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.
Funding options
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;
- 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.
'After the event' legal expense insurance cover (ATE) offers the opportunity to protect and indemnify a substantial proportion of your liability for costs with an insurance policy that is issued after the dispute arises. This can apply to your own costs, HMRC's or both.
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.
Payment of the premium can be deferred until the tribunal appeal is concluded, and the premium is only payable if you win. You will agree the definition of 'win' with the insurer when you take out the policy. If you are awarded a recovery of costs from HMRC, the ATE premium is currently recoverable from HMRC subject to the tribunal or court's assessment of the extent of costs payable by 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 – including any success fees – can sometimes be recovered from HMRC.
The government has proposed that ATE premiums and CFA success fees should not be recoverable from an opponent, but such change in the future (which will not be retrospective) is subject to pending legislation.
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'. 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 your successful opponent – HMRC, in the case of tax tribunal decisions.
Contingency fee agreements are currently not allowed in general civil litigation where proceedings have been commenced, including tax tribunal cases. However the Government is considering changes to the way litigation is funded, and to what costs will be recovered from a losing party. It has published a draft Bill that is likely to come into effect late in 2011 or in 2012 following a period of consultation in Parliament. The Bill proposes that ATE premiums and CFA success fees will no longer be recoverable from opponents and widens the scope of contingency fee agreements.
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 up to 50% of the amount in question. If you use a third party funder you will naturally lose an element of control and remain primarily liable for your own costs as well as any costs payable to an opponent, if appropriate.
Where funding is available it will generally cover your own costs and any costs payable to your opponent, or the premium for an ATE policy.