Claiming costs in the Tribunal – is it worth it?
Starting down the litigation route
If a tax dispute cannot be settled to the satisfaction of the parties, then the only option is litigation before the Tax Tribunals, and the Higher Courts if the matter proceeds that far. Right from the start, the issue of how best to fund such litigation must be considered.
This article deals with costs at the First-tier Tax Tribunal (“FTT”) and Upper Tier Tribunal (“UT”). The majority of costs will be incurred at the FTT, because this is where the facts of the case must be examined, as well as the legal arguments. We focus mainly on FTT costs, therefore, in this article.
The UT has a discretionary power to award costs in proceedings transferred by, or on appeal from the FTT (UT Rules r.10(1)(a)).
For the simpler cases, costs may not be an issue. There is no power to award costs in the FTT in default paper and standard cases. (Both the FTT and the UT may make awards of ‘wasted’ costs and costs for ‘unreasonable conduct’. Wasted costs are those incurred by a legal or other representative improperly, unreasonably or negligently. Costs for unreasonable conduct may be awarded if a party or their representative have acted ‘unreasonably in bringing, defending or conducting the proceedings.’ Such awards are unusual and are outside the scope of this article).
Where costs really come into play is in Complex category cases. Here, the FTT has jurisdiction to award costs. Complex category cases are 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 (FTT Rules r.23(4)).
Once the FTT assigns a case to the complex track, the taxpayer is at risk of costs if he loses as is HMRC.
To opt out or not to opt out?
The taxpayer, but not HMRC, has the right to opt out of the Complex track costs regime provided he (or she, or it in the case of a company), notifies the FTT within 28 days of receiving notice that the case has been allocated to the Complex category (FTT Rules r.10(1)(c)(ii)).
The issue of whether to remain in the Complex track costs regime can only be taken with knowledge of how the costs system works. The following points need to be taken into consideration.
The limits of a costs award
The Tribunals, Courts and Enforcement Act 2007 s.29 provides that the FTT has a discretion to award the costs of and incidental to all proceedings before it. The key point, therefore, is that such costs must be referable to the proceedings before the Tribunal, so it would not be possible to recover, for example, the costs incurred in instructing advisers during the course of an HMRC enquiry or investigation that led up to the litigation.
In assessing costs, the Tribunal will look to the system of costs contained in the Civil Procedure Rules 1998 (“CPR”), which apply to litigation before the County Court and the High Court.
How costs are assessed by the Tribunal
FTT Rules r.10 sets out the costs system. Essentially, the winner, called the ‘receiving person’, will make a written application to the FTT and enclose a schedule of the costs and expenses claimed against the loser, called the ‘paying person.’ The application must also be served on the paying person. The time limit for making this application is 28 days from the date of the Tribunal’s decision which disposes of all the issues under appeal. The paying person must be given an opportunity to make representations before any final order is made against him.
There are three ways, thereafter, that costs can be ascertained.
- By summary assessment by the Tribunal (generally, for short hearings lasting no more than a day);
- By agreement between the parties; or
- By a detailed assessment of costs if the parties cannot agree. In such a case, either the paying or the receiving person may apply for the costs to be decided by a Costs Judge at the County Court or High Court.
The principles that will be applied by the Tribunal
As a general rule, costs will be awarded, on the principles laid down by the CPR, on the ‘standard basis.’ In assessing standard basis costs, the Tribunal will examine all the circumstances of the case, and ask itself whether the costs were ‘proportionately or reasonably incurred,’ or were ‘proportionate and reasonable in amount.’ Any doubt which the Tribunal may have as to whether costs were reasonably and proportionately incurred, or were reasonable and proportionate in amount, will be resolved in favour of the paying party.
It is important to bear in mind that costs on the standard basis are awarded sparingly, and the receiving party can, as a rule of thumb, expect to receive back no more than 60% of the actual costs he has incurred.
Costs on the ‘indemnity’ basis are more generous, as the Tribunal will resolve any doubt which it may have as to whether costs were reasonably incurred or were reasonable in amount in favour of the receiving party. However, awards of indemnity costs are comparatively rare, and are designed to punish the losing person for unreasonable behaviour, for example by continuing to contest a particular issue in circumstances where it is clear that there is no reasonable prospect of success.
Costs and evidence
The receiving person must bear in mind that he will have to produce clear and cogent evidence of time spent in order to be persuade the Tribunal to make an award of costs. Each item of costs claimed will have to be particularised in a detailed schedule, (generally known as a ‘Bill of Costs’). The Bill of Costs may cover, amongst other things, the following areas:
- Time spent by the receiving person’s representative attending on the client;
- Time spent by the representative attending Conferences with Counsel;
- Time spent by the representative speaking to and corresponding with the paying person or his legal representative;
- Time spent by the representative attending the hearing at the FTT and any prior case management hearings;
- Time spent by the representative examining and working on documents;
- Time spent by the representative instructing and liaising with any expert;
- Time spent by the legal representative liaising with any witnesses of fact.
The Bill of Costs will also particularise any other items to be claimed, for example the fees of an expert.
The time must be broken down into small sections, detailing each occasion where an item of cost is claimed, so for a complex case the Bill of Costs may run into many pages. Each item must also show the Grade of Fee Earner and their hourly rate, (these are prescribed by the CPR).
The paying person will be expected to produce documents to support the Bill of Costs at any assessment hearing: Such documents will include:-
- Instructions and briefs to counsel together with all advices, opinions and drafts received and response to such instructions;
- Reports and opinions of accounting and other experts;
- Any other relevant papers;
- A full set of any relevant statements of case
- Correspondence, file notes, time sheets and attendance notes.
Given the detailed information that must be produced, it is important that accurate records are kept throughout the course of the litigation. All time spent should be entered into a time recording system with an entry explaining the work done. Notes of meetings, conferences and telephone attendance notes should be kept on file. In the course of a busy practice, this is not always easy to do, but reconstituting a complex case from memory is unlikely to lead to full recovery of costs.
Is it worth it?
The decision as to whether to remain in the costs regime of the Complex category is not an easy one, and the advantages and disadvantages must be weighed carefully by the taxpayer and his representatives at the outset of the case. On the plus side:
- 60% recovery of costs will at least partially recoup the expenses of litigation;
- It sends out a clear message that the taxpayer is confident of his case.
On the minus side:
- The taxpayer may lose the case and have to pay HMRC’s costs;
- It makes costing the litigation at the outset very difficult, because the taxpayer cannot know his ultimate exposure should he lose;
- Recovery of costs is complex and time consuming, leading to increased costs. The Tribunal or Costs Judge may award the costs of preparing for and attending the costs assessment hearing, but recovery is again unlikely to rise above 60% of monies expended by the taxpayer.
In the authors’ experience, most taxpayers, even the larger corporates, opt out of the Complex category costs regime, taking the view that the advantages are outweighed by the disadvantages.
Levy and Levy – the tax resolution specialists