Tax Disputes & Cost Orders

When advising on a dispute with HMRC, which may ultimately lead to an appeal before the tribunal and higher courts, it is necessary to consider from the outset the following key issues:

• Identify the key issues of law. In other words, what must the taxpayer prove as a matter of law concerning the relevant tax treatment, by reference to both relevant statutory provisions and case law.
• Identify key issues of fact. This means identifying what the taxpayer has actually done in order to justify the particular tax treatment.

Questions of law 

All disputes involving tax arise in the context of a specific statutory provision or framework, such as whether the taxpayer has chargeable income or capital, whether there is a valid claim to a tax relief, such as business asset disposal relief or a capital allowance. The specific statutory framework relevant to the dispute between the taxpayer and HMRC must be carefully considered and analysed from the outset of any dispute.

It is beyond the scope of this article to comment on specific points of statutory construction. However, in dealing with a tax dispute it is necessary to understand the key requirement that tax can only be imposed by reference to clear words in legislation, and that it is necessary to interpret the legislation by reference to specific principles.

There is a well-established principle against taxation without clear words, which can be found in the speech of Lord Wilberforce in Ramsay v CIR:

‘A subject is only to be taxed upon clear words, not upon “intendment” or upon the “equity” of an act. Any taxing act of parliament is to be construed in accordance with this principle. What are “clear words” is to be ascertained upon normal principles: these do not confine the courts to literal interpretation. There may, indeed should, be considered the context and scheme of the relevant Act as a whole, and its purpose may, indeed should, be regarded: see CIR v Wesleyan and General Assurance Society 30 TC 11, 16 per Lord Greene MR and: Mangin v CIR [1971] AC 739, 746 per Lord Donovan. The relevant act in these cases is the Finance Act 1965, the purpose of which is to impose a tax on gains less allowable losses, arising from disposals.’

Statutory interpretation

Any tax adviser or appellant dealing with a dispute must be in a position to properly argue their interpretation of the law. In this respect, a number of principles of statutory construction should be considered, often referred to as ‘canons of statutory interpretation’. 

The following is a brief summary of the relevant principles, and further detailed guidance is provided in Bennion on Statutory Interpretation. In relation to tax disputes, the relevant principles to have regard to are, in overview:

• In UBS AG v CRC [2016] STC 934 Lord Reed outlined the approach to the interpretation of statutory provisions at [72]: ‘It seems to me to be preferable to begin with the 
  interpretation of the legislation, and the fundamental question whether it can be given a purposive interpretation going beyond its literal terms: that is to say, whether a “Ramsay” approach is possible at all, and if so, the purposive construction on which it is to be based. … the question next arises how, on its proper interpretation, the legislation is to be applied to the facts.'
• Lord Reed in UBS AG then said at [73] that the statute, ITEPA 2003, contained no explanation of the purpose of the provision on which a purposive interpretation might be based and it was in that context that he examined the historical background to and development of the legislation by reference to budget notes, explanatory notes and case law.
• Both the House of Lords (Barclays Mercantile Business Finance Ltd v Mawson [2005] STC 1 per Lord Nicholls at [51]) and the Supreme Court (Tower MCashback LLP 1 v CRC [2011] STC 1143 per Lord Walker at [47]) have endorsed Ribeiro PJ’s succinct expression of the so-called ‘Ramsay’ principle of statutory interpretation in Collector of Stamp Revenue v Arrowtown Assets Ltd (2003) 6 ITLR 454, when he said: ‘The driving principle in the Ramsay line of cases 
  continues to involve a general rule of statutory construction and an unblinkered approach to the analysis of the facts. The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.’ (Emphasis added.)
• A court, when interpreting a statute, is permitted to adopt a ‘strained interpretation’ in place of one which would be contrary to the clear intention of parliament (Luke v CIR [1963] 1 All ER 655). The clear words principle as referred to in Ramsay does not confine the courts to a literal interpretation. The circumstances in which the principle in Luke can be applied are limited, for example, to those where there is not simply some inconsistency with evident parliamentary intention but some clear contradiction with it. Further, the intention of parliament must be clearly found on the wording of the legislation: see Hancock v CIR [2019] 3 All ER 473.
• The headings in an act are aids to construction. See Stephens v Cuckfield Rural District Council (Upjohn LJ for the Court of Appeal);
• The explanatory notes to an act of parliament may also be relevant to interpreting specific statutory provisions. In this regard, see Lord Steyn in R (oao Westminster City Council) v National Asylum Support Service [2002] 4 All ER 654 and Christianuyi Ltd v CRC [2018] STC 1863);
• In terms of the use of parliamentary debates recorded in Hansard, there would need to be an ambiguity, obscurity or absurdity in the statutory interpretation that would justify resort being had to such material (Pepper v Hart [1992] STC 898).

Questions of fact

Once you have determined the relevant legal framework specific to the issues of law it is then necessary to determine the specific questions of fact in order to enable the taxpayer to come within the specific tax treatment. Obviously, the facts are the facts in the sense that you are reviewing a historic factual position where transactions and events have actually occurred. Accordingly, it is necessary to fully collect together all relevant information and documents in order to understand what has happened and whether the taxpayer is within the tax treatment asserted or whether there is a different tax treatment because as a matter of fact the taxpayer has actually done something else. The key requirement is to adopt an analytical approach to identifying and recording the facts, which can often be best achieved by creating a chronology of events (starting with the earliest date) and cross-referencing all key documents, transactions and events to the chronology.

Correspondence: enquiry/pre-HMRC decision

During the course of an HMRC investigation into a taxpayer’s affairs it is necessary to have a clear understanding of the legal rights and obligations of both the taxpayer and HMRC. During the course of dealing with HMRC enquiries it is important to carefully evaluate all relevant legal and factual issues. In responding to questions raised by HMRC it is necessary to remember that all responses are permanent and on the record. A client must be reminded that if they are reviewing documents and providing factual responses then they must be equally as thorough as the professional adviser in ensuring that clear and precise answers are given. If there is any ambiguity in a reply then the reasons for this should be carefully considered and addressed. Obviously, if it is necessary to ask for more time to respond to HMRC during an enquiry then this should be requested as soon as the delay is identified

An issue which often arises during an enquiry is whether any applicable legal opinion should be disclosed to HMRC in order to assist with resolution of the investigation. The disclosure of such legal advice must be carefully considered, because a disclosure will result in the waiver of legal professional privilege (extending to the instructions for advice and the resulting opinion). Clearly, issues to consider will be whether any assumptions specified in the instructions for legal advice changed between the time of giving the advice and execution of the transactions. In these circumstances the advice is not likely to be specific to the transactions, and disclosure would have no material value due to the change in circumstances.

Checklist of points 

The nature of tax enquiry work is such that it is not possible to provide a comprehensive checklist of all points to consider. However, a starting point of relevant issues to consider is:

(1) What are the legal issues?

(2) What are the factual issues?

(3) In light of (1) and (2), what is the strength of the taxpayer’s position?

(4) To defend the taxpayer and resolve the dispute, what documents does the taxpayer have available, in their control or possession; and can documents be obtained from a third party?

(5) Does HMRC have a legal basis for conducting the enquiry or investigation? Has the enquiry been opened within the applicable statutory time limits, or has HMRC made a discovery which enables an assessment to be issued (eg due to deliberate or careless conduct by the taxpayer, or due to the lack of information in the tax return such that a hypothetical officer could not be aware of an insufficiency of tax)?

(6) What are the options available to the taxpayer? In this regard:

(a) Is it possible to agree a settlement with HMRC (in respect of agreeing figures)?
(b) Is there any opportunity for negotiation with HMRC (in respect of the quantum of tax/penalties)?
(c) Is it possible to resolve the dispute by alternative dispute resolution?
(d) What are the prospects of success if an appeal is made to the tribunal?

(7) Identify key benefits and risks for the client arising from the above (eg costs, management time, strength of case, reputational issues).

Wasted costs

Wasted costs is a procedure, under a statutory power, by which a lawyer, or other representative, whose conduct in proceedings can be shown to have been improper, unreasonable or negligent, can be ordered by the court or tribunal to pay the costs incurred by their own client or another party as a result of that conduct.

Tribunals, Courts and Enforcement Act 2007, s 29(5) defines wasted costs as any costs incurred by a party:

‘(a) as a result of any improper, unreasonable or negligent act or omission on the part of any legal or other representative or other employee of such a representative; or

(b) which in the light of any such act or omission occurring after they were incurred, the relevant tribunal considers it is unreasonable to expect that party to pay.'

This is a wide definition and will include situations where a party incurs costs as a result of any improper, unreasonable, or negligent acts or omissions on the part of their own, or the other party’s, legal or other representative.

Under TCEA 2007, s 29(6), the phrase ‘legal or other representative’ is defined as ‘any person exercising a right of audience or right to conduct the proceedings on his behalf’ and is wide enough to include representatives who are not legally qualified, such as accountants.

As the rules on wasted costs are in the same terms as those which apply in all proceedings in the county court, High Court and the Court of Appeal (see Senior Courts Act 1981, s 51(7)) guidance can be gleaned from the principles that apply when making a wasted costs order under the Civil Procedure Rules (CPR). The relevant rules are contained in CPR, parts 44 to 48 and the costs practice direction.

An example of the type of unreasonable behaviour that might lead to a wasted costs order being made against a party’s representative would be conduct that was designed to harass the other side, rather than progress the proceedings. See also Ridehalgh v Horsefield [1994] 3 All ER 848; Tolstoy Miloslavsky v Aldington [1996] 2 All ER 556 and Morris v Roberts (Inspector of Taxes) [2006] STC 135.

Unreasonable conduct

Under First-tier Tribunal (FTT) Rules, rule 10(1)(b), the FTT may make an order awarding costs if it considers that a party, or their representative, has acted unreasonably in ‘bringing, defending or conducting the proceedings’.

A party who persists with a truly hopeless case may be vulnerable to a costs order being made against them. In the case of an unrepresented taxpayer, the FTT tends to be reluctant to make a costs order in favour of HMRC. The FTT may make an order against a party where there is a history of delay and lack of co-operation throughout the proceedings which have hampered the timely progress of the matter. A party whose case is struck out under FTT Rules, rule 8 will be vulnerable to a costs order being made against them for unreasonable conduct.

In Distinctive Care Limited v CRC [2019] STC 1386, the Court of Appeal dismissed the taxpayer’s application for costs under FTT Rules, rule 10(1)(b), and held that the jurisdiction of the FTT to award costs for unreasonable conduct is not engaged where the conduct complained of occurs before the matter has become the subject of proceedings before the FTT.

In that case, HMRC had issued the taxpayer with an information notice under FA 2008, Sch 36 in relation to the taxpayer’s liability to stamp duty land tax. The taxpayer took the view that HMRC did not have the power to issue the information notice because HMRC had already raised a determination in respect of the alleged liability, which was the subject of a live appeal to the FTT. The taxpayer appealed the information notice to the FTT and, following notification of the appeal by the FTT, HMRC advised the taxpayer and the FTT that, following the receipt of legal advice, it had concluded that it could not rely on the power in Sch 36 to require the production of the documents sought from the taxpayer. HMRC’s change in position arose from a failure of communication within HMRC between its central policy team and the officer who issued the information notice. HMRC therefore withdrew the information notice and conceded the appeal.

The taxpayer applied for an order that HMRC pay its costs of the appeal against the information notice on the grounds that HMRC had acted unreasonably. The taxpayer’s application was dismissed by the FTT and the Upper Tribunal. On appeal, the Court of Appeal determined that the earliest conduct that is relevant for the purposes of FTT Rules,  rule 10(1)(b), is the bringing of the proceedings before the FTT, namely, the sending or delivering of the notice of appeal pursuant to FTT Rules, rule 20. Accordingly, the issue of an appealable decision by HMRC did not amount to the bringing of proceedings for the purposes of the cost rule. The Court of Appeal stated at [25]:

‘There may be circumstances in which behaviour before the appeal is brought is relevant to the tribunal’s assessment of the reasonableness of conduct post-commencement but an applicant cannot extend the scope of the tribunal’s inquiry by alleging bad faith at an earlier stage on the part of HMRC. The parties and the tribunal must always bear in mind first that the focus should be on the standard of handling the case rather than the quality of the original decision: see Maryan (t/a Hazeldene Catering) v HMRC [2012] UKFTT 215 (TC) and secondly, that the jurisdiction to award costs is intended to be exercised in a straightforward and summary way and should not trigger a wide-ranging analysis of HMRC’s conduct relating to the applicant’s tax affairs.’

In Catanã v CRC [2012] UKUT 172(TCC) the First-tier Tribunal had refused to make a costs order against HMRC under FTT Rules, rule 10(1)(b), where the proceedings had been compromised on the day of the hearing. The taxpayer’s appeal to the Upper Tribunal was dismissed. Judge Bishopp 
was of the view that the FTT had not exercised its discretion in an unreasonable manner, it had not failed to apply the correct law, or taken into account the irrelevant, ignored the relevant or reached a conclusion which no tribunal, properly exercising its discretion, could reasonably have reached. In Catanã the Upper Tribunal stated at [14]:

‘Mr Catanã has made a number of points about the phrase “bringing, defending or conducting the proceedings”. It is, quite plainly, an inclusive phrase designed to capture cases in which an appellant has unreasonably brought an appeal which he should know could not succeed, a respondent has unreasonably resisted an obviously meritorious appeal, or either party has acted unreasonably in the course of the proceedings, for example by persistently failing to comply with the rules or directions to the prejudice of the other side.’

In another decision of the Upper Tribunal in Shahjahan Tarafdar (t/a Shah Indian Cuisine) v CRC [2014] UKUT 0362 (TCC) the Upper Tribunal stated at [34]:

‘In our view, a tribunal faced with an application for costs on the basis of unreasonable conduct where a party has withdrawn from the appeal should pose itself the following questions:

(1) What was the reason for the withdrawal of that party from the appeal?

(2) Having regard to that reason, could that party have withdrawn at an earlier stage in the proceedings?

(3) Was it unreasonable for that party not to have withdrawn at an earlier stage?'

This article is taken from A Practical Guide to Tax Disputes 2024-25, published by Tolley.