One of the questions we hear most often from clients weighing up whether to appeal an HMRC decision is the simplest one: if I lose, will I have to pay HMRC's legal costs too? For the great majority of tax appeals the answer is reassuring, but there are real exceptions worth understanding before you commit to a fight.
The no-costs default
Unlike the civil courts, where the general rule is that the losing party pays the winner's costs, the First-tier Tribunal (Tax Chamber) operates on the opposite starting assumption for the great majority of appeals. Cases allocated to the default paper, basic or standard tracks carry no automatic costs-shifting at all: each side bears its own costs of the appeal, its own representation fees, its own preparation costs, regardless of the outcome. This is a deliberate design choice, intended to ensure that ordinary taxpayers are not deterred from exercising a genuine right of appeal by the fear of being landed with HMRC's costs if they lose.
Rule 10 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 sets out the limited circumstances in which the tribunal can depart from this default and make a costs order. There are three: wasted costs (costs thrown away by a representative's improper, unreasonable or negligent conduct), a case allocated to the complex track where the taxpayer has not opted out of costs-shifting, and unreasonable behaviour by a party or its representative in bringing, defending or conducting the proceedings.
The complex track and the opt-out decision
The tribunal allocates the largest, most complicated appeals to the complex track, based on factors including the amount of tax in dispute, the number of parties or issues involved, and the complexity of the facts, evidence or law. Complex track allocation matters enormously for costs, because unless the taxpayer formally opts out of the costs regime within 28 days of being notified of the allocation, the ordinary civil litigation costs rule applies by default: the unsuccessful party generally pays the successful party's reasonable costs, calculated broadly along the lines of the Civil Procedure Rules approach used in the ordinary courts.
This makes the opt-out decision one of the single most consequential procedural choices in a substantial tax appeal, and one that is easy to miss if it is not flagged early. Opting out removes the costs risk but also removes the ability to recover costs if the appeal succeeds. Staying in the costs regime is a real gamble: a strong, well-evidenced case may justify keeping the ability to recover costs on a win, but a case with genuine uncertainty on the facts or the law carries a correspondingly real risk of a substantial adverse costs order if it fails.
Unreasonable behaviour costs orders
Even in a standard or basic track appeal, carrying no costs risk by default, rule 10(1)(b) allows the tribunal to make a costs order where it considers a party or its representative has acted unreasonably in bringing, defending or conducting the proceedings. The tribunals have consistently described the test as whether the conduct in question permits of a reasonable explanation, conduct that is genuinely vexatious, or designed to harass the other side rather than advance resolution of the dispute, crosses the line, whereas strong, even aggressive, advocacy in pursuit of a properly arguable case generally does not.
Examples that have attracted unreasonable behaviour findings include pursuing an appeal with no realistic prospect of success after being clearly advised of its weakness, persistently ignoring tribunal directions without good reason, and withdrawing at a very late stage after putting the other side to substantial, unnecessary preparation cost. This cuts both ways: HMRC is equally exposed to an unreasonable behaviour costs order where its own conduct of a case, for example continuing to defend a position long after it should reasonably have recognised it could not be sustained, meets the same threshold.
Costs when HMRC withdraws
A frequent scenario in practice: HMRC withdraws from an appeal shortly before a hearing, having reassessed its own case, and the taxpayer, having already incurred the cost of preparing for a hearing that will now not happen, asks whether those costs can be recovered. A withdrawal is not, by itself, automatic proof of unreasonable conduct, HMRC is entitled to reassess a case and withdraw sensibly rather than persist unreasonably, and doing so promptly on genuinely re-evaluating the merits is not itself a costs risk. Where the picture is different, HMRC maintained a position for a long period, forcing extensive taxpayer preparation, only to withdraw once faced with a fully prepared case shortly before the hearing, without any real change in the underlying facts, that pattern is far more likely to support a rule 10(1)(b) costs application in the taxpayer's favour.
Wasted costs orders
The third route, wasted costs, is narrower and aimed specifically at costs thrown away by a representative's own improper, unreasonable or negligent conduct, rather than at the underlying merits of the case itself. It is a mechanism for holding an adviser personally accountable for costs caused by their own conduct of the proceedings, missed deadlines, failure to prepare adequately, conduct falling below the standard reasonably expected of a professional representative, rather than a general costs-shifting tool tied to the outcome of the appeal.
Practical takeaways before you appeal
For the great majority of individuals and small businesses appealing a routine HMRC decision, penalty, discovery assessment, or enquiry conclusion, the financial risk of appealing is limited to your own representation costs, not HMRC's, because the case will sit in the standard or basic track with no costs-shifting. The two situations that change that calculation are a genuinely large or complex dispute heading for complex track allocation, where the opt-out decision needs early, deliberate attention, and any appeal or defence conducted in a way that risks crossing into unreasonable behaviour, persisting with a case advisers have clearly flagged as weak, or ignoring tribunal directions.
Related guides in this series
- What happens at a tax tribunal hearing
- HMRC statutory review and the tax appeals ladder
- Alternative Dispute Resolution in tax appeals
- Relief from sanctions: the Denton/BPP test
Frequently asked questions
Will I have to pay HMRC's costs if I lose my tax tribunal appeal?
In most cases, no. Standard and basic track appeals carry no costs-shifting default. The main exceptions are complex track cases (unless you opt out) and any case where the tribunal finds unreasonable conduct by a party.
What is the complex track and why does it matter for costs?
The tribunal allocates the largest, most complicated appeals to it. Unless you opt out within 28 days of notification, ordinary costs-shifting applies: the loser generally pays the winner's reasonable costs. This makes the opt-out decision highly consequential.
What counts as "unreasonable behaviour" justifying a costs order?
Conduct with no reasonable explanation, vexatious conduct, pursuing a hopeless case after being warned, or ignoring tribunal directions. This applies to both taxpayers and HMRC and can arise even in a standard track case with no default costs risk.
Can I recover my costs if HMRC withdraws before the hearing?
Potentially, but not automatically. A bare withdrawal isn't proof of unreasonable conduct. Where HMRC maintained a weak position for a long period, forcing extensive preparation, before withdrawing late, a costs application is more likely to succeed.