Out-Law Guide | 03 Aug 2011 | 12:45 pm | 6 min. read
The Tax Tribunal is a two tier system comprised of the First-tier Tribunal and the Upper Tribunal which deals with UK tax appeals.
If a taxpayer disagrees with a decision made by HM Revenue and Customs (HMRC), that person can usually appeal the decision. The procedure for doing so depends upon whether the appeal relates to direct taxes or to VAT.
Appealing a decision of HMRC
In relation to direct taxes the taxpayer must first send a notice of appeal to HMRC in writing, normally within 30 days of the date of HMRC's decision. In relation to VAT, the appeal is made direct to the Tribunal.
The procedure is different for VAT because HMRC is obliged to offer an internal review in relation to VAT, whereas it can choose to offer a review in relation to other taxes (although it normally does). In relation to direct taxes the taxpayer can request an internal review when or at any time after sending an appeal to HMRC.
The First-tier Tribunal
Most tax cases start in the First-tier Tribunal.
If a case is to be heard by the First-tier Tribunal then, when the Tribunal receives a notice of appeal, the Tribunal must give a direction allocating the case to one of four categories:
The normal position at the First-tier Tribunal is that neither party gets their costs. Both sides pay for their own legal advice and representation.
The allocation of a case as a complex one has particular significance, as it means the case may be considered for transfer to the Upper Tribunal and that the taxpayer may become liable to pay some of HMRC's costs if the taxpayer loses.
If the case is categorised as complex, the taxpayer does, however, have the option of opting out of the cost exposure. The benefit of opting out is to avoid the risk of becoming liable to pay HMRC's costs if the taxpayer loses their appeal, but in doing so the taxpayer loses the right to recover their own costs from HMRC if they win.
There are two types of legal expense insurance cover that may be relevant to tax disputes. 'Before the event' legal expense insurance 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. It may consist of a specific policy taken out against the risk of an investigation by HMRC.
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.
In addition to insurance, there are various other funding options that may help in reducing the risks and meeting the cost of tax litigation. These include risk sharing with lawyers and risk sharing with a third party funder.
Even if a case is not allocated to the complex track, the First-tier Tribunal has discretion to make a ‘wasted costs’ orders against a party or their representatives if they have acted unreasonably in bringing, defending or conducting the proceedings.
For some taxes such as VAT, although not normally for direct taxes, the disputed tax may have to be paid before the appeal can be made. For direct taxes the taxpayer may be able to apply to postpone the payment of the tax until after the outcome of the appeal. Postponing the payment of the tax will not be possible if HMRC has issued an accelerated payment notice.
What happens at a First-tier Tribunal hearing?
There are usually two people sitting on the tribunal, a legally qualified judge and a member. The member is not usually a lawyer, but has other relevant experience e.g. as an accountant.
All parties are normally entitled to attend the hearing. Hearings of the First-tier Tribunal are held in public (except in exceptional cases) in HM Courts and Tribunal Service venues throughout the UK.
In basic and standard cases, HMRC is often represented by a person from its Appeals and Reviews Unit, known as a ‘presenting officer’. In complex cases, HMRC is usually represented by a lawyer from its solicitor’s office, or by a barrister.
The proceedings are informal, and the tribunal can decide the order of events. But the normal structure is as follows:
Full decisions are published on the tribunal website and elsewhere, typically within three months of the hearing.
The Upper Tribunal
If the taxpayer or HMRC loses in the First–tier Tribunal they can appeal to the Upper Tribunal if they get permission and only on the grounds that there is an error of law in the First-tier Tribunal decision. Appeals cannot be made to the Upper Tribunal on findings of fact by the First Tier Tribunal except on the basis that no reasonable tribunal could have come to the same conclusion as the tribunal in question.
The Upper Tribunal is intended, in broad terms, to be of equivalent status to the High Court. Cases are usually heard by two judges. They will be High Court judges or experienced First-tier Tribunal judges with tax knowledge who have been appointed Upper Tribunal judges. The Upper Tribunal is a court of record, creating binding precedents which must be followed by the First-tier Tribunal.
As well as hearing appeals from the First-tier Tribunal, the Upper Tribunal occasionally hears some complex cases as a court of first instance and some tax-related judicial review applications (although some judicial review applications must be heard in the High Court).
In the First-tier Tribunal taxpayers are not usually exposed to the risk of having to pay HMRC's costs if HMRC wins the case, unless the case is a complex case and the taxpayer has not opted out of costs. However, in the Upper Tribunal, the taxpayer is at risk of having to pay HMRC's costs if the appeal is unsuccessful.
Occasionally HMRC will apply the 'Rees practice' and will waive its right to costs where it is appealing a decision. This is at HMRC's discretion and will only be applied in cases involving financial hardship or a point of law if the clarification of that case would be of significant benefit to taxpayers as a whole.
HMRC will normally demand the payment of the disputed tax before the appeal is heard, for any First-tier Tribunal decisions found in its favour. If the taxpayer has won its case in the First-tier Tribunal HMRC normally repays any tax plus interest.
Appeals from the Upper Tribunal
Appeals beyond the Upper Tribunal to the Court of Appeal require permission to appeal, and are only on points of law. If the Upper Tribunal refuses this leave to appeal, then approval may be sought from the Court of Appeal.
Appeals from the Upper Tribunal are limited to cases which would raise some 'important point of principle or practice' or for some other 'compelling reason'.