Just swapped over to Brave a few days ago and started fully using it today. One of the first things I did was search for and toggle the flag which disables the updated horizontal tab design so that it looked more like Chrome:
#brave-horizontal-tabs-update
However, when this is enabled, the “old” tabs as Brave calls it are forced into a compact mode that I cannot disable. I attempted to toggle the compact tabs flag #brave-compact-horizontal-tabs but the result is the same regardless of whether it is enabled or disabled.
My feedback is this setting should still be obeyed if I have turned off the new horizontal tab design. It seems likely to be a bug, but I’m unaware of the developer intent behind why compact is ignored in this scenario.