Fiscal litigation involves a calculated gamble. A rational gamble involves balancing the probabilities of success and of failure against the rewards of the former and the costs of the latter. Pinsent Masons LLP has made a review of appeals to the First-tier Tribunal, which casts light on the probability of succeeding in such litigation. In the year to 31st March 2021 HMRC succeeded in 86% of appeals decided in the FtT, up from 82% and 75% respectively in the preceding two years. There were 38 cases involving tax avoidance and in these HMRC’s success rate was 92%.
Even allowing that consideration of general success rates such as this is no substitute for an assessment by an experienced specialist of the probabilities of the success in a particular case, these are not figures likely to encourage the taxpayer to take on the HMRC behemoth.
What about the other side of the gamble – the costs of unsuccessful litigation and the rewards of success? The costs of litigation in the FtT and on further appeal vary widely according to the issues in dispute and the complexity and contentiousness of the relevant factual background. A taxpayer considering appealing to the FtT should take into account that in the event that he is successful before the FtT, if HMRC are successful on appeal he may yet bear his own and HMRC’s costs of the hearing before the FtT and of subsequent appeals to the Upper Tribunal, the Court of Appeal and the Supreme Court.
Where relatively modest amounts of tax are at stake, the rational decision may be to acquiesce in HMRC’s assessment even where the best professional advice suggests that the assessment is probably wrong in law. HMRC’s possession of overwhelming financial resources and the fact that it may pursue a case even where the tax at stake is small if the issues at stake have important yield implications due to their being relevant to a large group of taxpayers mean that HMRC will often, in effect, dare a taxpayer to risk the substantial monetary and time costs of litigation even where its case is weak.