Winner takes all? How costs are allocated in tax tribunals

Sometimes a court or tribunal has power to make orders about who pays the costs of a trial, whether on its own initiative or on the application of one of the parties. It is usual for such orders for costs (‘expenses’ in Scotland) to follow the cause – in other words, the loser pays the costs of the winner. However, that is by no means an absolute rule, and identifying who has won may not be easy when both parties are partially successful.

In this article, I consider the circumstances in which costs orders may, or may not, be made in tribunal proceedings, and what happens when there is no clear winner.

The basic rules about costs

The rules about costs are set out in the Tribunal Procedure Rules for both First-tier and Upper Tribunals (SI 2009/273, rule 10 and SI 2008/2698, rule 10 respectively).

In the First-tier Tribunal (FTT), each party bears its own costs in cases that are classified as ‘default paper’, ‘basic’ or ‘standard’. There are exceptions: a tribunal may make an order in respect of ‘wasted costs’, or in respect of costs incurred because the tribunal considers that a party or the party’s representative has ‘acted unreasonably in bringing, defending or conducting the proceedings’. ‘Wasted costs’ are, in essence, those incurred by a party because of some improper, unreasonable or negligent act or omission by a representative, or costs which the tribunal thinks it unreasonable to expect that party to pay because of such behaviour by a representative.

The First-tier Tribunal may make orders for costs in cases that are categorised as ‘complex’, unless the taxpayer makes a written request to the tribunal to be excluded from any potential liability for costs. This the taxpayer must do within 28 days of being informed that the case has been allocated as a complex case. Where there is more than one taxpayer involved, each can decide for itself whether to opt out of the costs regime in this way. This rule was introduced so that appellants would not be discouraged from taking appeals to the FTT for fear of HMRC’s costs if they lost.

The Upper Tribunal (UT) may make orders for costs in proceedings transferred by, or on appeal from, the Tax Chamber of the FTT. Otherwise, the UT may make costs orders in respect of wasted costs; or where one party has acted unreasonably in bringing, defending or conducting the proceedings; or when the UT is exercising its judicial review jurisdiction.

Before making any order for costs, the UT, or the FTT in a complex case, must give the party against whom the order is to be made the chance to make representations. If the party is an individual, the tribunal must consider his or her financial means before making a costs order.

Who is the winner?

If costs are to be awarded in the cause, or in favour of the winning party and against the losing party, it is first necessary to establish who, if anyone, has (so to speak) won, and who has lost. The answer to that question may not always be clear, particularly if (say) an appellant has succeeded in part only, or if a defendant has mostly, but not entirely, resisted a claim.

For example, in Bastionspark LLP and others v HMRC Commrs [2016] UKUT 0425 (TCC), an appeal by the taxpayers to the UT against an order for costs imposed by the FTT, the UT judge, Nugee J, said (para 23) that the matter of costs is always fact-sensitive:

‘In seeking to apply the overriding objective of being fair and just, I do not myself see why the FTT needs to identify one overall winner; what one would expect it to do is fashion a costs order that reflected the fact that each side won in some respects but lost in others.’

The overriding objective he was referring to is found in rule 2 of the Tribunal Rules referred to above: it is ‘to enable the tribunal to deal with cases fairly and justly’.

Very briefly, Bastionspark was one of the ‘Icebreaker’ series of tax avoidance cases, one in which HMRC had disallowed 100% of the deductions claimed by the appellant LLPs. The FTT had upheld HMRC as to disallowing the majority of the expenses claimed, but found in favour of the claimants in respect of 13-15% of the expense claims. In doing so, Judge Bishopp found that HMRC were ‘the substantial victors’ and the outcome was ‘substantially in HMRC’s favour’, but some issues (notably those on which the LLPs were successful) had taken up more time and effort than others (where HMRC had won).

The UT agreed with Judge Bishopp. Judge Nugee quoted Sir Thomas Bingham MR in Roache v News Group Newspapers Ltd (1992) [1998] EMLR 161 (para 168):

‘The judge must look closely at the facts of the particular case before him, and ask: who, as a matter of substance and reality, has won? Has the plaintiff won anything of value which he could not have won without fighting the action through to a finish? Has the defendant substantially denied the plaintiff the prize which the plaintiff fought the action to win?’

Judge Nugee then summed up his review of the authorities as follows:

‘But in truth what the cases to my mind demonstrate is that in a case of any complexity there may be any number of reasons why it is right to regard the defendant as the real winner even if they have not defeated the entirety of the claimant’s claim, and that it would be wrong to try and force such reasons into a fixed number of pigeonholes.’

The question is ‘who as a matter of substance and reality has won’, and ‘the factors that can be taken into account in answering that question are not confined to any particular checklist’.

In the final result, HMRC were awarded two-thirds of their costs. The monetary values of the respective claims were not the only yardstick, but other matters were taken into account to reflect the extent to which the parties had respectively succeeded, both as to values and as to issues.

Practical lesson

In most cases before the FTT, orders for costs will not be an issue – each party bears its own. In complex cases, where the tribunal has power to award costs, advisers should consider whether clients should opt for a no-costs regime; if so, it is vital to observe the 28-day time limit. If that is not appropriate, it is likely that the tribunal will follow the basic rule of winner takes all, but there is not always a clear winner, and the tribunal has a wide discretion as to how to apportion the costs between the parties.

Robin Williamson

Written by Robin Williamson

Robin Williamson MBE CTA (Fellow) is an author and commentator on tax, welfare and public policy. He was technical director of the CIOT’s Low Incomes Tax Reform Group from 2003 to 2018 and a part-time senior policy adviser at the Office of Tax Simplification from 2018 to 2019. In May 2020 he won the lifetime achievement award at the Tolley Taxation Awards. He was recently appointed UK country reporter to the Observatory on the Protection of Taxpayer Rights at the IBFD.

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