be taken into account in determining a party’s entitlement to and the amount of costs to be awarded include whether the proceedings have been conducted at proportionate cost, and all the circumstances of the case including matters such as:
Whilst a successful party will normally be entitled to an award of costs, in the light of the tribunal’s full discretion to award and assess costs and the matters which will be taken into account, there is no guarantee that you can expect an award of any specified or minimum proportion of your costs relating to a particular application or issue, or the proceedings as a whole. In most instances there will be an element of irrecoverable costs from an opponent.
The Upper Tribunal has power to order that a losing party pays interest on costs payable to a successful party, and possibly a payment on account of costs subject to the final amount of costs payable being assessed.
If you are unsuccessful on the hearing of any application, your appeal is dismissed, HMRC’s appeal is allowed, you have part or all of your case struck out, or if you discontinue part or all of your case, then you are likely to be ordered to pay a proportion of HMRC’s costs. Such costs will be assessed by the tribunal (or court) in the absence of agreement, and may include (but not exclusively) solicitors’ fees and disbursements (including counsel and expert fees), expenses and VAT.
Any liability for costs to HMRC will be in addition to your own legal costs and any tax liability arising from the decision.
The costs awarded will usually be assessed either at the conclusion of a particular application or at the conclusion of the proceedings.
Any tribunal order for the payment of assessed costs between parties will generally be payable within 14 days from the making of the order, or the issue of an appropriate costs certificate, provided in either case that the amount payable has been assessed and is specified.