The costs of tax tribunal appeals can be significant, but there are a number of funding options which can help businesses manage the cost of defending themselves against HM Revenue and Customs (HMRC) challenges.
Tax tribunal appeals can be complex and the cost substantial. Whether you can recover a proportion of your legal costs from HMRC depends on the circumstances and the outcome of your appeal. Depending on the circumstances, if you lose you may be required to pay a proportion of HMRC's costs as well as your own.
There are various funding and other options that may help in reducing the risks and meeting the cost of tax litigation. These include:
- avoiding the complex track and/or opting out of cost risk in the First-tier Tax Tribunal;
- risk sharing with an insurer;
- risk sharing with lawyers;
- risk sharing by funding from third parties.
This guide considers these various options when appealing to the First-tier Tax Tribunal. The options must be judged in each individual case in accordance with your investment capacity and your appetite for risk. For more general information about the tax tribunal process, please see our separate Out-Law Guide.
Costs risks in Tax Tribunal appeals
In most appeals before the First Tier Tax Tribunal a losing party is not at risk of paying the other side's costs. However, where a tax appeal is allocated to the complex track of the First-tier Tax Tribunal - which is reserved for lengthy, complex or high value cases - then the losing party in the appeal may have to pay a proportion of the other side's costs.
If the case is allocated to the complex track, the taxpayer does however have the option of opting out of this cost exposure. The benefit of opting out is to avoid the risk of becoming liable to pay HMRC's costs if the taxpayer loses its appeal, but in doing so it loses its right to recover its own costs from HMRC if it wins.
Risk sharing with legal expense insurers
There are two different types of legal expense insurance cover that may be relevant to tax disputes.
'Before the event' legal expense insurance cover (BTE) is usually taken out alongside another form of insurance cover, but for tax litigation may consist of a specific policy taken out against the risk of an investigation by HMRC. BTE cover is taken out before any actual dispute arises and its purpose is to meet any legal costs incurred by the policyholder in respect of further tax or legal disputes.
If you have BTE which you think may cover you in the event of a tax dispute, you should provide a copy to your tax adviser as soon as possible so that a claim can be made.
Subject to the level and terms of indemnity of the policy, 'after the event' legal expense insurance cover (ATE) offers the opportunity to protect and indemnify any liability for HMRC's costs only, an element of your own costs, or both with an insurance policy that is issued after the dispute arises.
The level of premium payable depends on the type and level of cover sought. The premium can typically be as high as 30%-50% of the costs insured, or it can be calculated as a percentage of the costs incurred at the date a claim is successfully concluded either by negotiation or in tribunal proceedings. Some insurers may be willing to offer ATE at lower premiums if the insured is willing to accept a high insurance excess.
For ATE policies taken out prior to 1 April 2013, payment of the premium was usually deferred until the outcome of the case, with the premium only payable in the event of the case being successful.
For ATE policies taken from 1 April 2013 not all premiums will be deferred until the outcome of the case is determined, and as with other insurance products, in respect of commercial disputes ATE insurers may seek payment of all or an element of the premium when the policy is taken out.
For ATE policies taken out before 1 April 2013, if you are entitled to claim your costs from HMRC, in principle the premium payable to the insurer may be recoverable from HMRC. However, the tribunal has discretion to award costs, and the level of recovery will likely depend on the reasonableness and proportionality of the insurance premium and ATE cover.
For ATE policies taken out from 1 April 2013 (save for very limited exceptions in the period to April 2016), the ATE premium will not be recoverable from HMRC.
ATE can be combined with other funding options, typically conditional fee agreements (see below). For more information about ATE insurance and tax litigation, please see our separate Out-Law Guide.
Risk sharing with lawyers
Conditional fee agreements (CFA): these allow a lawyer to charge a reduced fee or sometimes no fee if you lose your case, and a 'success fee' on top of normal fees if you win. It may be possible to enter into a similar arrangement with a barrister. CFAs can be entered into before or at any stage of the proceedings. Subject to the outcome of the case and the nature of the tax appeal, costs can sometimes be recovered from HMRC.
If a CFA was entered into prior to 1 April 2013, if you are entitled to claim your costs from HMRC, the success fee may in whole or in part be recoverable. However, if the CFA is entered into from 1 April 2013 (save for very limited exceptions in the period to April 2016) the success fee will not be recoverable from HMRC.
A CFA can be combined with ATE. For example you might have a CFA with your lawyer and purchase ATE to cover the risk of liability for HMRC's costs, and possibly for some of your own costs, if the claim is unsuccessful.
Contingency agreement: this is also known as a 'damages based agreement' (DBA). It allows a lawyer to charge a percentage of the damages recovered in the event that you win your case. All or part of your lawyer's fees may be on a contingent basis. A contingency fee agreement will not take away any liability to pay costs to HMRCif you lose your case.
To compensate for the risk of not being paid fees in the event of the case losing and the success criteria not being achieved, save for appeal proceedings, the DBA fee payable for solicitors’ fees, counsel fees and VAT from monies recovered will equate to a sum of up to 50% of the sum recovered. In respect of any appeal proceedings there is no limit on the DBA percentage fee payable.
All other disbursements (including expert fees) and expenses are payable by you in any event, and in addition to the DBA percentage fee.
Where you are entitled to recover costs from HMRC, you will not be entitled to recover a fee directly based on the DBA percentage fee, but may be entitled to recover solicitors’ fees based upon time spent and applicable hourly rates, plus all disbursements, deemed reasonably and proportionately incurred and VAT if applicable. In any event, you cannot recover greater costs than incurred under the DBA.
Risk sharing with a third party funder
Commercial 'third party funders' invest in litigation to make a profit. This type of funding may be available for tribunal and other proceedings which involve significant sums, where legal opinion confirms that the prospects of success are good. Funders will consider a wide range of disputes, but tend to prefer cases with few issues and that are not too dependent on uncertain factual or expert evidence.
Funders have varying charging structures, but will generally look for a return on investment/funding, a multiple of the investment/funding, or a percentage of the monies (say 35%) recovered or preserved. If you use a third party funder you will still remain primarily liable for your own costs as well as any costs payable to HMRC, if appropriate.
Where funding is available it will generally cover your own costs and any costs payable to HMRC, or the premium for an ATE policy. Where funding covers costs payable to HMRC and an ATE premium, the cost will be reflected in the funder's charging structure.