In the First tier Tribunal (Tax Chamber) each side normally pays its own costs, win or lose. The tribunal can only order one party to pay the other’s costs in three situations set out in rule 10 of the Tax Chamber Rules: wasted costs caused by a representative, unreasonable conduct of the proceedings, and cases allocated as Complex where the taxpayer has not opted out of costs in writing within 28 days of being told of the allocation.

Who pays the costs of a tax appeal?

Section 29 of the Tribunals, Courts and Enforcement Act 2007 gives the First tier and Upper Tribunals discretion over the costs of proceedings before them, subject to the Tribunal Procedure Rules. For tax appeals those rules are the Tribunal Procedure (First tier Tribunal) (Tax Chamber) Rules 2009 (SI 2009/273), and rule 10(1) says the tribunal may only make a costs order in the listed cases.

HMRC’s Appeals, Reviews and Tribunals Guidance summarises the result at ARTG8660: where a case is litigated at the First tier Tribunal, each party generally pays their own costs. This “no costs” starting point is deliberate. It allows individuals and small businesses to appeal without the risk of a large bill from HMRC’s lawyers if they lose, which is one reason the tribunal is often a realistic option even for modest disputes after a statutory review.

Which case categories can carry a costs risk?

Rule 23 requires the tribunal to allocate every appeal to one of four categories when it receives the notice of appeal:

Category How it is decided Typical examples (ARTG8350)
Default Paper Usually without a hearing Fixed filing penalties for Self Assessment and company tax returns
Basic Hearing with minimal exchange of documents Late filing and late payment penalties, postponement applications, applications for a direction to close an enquiry
Standard More detailed case management, then a hearing Cases not placed in another category
Complex Full case management; costs regime and possible transfer apply See the criteria below

Under rule 23(4) the tribunal may allocate a case as Complex only if it considers the case will require lengthy or complex evidence or a lengthy hearing, involves a complex or important principle or issue, or involves a large financial sum. Either party may apply for reallocation at any time, and the tribunal can reallocate on its own initiative (rule 23(3)).

What is the complex case election?

Rule 23(5) says that once a case is allocated as Complex, two things follow: rule 10(1)(c) (costs in Complex cases) applies, and rule 28 allows the case to be transferred to the Upper Tribunal. Under rule 10(1)(c), the tribunal may award costs in a Complex case unless the taxpayer has sent or delivered a written request to the tribunal, within 28 days of receiving notice that the case has been allocated as Complex, that the proceedings be excluded from potential liability for costs. Where more than one party is a taxpayer, a request from one of them is enough.

“Taxpayer” is defined in rule 10(8) as a party who is liable to pay, or has paid, the tax, duty, levy or penalty in issue, or whose liability is in issue. Only the taxpayer can make the election; HMRC cannot.

The wording of the rule excludes the proceedings, not just the taxpayer, from potential liability under that head. In practice that means opting out removes your exposure to HMRC’s costs if you lose, but also removes your ability to recover your own costs under rule 10(1)(c) if you win. The unreasonable conduct and wasted costs routes remain available in every category.

Should you opt out of costs in a Complex case?

It is a judgement call that should be made, in writing, well inside the 28 days. Points to weigh:

  • Strength of the case. If counsel rates your prospects highly, staying in the costs regime gives a route to recover substantial professional fees.
  • Size of each side’s likely bill. HMRC’s costs in a long hearing with counsel can be significant. If your budget could not absorb them, opting out caps the downside.
  • Funding. Check whether any tax fee protection or legal expenses policy covers tribunal work and adverse costs, and what it requires you to do about the election.
  • Onward appeals. The opt out only affects the First tier Tribunal. In the Upper Tribunal and courts different rules apply (see below).

Illustration only. A company appeals a £400,000 corporation tax assessment and the case is allocated as Complex. Its advisers estimate their own costs to a hearing at £80,000 and HMRC’s at a similar figure. If the company stays in and wins, it can ask for its £80,000; if it loses, it faces a claim of about £80,000 as well as the tax. If it opts out, neither side can claim costs under rule 10(1)(c), whatever the outcome.

What counts as unreasonable conduct?

Rule 10(1)(b) allows a costs order in any category if a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings. ARTG8660 gives examples: an appellant unreasonably bringing an appeal they should know could not succeed, a respondent unreasonably resisting an obviously meritorious appeal, or either party persistently failing to comply with the rules and directions to the prejudice of the other side. The test applies to HMRC as much as to taxpayers, so an HMRC refusal to engage with an obviously correct argument can itself found a costs application.

Separately, rule 10(1)(a) and section 29(4) of the 2007 Act allow a wasted costs order against a legal or other representative. Section 29(5) defines wasted costs as costs incurred as a result of any improper, unreasonable or negligent act or omission by the representative or their employee. ARTG8660 notes these orders usually follow a series of unreasonable acts rather than a single slip.

How do you claim costs, and how much can you recover?

Rule 10 sets out the procedure:

  1. Send a written application to the tribunal and to the person you want to pay, with a schedule of costs detailed enough for the tribunal to carry out a summary assessment (rule 10(3)).
  2. Apply at any time during the proceedings, but no later than 28 days after the tribunal sends the decision notice that finally disposes of all issues, or its notice of receipt of a withdrawal that ends the proceedings (rule 10(4)).
  3. The tribunal must give the paying person an opportunity to make representations and, if they are an individual, consider their financial means (rule 10(5)).
  4. The amount is fixed by summary assessment, by agreement, or by detailed assessment (rule 10(6)). Detailed assessment is carried out in England and Wales by the county court, High Court or Costs Office, in Scotland by the Auditor of the Sheriff Court or Court of Session, and in Northern Ireland by the Taxing Office of the High Court (rule 10(7)). The tribunal may order a payment on account (rule 10(7A)).

HMRC’s guidance says costs claimed must be reasonable and proportionate, and must clearly have been incurred in the conduct of the appeal rather than for some broader purpose. Keep time records that separate appeal work from other advice.

Can you recover the cost of the enquiry itself?

No, not through the tribunal. ARTG8660 states that the tribunal may award costs of and incidental to the proceedings, but this does not include the costs of the enquiry that gave rise to the decision under appeal. If HMRC’s handling of the enquiry caused you unnecessary expense, the route is HMRC’s complaints procedure, which can consider compensation. The wider question of who funds accountants’ fees in an enquiry is covered in who pays accountants’ fees in an HMRC enquiry and how much an HMRC investigation costs.

What happens to costs in the Upper Tribunal?

ARTG8665 explains that the Upper Tribunal can award costs on appeals from the First tier Tax Chamber, in transferred Complex cases, in judicial review proceedings, for unreasonable conduct and for wasted costs. Applications must be made within one month of the Upper Tribunal’s decision notice. HMRC’s Legal Group usually applies for costs in all successful cases, and costs will generally follow the event before the Upper Tribunal and higher courts.

HMRC may agree in advance not to seek its costs under the Rees Practice (ARTG8670). The main factors are a risk of financial hardship and a point of law whose clarification would benefit taxpayers generally. The request should be made well before any hearing; it does not apply to suspected avoidance or evasion, and HMRC says it is not appropriate where the taxpayer is appealing against a decision in HMRC’s favour.

What are the common mistakes?

  • Missing the 28 day window for the Complex case election because the allocation letter was not passed to the adviser.
  • Assuming the opt out is one way, protecting you from HMRC’s costs while preserving your own claim.
  • Applying for costs after the 28 day deadline in rule 10(4).
  • Including enquiry stage fees in the schedule of costs.
  • Pressing on with a hopeless appeal after a clear adverse authority appears, which risks an unreasonable conduct order. HMRC applies the Litigation and Settlement Strategy in deciding whether to fight, and taxpayers should run the same test.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.