Mark McLaughlin warns that winning a battle against HMRC at the First-tier Tribunal does not necessarily mean winning the war.
When a dispute between a taxpayer and HM Revenue and Customs (HMRC) reaches the First-tier Tribunal (FTT), the taxpayer may incur significant costs, such as for professional representation.
Picking up the tab
In FTT cases, taxpayers and HMRC normally pay only their own costs, regardless of whether the appeal is won or lost. Normally, the losing party cannot be made to pay the other party’s costs. The FTT may only make an order for costs in certain limited circumstances, such as if the tribunal considers that a party (or representative) acted unreasonably in bringing, defending, or conducting the proceedings.
For example, if the FTT considers that HMRC unreasonably resisted an appeal by the taxpayer, the tribunal can order HMRC to pay the taxpayer’s costs in defending the case. The same might apply if HMRC persistently failed to comply with the rules and the tribunal’s directions to the detriment of the taxpayer. Alternatively, the FTT can make a ‘wasted costs’ order against a party where their representative has acted improperly or unreasonably or has been negligent, if the tribunal considers it unreasonable to expect the other party to pay their resulting costs.
How much?
The FTT has a fairly wide discretion on the amount of costs awarded. The amount of costs in a tribunal order can be arrived at by a decision of the tribunal, by agreement between those who are paying and receiving, or (where agreement cannot be reached) by an assessment of all or part of the costs incurred by the receiving person.
It is important to be aware that the FTT does not necessarily need to award an amount equal to the costs actually incurred.
Winning the battle, but…
For example, in G C Field & Son Ltd & Ors v Revenue and Customs [2022] UKFTT 314 (TC), the appellants had used stamp duty land tax (SDLT) avoidance schemes. HMRC raised discovery assessments and issued determinations of the SDLT payable. The appellants appealed. The FTT concluded that HMRC had not discharged the burden of proving they had made a ‘discovery’.
The appellants subsequently claimed costs on the basis that HMRC failed to make any attempt to satisfy their burden of proving that the appellants or [the promoter] acted negligently. The FTT considered whether there had been unreasonable conduct by HMRC. The tribunal stated HMRC had been “arrogant” in certain respects. HMRC’s decision to call no evidence to support a point in their case essentially rendered the hearing pointless, which had put the appellants to the unnecessary costs of preparing for and attending a hearing that had only one possible outcome. The FTT considered it just and fair to award costs against HMRC.
Out of luck!
The taxpayers stated that their costs amounted to over £80,000. However, the FTT commented that the appellants had benefited from a “lucky strike” because SDLT relief to which they knew they were not entitled had been secured. The tribunal considered that an award of substantive costs in such a situation would be to compound their luck to the detriment of taxpayers because of HMRC’s failure.
Consequently, the FTT allowed the taxpayers’ application, but the quantum of costs was assessed at only £1.
Practical tip
In a sense, the costs award of only £1 was something of a Pyrrhic victory for the taxpayers. However, HMRC’s procedural failure in G C Field had resulted in a tax benefit for the taxpayers amounting to well over £1.3 million, to which the taxpayers acknowledged they would not otherwise have been entitled. So perhaps the moral of this story (and of cost applications in general) is ‘don’t push your luck’!
