For most appeals before the First-tier Tax Tribunal, a losing party will not be at risk of paying the other party's costs unless it acts unreasonably in bringing, defending or conducting the proceedings.
However, where a tax appeal is lengthy, complex or involves large sums it may be allocated to the complex track of the First-tier Tax Tribunal. If this is the case, then the losing party in the appeal may be required to pay a proportion of the winning party's costs.
In the First-tier Tribunal, even if allocated to the complex track, the taxpayer has the option of opting out of this cost exposure. The benefit of doing so is avoiding the risk of paying HMRC's costs if the appeal is lost, but the downside is that the taxpayer will lose the right to recover its own fees if it wins. In Upper Tribunal and court proceedings there is no option to opt out of costs exposure, save by agreement, which is very rare.
What is ATE?
'After the event' legal expenses insurance (ATE) will cover some or all of your legal costs or those of HMRC.
An insured party in tribunal or court proceedings must act in the same way as if uninsured, but must also report to insurers on any important matters which arise in connection with the claim and its progress. It must also notify insurers if any offers are received or are going to be made.
What cover is available?
ATE may be available to meet HMRC's costs only, an element of your own costs, or both, subject to the level and terms of indemnity of the policy. It can include costs incurred before the policy is taken out.
ATE cover does not extend to your own management time and expenses.
When is payment made under the policy?
If an element of your own costs are covered by an ATE policy you will still remain primarily liable for them, but will be able to claim these back from the insurer according to the outcome of the appeal and terms of the policy.
The insurer will normally pay at the conclusion of the tax appeal, when the case has been won or lost.
If you are at risk of paying HMRC's costs and have taken out ATE to cover that risk, then if you lose and a costs award is made agianst you, the insurer will pay out, subject to the terms of the policy.
At what stage should ATE be purchased?
ATE can be purchased before proceedings have been issued and at any time after they have begun. However, the later the date of purchase the more expensive the premium is likely to be.
What is the procedure for purchasing ATE?
A proposal form and your lawyer's risk assessment of the case, addressing merits and the likely costs, will need to be provided to insurers through a broker that places ATE cover. The proposal form will attach any pleadings, your lawyer's opinions or other relevant documents. The insurer will then assess the information provided and decide whether to offer insurance and on what terms and premium.
Can the level of cover be increased as a matter progresses?
Subject to the circumstances of the matter and the type of ATE policy entered into it may be possible to increase the level of indemnity in stages, with an additional premium due each time cover increases.
What level of premium is payable?
The level of premium payable depends on the type and level of cover sought and assessment of the risk. It can typically be 30% to 50% of the sum insured, or may be calculated as a percentage of the costs incurred at the date the claim is successfully concluded, whether by negotiation or as a result of the tribunal proceedings. Some insurers may be willing to offer ATE at lower premiums if the insured is willing to accept a high insurance excess.
When is the premium payable?
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 some or all of the premium when the policy is taken out.
You will have to fund the appeal until it is settled or determined by the tribunal or the court, although alternative funding options may be available. For more information, please see our separate OUT-LAW Guide to Funding options for tax tribunals.
Is the premium recoverable if the case is won?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 it. However the tribunal or the court 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.
Are there other costs involved?
Very occasionallyif you are taking out very substantial cover some insurers may ask for an application fee to be paid. This will cover the cost of the insurer carrying out a risk assessment on the case before deciding whether or not to offer cover.