New approaches to funding tax litigation

There are times when, however hard an advisor tries, a settlement with HMRC is simply not possible.

1. Third party funding

This may occur, for example, where HMRC are of the view that the taxpayer's interpretation of the law under consideration is incorrect and under the terms of their Litigation and Settlement Strategy, HMRC have concluded that they are unable to settle the dispute by way of compromise. An important issue facing a taxpayer in such circumstances, is how best to finance any litigation which may become necessary.

Effective tax dispute resolution requires specialist knowledge and expertise. In our experience, once deadlock has been reached in a dispute with HMRC, the best results are often achieved in those cases where existing professional advisers team up with specialist contentious tax experts.

However, it is a sad fact of life that taxpayers often have to balance expenditure on professional fees against instructing the best possible personnel to win their case. Taxpayers often find that they have a very good case, but lack the financial resources to progress their appeal or that they, particularly in the case of corporates, do not wish to accept the cost risk associated with progressing an appeal before the Tax Tribunals and possibly beyond. This is not a dilemma faced by HMRC, who not only have deep pockets but also the authority to incur the professional fees associated with litigation.

Litigation funding can offer a solution to such problems, ensuring that the very best professionals are engaged to run the case with all of the expense, risk and burden borne by the funder in return for an agreed payment should the case be successful. The funder will pay all of the taxpayer's costs associated with the case. This will include the fees of solicitors, barristers and any other professionals needed to secure a positive result. Typically, this will include accountants and any expert witnesses. This provides the client with the comfort that the case is being properly funded and run by a team with the necessary expertise to achieve the best possible result.

RPC are working closely with a leading litigation fund and can arrange funding for our clients in cases where the claim has good prospects of success.

2. Group funding

Group funding can be an alternative to third party funding. Increasingly, disputes with HMRC involve a number of taxpayers who have common or related issues.

In cases where there are common issues, consideration should be given to the formation of a 'group' action. A group action has a number of benefits. The costs associated with litigation can be shared through the creation of a litigation fund into which each participating taxpayer will contribute a predetermined amount. This enables those taxpayers to share the costs of litigation by funding a single test case to determine the common issues that are in dispute. Such an arrangement also enables taxpayers to choose a test case that presents the best factual pattern.

Increasingly, HMRC is also attracted to the idea of a group action, as such an arrangement presents administrative advantages for all parties. Corresponding with one representative can be a great deal easier for HMRC than having to deal with a number of separate taxpayers.

Such an approach often involves a number of taxpayers and their advisers pooling their resources and working together to achieve a common goal. We have extensive experience of involvement in such litigation.

Because litigation funding is important, we have provided, under the Civil Guidance section of this blog, a litigation funding note which we hope you will find helpful.

Please contact a member of our team should you wish to discuss litigation funding further.