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P10: Unreasonable behaviour costs regime

Power

 

“(1) The Tribunal may only make an order in respect of costs (or, in Scotland, expenses)—
[…]
(b) if the Tribunal considers that a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings;” (FTT Rules, r.10(1)(b)).

 

“[Unreasonable behaviour covers] cases in which the appellant has unreasonably brought an appeal which he should know could not succeed, a respondent has unreasonably resisted an obviously meritorious appeal, or either party has acted unreasonably in the course of the proceedings, for example by persistently failing to comply with the rules and directions to the prejudice of the other side.” (Catana v. HMRC [2012] UKUT 172 (TCC), §14).
 

Power

Starting point in non-complex cases: no order as to costs 

 

FTT slow to award costs in relation to parts of case management issues

 

“I should add that I consider that the Tribunal should not be too ready to make costs orders in relation to parts of case management proceedings where, as is frequently the case, a number of different matters are raised and decided in preparation for a substantive hearing. I would not wish to inhibit the parties from applying to the Tribunal for directions in order to promote the efficient conduct of an appeal. That is not to say that the Tribunal should never make such a costs order, but simply that it should not do so without careful consideration of the consequences.” (British-American Tobacco (Holdings) Ltd v. HMRC [2017] UKFTT 99 (TC), §71).
 

Starting point in non-complex cases: no order as to costs 

Unreasonable behaviour costs even if receiving party not the successful party

 

“I have taken into account the fact that the Tribunal decided not to strike out the appeal at the hearing of 10 April 2015. Ordinarily, a party would not expect to obtain the costs of an unsuccessful application. However, HMRC had not requested the hearing on 10 April 2015. The Tribunal had listed it of its own motion and therefore HMRC were obliged to attend it. Given that the Tribunal had itself indicated that it was considering whether the appeal should be struck out, it was reasonable for HMRC to make submissions to the effect that it should be struck out. Therefore, HMRC were not in the position of being an unsuccessful applicant and I am satisfied that I should exercise my discretion to award costs in this case.” (Tor View Self Storage Ltd v. HMRC [2015] UKFTT 564 (TC), §38 – failure to notify withdrawal promptly meaning that strike out hearing went ahead).
 

Unreasonable behaviour costs even if receiving party not the successful party

Tribunal must form its own assessment of the parties’ behaviour rather than relying on previous Tribunal’s view

 

“by simply adopting the first FTT’s views Judge Brooks seems to have taken the view that he was exercising its discretion, when he was seised of the matter himself and should have exercised his own discretion. It was, in our view, his duty to consider the matter afresh in the light of HMRC’s submissions and explain why, if it were the case, he rejected them. His failure to engage with the submissions amounts to a procedural irregularity which is sufficiently serious to amount to an error of law on his part.” (HMRC v. Jackson Grundy Limited [2017] UKUT 180 (TCC), §64 Judges Bishopp and Herrington).
 

Unreasonable behaviour by a representative

 

“In addition, if Albert Goodman Lewis are correct that Mr Corbould did not keep his clients informed of the progress of the appeal, that could amount to unreasonable conduct (of a representative) that could lead to a costs award against the Company.” (Tor View Self Storage Ltd v. HMRC [2015] UKFTT 564 (TC), §26).

Tribunal must form its own assessment of the parties’ behaviour rather than relying on previous Tribunal’s view
Unreasonable behaviour by a representative

Further findings of fact relevant to reasonableness  

 

“Without having heard any evidence I am not in a position to make a finding that the invoices referred to by [HMRC] had been deliberately doctored to mislead the respondents and the tribunal, but I consider that for the purpose of this application I should proceed on the basis that on the balance of probabilities they were because there seems to be no other explanation. The appellant was therefore putting forward misleading evidence (I am not in any way suggesting that this was known to his advisers).” (Businessman v. HMRC [2008] STC (SCD) 1151, §7).

 

No disproportionate enquiry into the merits 


“The judge then properly directed himself that, even if he were to have concluded that HMRC might have [unreasonably prolonged matters], the question of costs was in his discretion. He concluded that, having regard to the basis on which the application had been made, and to the “disproportionate enquiry” that would be needed to resolve the matter, he was not prepared to exercise his discretion in Mr Tarafdar’s favour.” (Tarafdar v. HMRC [2014] UKUT 0362 (TCC), §33, Judge Berner and Powell).

Further findings of fact relevant to reasonableness  

Meaning of unreasonable

 

Not open to losing party to argue substantive decision was wrong

 

“We should add before going further that as HMRC, despite securing permission, have chosen not to appeal against the level of penalty imposed by the FTT, we must and do accept that the FTT’s conclusion about the appropriate level of penalty was correct.” (HMRC v. Jackson Grundy Limited [2017] UKUT 180 (TCC), §67 Judges Bishopp and Herrington).

 

Unreasonable does not require irrational or vexatious

 

“Unreasonableness was clearly not intended to be confined, even in the context of wasted costs, to vexatious or other conduct at the extreme end of the scale. I do not therefore agree that it is appropriate, in the context of Rule 10(1)(b), to examine a party’s conduct from the perspective of vexatiousness or harassing behaviour.” (Hills v. HMRC [2016] UKUT 266 (TCC), §54, Judge Berner).

 

“Moreover, I do not consider that the Upper Tribunal in Market Opinion and Research set the test as one approaching “irrationality”.” (British-American Tobacco (Holdings) Ltd v. HMRC [2017] UKFTT 99 (TC), §67).

 

What would a reasonable person have done?

 

“The application of an objective test of that nature is familiar to tribunals, particularly in the Tax Chamber. It involves a value judgment which will depend upon the particular facts and circumstances of each case. It requires the tribunal to consider what a reasonable person in the position of the party concerned would reasonably have done, or not done.” (Market & Opinion Research International Limited v. HMRC [2015] UKUT 12 (TCC), §49, Judges Berner and Powell).

 

“The question is what a reasonable person in Mr Hone’s position would have done.” (Ritchie v. HMRC [2016] UKFTT 509 (TC), §144).

 

Failing to appreciate the obvious is unreasonable

 

“It is clear that a test of obviousness is not the same as a test of reasonableness. If something is not obvious or readily apparent, a person may nevertheless act unreasonably in not applying reasonable diligence, whether by applying their mind to the issue, or by making reasonable enquiries. On the other hand, if, viewed 25 objectively, something would be obvious to the properly comparable reasonable observer, or the inferences to be drawn would be obvious to such an observer, a failure of a particular person not to appreciate that thing, or those inferences, is likely to be unreasonable.” (Market & Opinion Research International Limited v. HMRC [2015] UKUT 12 (TCC), §48, Judges Berner and Powell).

 

Consider abilities and experience of party

 

“However, the test of reasonableness must be applied to the particular circumstances of a case, which will include the abilities and experience of the party in question. The reasonableness or otherwise of a party’s actions fall to be tested by reference to a reasonable person in the circumstances of the party in question. There is a single standard, but its application, and the result of applying the necessary value judgment, will depend on the circumstances.” (Market & Opinion Research International Limited v. HMRC [2015] UKUT 12 (TCC), §56, Judges Berner and Powell).
 

Meaning of unreasonable

- HMRC’s conduct to be considered as a whole

 

“The Tribunal must look at how HMRC acted as a body, and the fact that at the time the information notice a person in CenPOL did not think HMRC had power to issue the information notice was irrelevant if at the time HMRC reasonably acted in reliance on earlier, contrary advice, and HMRC as a body could reasonably have held the view that they did have power to issue the information notice.” (Distinctive Care Ltd v. HMRC [2016] UKFTT 764 (TC), §66, Judge Mosedale).
 

- HMRC’s conduct to be considered as a whole

Meaning of bringing, defending or conduct proceedings

 

Bringing, defending or conducting the proceedings is an inclusive phrase

 

“Mr Catanã has made a number of points about the phrase “bringing, defending or conducting the proceedings”. It is, quite plainly, an inclusive phrase designed to capture cases in which an appellant has unreasonably brought an appeal which he should know could not succeed, a respondent has unreasonably resisted an obviously meritorious appeal, or either party has acted unreasonably in the course of proceedings, for example by persistently failing to comply with the rules and directions to the prejudice of the other side”. (Cantana v. HMRC [2012] UKUT 172 (TCC), §14 and see Marshall v. HMRC [2016] UKUT 116 (TCC), §10).

 

Proceedings means proceedings before the FTT

 

“The reference to “the proceedings” in Rule 10(1)(b) is to proceedings before the Tribunal which has jurisdiction of the appeal, whilst it has such jurisdiction.” (Marshall & Co v. HMRC [2016] UKUT 116 (TCC), §11).

 

HMRC only liable for unreasonable behaviour after appeal lodged, T liable for unreasonable behaviour in lodging appeal

"[25] Drawing those tribunal decisions together, in my judgment the passage from Catanã and the questions posed by the UT (IAC) in Cancino show the correct approach to the application of rule 10(1)(b). I would sound a note of caution about the proviso discussed in Bulkliner and Marshall & Co that pre-commencement conduct may be relevant if there is bad faith. That should not be read as suggesting that there is some exception to the general principle such that if an assessment or penalty is issued in bad faith by HMRC, that can in some way bring conduct before the start of the appeal within the scope of rule 10(1)(b). There may be circumstances in which behaviour before the appeal is brought is relevant to the tribunal's assessment of the reasonableness of conduct post-commencement but an applicant cannot extend the scope of the tribunal's inquiry by alleging bad faith at an earlier stage on the part of HMRC. The parties and the tribunal must always bear in mind first that the focus should be on the standard of handling the case rather than the quality of the original decision: see Maryan (t/a Hazeldene Catering) v HMRC [2012] UKFTT 215 (TC) and secondly, that the jurisdiction to award costs is intended to be exercised in a straight-forward and summary way and should not trigger a wide-ranging analysis of HMRC's conduct relating to the applicant's tax affairs.

...

[31] It would be inconsistent with the structure of the FTT Rules to treat the conduct of the respondent prior to being notified of the appeal as conduct 'in the proceedings' for the purposes of rule 10(1)(b). The FTT Rules do not require the appellant to serve the notice on the respondent and in the present case DCL did not do so. It is the tribunal itself that gives notice of the proceedings to the respondent under rule 20(5). At that point HMRC must consider their position in relation to the case in order either to notify the appellant of any new grounds under rule 24(4) or to deliver the statement of case to the tribunal and the appellant within the 60 days allowed by rule 25(1)(c). HMRC must act promptly, once notified, if it becomes clear that the appeal cannot properly be defended." (Distinctive Care Ltd v. HMRC [2019] EWCA Civ 1010, Rose LJ)

“The appellant’s case, if correct, would effectively permit a costs award against HMRC for unreasonable decisions and/or reviews:  if Parliament had intended the Tribunal to have jurisdiction to award costs on that basis, it would have said so.  On the contrary, the Rules provide HMRC is only liable in costs for omissions or acts after the appeal is lodged.” (Distinctive Care Ltd v. HMRC [2016] UKFTT 764 (TC), §50, Judge Mosedale).

 

Reasonableness of original decision relevant to whether it is reasonable to defend appeal (rigorous review should be carried out)

 

“Nevertheless, in the circumstances of a case such as this, where the FTT reduced the penalty imposed and upheld on review by as much as 97%, one has to consider whether HMRC were, as this tribunal put it in Catana, unreasonably resisting an obviously meritorious appeal. In that context the reasonableness or otherwise of the original and review decisions is, plainly, an important factor. The question has, of course, to be considered, not with the benefit of hindsight and knowledge of the FTT’s conclusion, but from the position in which HMRC found themselves when the appeal was brought and as it progressed.” (HMRC v. Jackson Grundy Limited [2017] UKUT 180 (TCC), §67 Judges Bishopp and Herrington).

 

“(5) A failure to undertake a rigorous review of assessments at the time of making the appeal to the tribunal can amount to unreasonable conduct (Carvill v Frost (Inspector of Taxes) [2005] STC (SCD) 208 and Southwest Communications Group Ltd v HMRC [2012] UKFTT 701 (TC)) at [45]).” (Market & Opinion Research International Limited v. HMRC [2015] UKUT 12 (TCC), §22(5), Judges Berner and Powell).

 

“The reasonableness of the original decision against which the appeal has been made is not directly in point, but is relevant to the question of whether it was reasonable of HMRC to defend, or to continue to defend, the appeal.” (Tarafdar v. HMRC [2014] UKUT 0362 (TCC), §19, Judge Berner and Powell).

 

“However, in my view the correct approach is for the Tribunal to put itself in the shoes of the Respondents’ officer who, on reviewing the notice of appeal has to consider whether to defend the appeal or concede that a further review should be undertaken with a view to restoring the vehicle…In my view a person in that hypothetical officer’s position, acting reasonably, would have reviewed Mr Brenton’s decision and considered the prospects of success on the appeal. In my view such an officer  would have had no hesitation in concluding that the appeal should not be defended.  It should have been readily  apparent to such an officer that Mr Brenton’s approach was perverse, essentially failing to take proper account of the findings of fact made by the Tribunal in its first decision.  No reasonable officer could have concluded that the recommendation in the first decision was pointing to anything other than restoration without a fee; indeed the Respondents’ policy in the light of the Tribunal’s findings of fact would indicate strongly such an outcome.” (Logistika Peklaj AS v. Director of Border Revenue [2014] UKFTT 246 (TC), §§9…10, Judge Herrington).

 

Unreasonable failure to withdraw a decision after appeal lodged may lead to costs order

 

“An omission to withdraw such an assessment after an appeal is lodged may be unreasonable behaviour for the purposes of Rule 10 but it seems to me that it could only be unreasonable because the behaviour after the lodging of the appeal is unreasonable and that means that the defendant has to have a reasonable time to consider the appealed assessment.  By any measure, HMRC acted reasonably in this case because they withdraw the information notice two weeks after notification of notification of the appeal and without taking any steps to defend the appeal.” (Distinctive Care Ltd v. HMRC [2016] UKFTT 764 (TC), §45, Judge Mosedale).

 

Pre-appeal behaviour may “inform” actions taken during proceedings

 

“The correct approach in law to the relative importance of behaviour prior to proceedings is clearly set out in the FTT judgment. Judge Kempster adopts that approach by considering both parties’ submissions in this area, and concluding on the facts (at [28]) that he rejects Mr Cannon’s suggestion that HMRC were “wilfully blind” and that he prefers the explanation of Mr Brooke as regards the disputed telephone calls. Given that there was no evidence of bad faith in the making of the assessment or the raising of the penalties (by contrast with Farthings Steak House as referred to in Bulkliner), we find that Judge Kempster made no error of law in his evaluation of HMRC’s behaviour prior to proceedings. He clearly found on the facts that such prior behaviour had not, in the terminology of Bulkiner, informed actions taken during the proceedings.” (Marshall & Co v. HMRC [2016] UKUT 116 (TCC), §28).

 

“It is not possible under the 2009 Rules, any more than it was under the Special Commissioners’ regulations, for a party to rely on the unreasonable behaviour of the other party prior to the commencement of the appeal, at some earlier stage in the history of the tax affairs of the taxpayer, nor, even if unreasonable behaviour were established for a period over which the Tribunal does have jurisdiction, can costs incurred before that period be ordered... That is not to say that the behaviour of a party prior to the commencement of proceedings can be entirely disregarded. Such behaviour, or actions, might well inform the actions taken during proceedings, as it did in Scott and another (trading as Farthings Steak House) v McDonald [1996]STC(SCD) 381, where bad faith in the making of an assessment was relevant to consideration of behaviour in the continued defence of an appeal.” (Bulkliner Intermodal Ltd v. HMRC [2010] UKFTT 395 (TC), §11).

 

For example where there is bad faith

 

“HMRC’s conduct before the commencement of an appeal may be relevant if it shows that defending an appeal is unreasonable e.g. where an assessment was issued in bad faith as in the Farthings’ Steak House case.  Finding bad faith requires much more than a refusal by an inspector to accept that he or she is wrong, even in the face of compelling arguments by the appellant.  It is a high hurdle to surmount and requires proof of some egregious conduct.  In Farthings’ Steak House, the Special Commissioner accepted evidence indicating that the investigation had been inspired by the Inspector’s desire to get his own back on the taxpayers’ accountant.  There is no suggestion of any such malice on the part of Mr Millions in this case.” (Adderson v. HMRC [2016] UKFTT 273 (TC), §41).

Scott and anor (trading as Farthings’ Steak House) v McDonald (Inspector of Taxes) [1996] STC (SCD) 381

 

But:

 

“I have considered the Appellant’s reference to the much cited Bulkliner case and the relevance of HMRC’s previous behaviour, but have concluded that it is not legitimate, in a costs application under Rule 10(1)(b), to simply import into HMRC’s actions after proceedings have been issued, any alleged unreasonable behaviour prior to the start of the relevant proceedings.  The judge’s reference in Bulkliner to the earlier behaviour of a party “informing actions taken during proceedings” suggests only that it is one element which needs to be taken account of in determining whether HMRC’s actions are reasonable. Previous unreasonable behaviour is not enough, in itself, to change the character of HMRC’s behaviour after the issue of proceedings from reasonable to unreasonable.” (Archer v. HMRC [2016] UKFTT 141 (TC), §35).
 

Meaning of bringing, defending or conduct proceedings

Cases of withdrawal by one party 

“It is evident from the decision that the judge accepted that it was not unreasonable for HMRC not to have withdrawn from the proceedings prior to the discovery by Mr Brooke of the disputed telephone calls, and that any subsequent delay was not unreasonable in the context of matters being addressed in a meeting rather than by way of correspondence: see in particular the factual position as submitted by HMRC, which Judge Kempster preferred (at [23]).” (Marshall & Co v. HMRC [2016] UKUT 116 (TCC), §33).

“…a tribunal faced with an application for costs on the basis of unreasonable conduct where a party has withdrawn from the appeal should pose itself the following questions:
(1) What was the reason for the withdrawal of that party from the appeal?
(2) Having regard to that reason, could that party have withdrawn at an earlier stage in the proceedings?
(3) Was it unreasonable for that party not to have withdrawn at an earlier stage?” (Tarafdar v. HMRC [2014] UKUT 0362 (TCC), §34 – common ground that this was the correct approach in Market & Opinion Research International Limited v. HMRC [2015] UKUT 12 (TCC), §18, Judges Berner and Powell)

 

“In my judgment it is not sufficient in a claim for costs under rule 10(1)(b) of the Tribunal Procedure Rules for the grounds of appeal in an appellant’s Notice of Appeal to refer to the errors in the VAT returns being “genuine mistakes and no tax advantage” being gained as a result relying on HMRC to ascertain from information that may be in its possession as to why this might be the case without providing any further explanation until the day before the hearing.” (Executive Car Rentals v. HMRC [2015] UKFTT 473 (TC), §19).

 

Not open to withdrawing party to argue the substantive merits

 

“The FTT was also right to decide that HMRC could not rein back from its decision to settle and seek to raise arguments on the merits of the case. Once a case has been abandoned, it must, for the purpose of determining a costs application, be presumed that the other party’s case would have succeeded.” (Market & Opinion Research International Limited v. HMRC [2015] UKUT 12 (TCC), §64, Judges Berner and Powell)

 

Withdrawal before statement of case unlikely to be unreasonable

 

“The fact that, once the appeal had been lodged, HMRC reviewed the decision to issue the assessments and withdrew the disputed decision before proceedings had even reached the stage of service of a Statement of Case cannot be said to be unreasonable.  I accept that HMRC could have reached that view at a much earlier stage before Mr Adderson had lodged his appeal but that is not the question.  The relevant question is whether HMRC could have decided not to defend the disputed assessments at an earlier stage in the proceedings and, if so, was it unreasonable for HMRC not to have done so and withdrawn from the appeal at an earlier stage than they did.  I consider that, taking account of the nature of the issues in the appeal and the intervening holiday period, HMRC could not reasonably have been expected to have reviewed the case and decided not to defend the appeal any sooner than the eight weeks that it took.” (Adderson v. HMRC [2016] UKFTT 273 (TC), §42).

 

Even if HMRC knew their decision was wrong before appeal lodged

 

“And while that change of opinion more likely than not predated the lodging of the appeal, and while it may have been unreasonable for HMRC to fail to withdraw affected information notices once HMRC changed their opinion, that unreasonableness is not relevant to Rule 10 as it was not during the course of defending or conducting an appeal…In terms of the three stage test put forward in Tarafdar, the Tribunal does not get beyond question (2).  HMRC could not have withdrawn at an earlier stage of the proceedings as HMRC effectively withdrew from the proceedings at the first possible opportunity.  It was therefore not unreasonable for them not to have withdrawn at an earlier stage of the proceedings.” (Distinctive Care Ltd v. HMRC [2016] UKFTT 764 (TC), §48…51, Judge Mosedale).

 

Cases of settlement following HMRC policy review

 

“I consider that I should approach that issue by reference to the following matters:
(1) What were the circumstances in which the appeals proceeded and in which the parties came to settle the appeals?
(2) Having regard to those circumstances, should the Respondents have applied for a stay of the appeals pending the outcome of their policy review prior to the time when the appeals were settled? Alternatively should they have notified the Appellant that they were undertaking a policy review?
(3) If so, was it unreasonable of the Respondents not to have applied for a stay of the appeals, or at least notified the Appellant that they were undertaking a policy review.” (Football Mundial Ltd v. HMRC [2016] UKFTT 736 (TC), §50, Judge Cannan).

 

Query whether HMRC should tell taxpayer it is conducting internal review

 

“I reach that conclusion without considering as a matter of principle whether the Respondents are entitled to keep confidential the fact that they are conducting a policy review. I can see reasons why that might be desirable but I did not hear full argument on the point.” (Football Mundial Ltd v. HMRC [2016] UKFTT 736 (TC), §75, Judge Cannan).

 

Pre-existing change of view by HMRC makes it unreasonable to actively defend appeal

 

“In the circumstances where there was a pre-existing change of opinion so HMRC had formed the view, by the time the appeal was lodged,  that such information notices were ultra vires, it may well have been unreasonable to actively defend the appeal:  but I find HMRC did not do so in this case. The information notice in this case was withdrawn very shortly after the appeal was lodged without HMRC taking any steps to defend it.” (Distinctive Care Ltd v. HMRC [2016] UKFTT 764 (TC), §49, Judge Mosedale).

 

Not to use hindsight

 

“Whilst the Tribunal was critical at [52] of the substantive decision of Officer Hawes’s failure to understand the business context in which the facilities were made available, this comment was made with a degree of hindsight having heard Sir Christopher’s oral evidence.” (Merlin Scientific LLP v. HMRC [2016] UKFTT 81 (TC), §29).
 

Cases of withdrawal by one party 

Similar approach to party raising trump argument late

 

"[28] In terms of the framework to address the issue, in the circumstances of this case where it is plain that HMRC’s raising of Ground 2 was the reason for CCIL conceding, I am content to adopt the adaptation which Mr Hill, who appeared for HMRC, proposed, to the three stage approach set out in the case-law (e.g. MORI where the complaint is of an unsuccessful party unreasonably not conceding sooner : (1)What was the reason for HMRC raising Ground 2 as a new ground before the UT? (2) Having regard to that reason, could HMRC have raised Ground 2 at an earlier stage in the proceedings? (3) Was it unreasonable for HMRC not to have raised Ground 2 at an earlier stage?" (HMRC v. Cheshire Centre for Independent Living [2020] UKUT 275 (TCC), Judge Raghavan)

Similar approach to party raising trump argument late

Objecting to extension of time

 

Extension up to 28 days should be agreed if reasonable

"[35] Although the Court of Appeal in Denton considered that parties should be “ready to agree” extensions of time up to 28 days, it does not follow that the other party should agree to, or the Tribunal grant, every application for an extension of time of up to 28 days no matter what. It is clear that the Court of Appeal intended that its remarks should only apply to applications for extensions that are “reasonable”, something which can only be ascertained by reference to the reasons provided with the application."

Reasonable to object to short extension of time until detailed reasons for extension given

"[38] Had this further explanation, particularly in relation to the documents being in physical format requiring not only their retrieval from HMRC’s central storage but also their transferral into electronic format, been included as reasons for the application at the time it was made, rather than after the provision of the SOC, the withdrawal by Redevco of its opposition to the application and this case management having been listed, I might well have considered Redevco to have been unreasonable in opposing the application.

[39] However, it was not. While I accept that the period between the application and original compliance date did include the Christmas and New Year holiday period, I agree with Mr Margolin that HMRC could and should, in the reasons for the application, have provided more details of the “unexpected difficulties” that had been encountered in transferring the papers to counsel and the “further attempts” that had been made to do so on 16 December 2021, almost six weeks after the direction for the provision of the SOC had been made and, in the circumstances, do not consider that it was unreasonable of Redevco to have opposed the application until it had ben provided with the SOC.

[40] As such, HMRC’s application for its costs for of preparing for and attending this hearing is dismissed." (Redevco Properties UK 1 Ltd v. HMRC [2022] UKFTT 102 (TC), Judge Brooks)

Objecting to extension of time

HMRC failing to follow litigation and settlement strategy

 

“In our view a failure to abide by the LSS (and in particular paragraph 15) in a material way would be unreasonable conduct by HMRC.” (Gekko and Company Ltd v. HMRC [2017] UKFTT 586 (TC), §167, Judge Richard Thomas – on the facts, the FTT was concerned by a mysterious change in classification of a penalty from unprompted to prompted).

 

LSS: overall revenue flow must usually justify taking case

 

“Engaging in disputes 

8.  HMRC seeks to secure the best practicable return for the Exchequer, and to do that it must apply the law fairly and even-handedly.  Entering into, or taking forward, disputes can contribute to maximising overall revenue flows in a fair and even-handed way.  
·         The objective of maximising revenue flows involves considering not only the tax at stake in the dispute itself but also – in circumstances where a precedent may be set, or where HMRC is seeking to influence customer behaviour – potential tax liabilities of the same or other customers.  

·         In general, HMRC will not take up a tax dispute unless the overall revenue flows potentially involved justify doing so.” 
(LSS, §8).
“HMRC will aim to work disputes to the same professional standard whether or not the disputes are ultimately resolved by agreement or through litigation.  Furthermore, HMRC will not usually persist with a tax dispute unless the revenue flows potentially involved justify doing so and HMRC has a case which it believes would be successful in  litigation.” (LSS, §15).
 
HMRC failing to follow litigation and settlement strategy

Tribunal discretion even if unreasonable behaviour found 

 

“The condition in rule 10(1)(b) is a threshold condition. It is only if the tribunal considers that a party has acted unreasonably in a relevant respect that the question of the exercise of a discretion can arise.” (Market & Opinion Research International Limited v. HMRC [2015] UKUT 12 (TCC), §15, Judges Berner and Powell).

 

“Even if the tribunal is satisfied that a party has acted unreasonably in the terms of rule 10, the tribunal nevertheless has a discretion whether or not to make a costs order, or as regards the extent of a costs order. Such a discretion, like any other discretion conferred on the tribunal, must be exercised judicially.” (Tarafdar v. HMRC [2014] UKUT 0362 (TCC), §20).

 

One off, short lived slip

 

“I find that this incident, unreasonable conduct though it was, was an inadvertent, one-off and short-lived “slip” (as Ms Nathan put it), and one that was quickly put right. It did not materially affect the progress of the proceedings. It does not therefore seem to me an appropriate instance to exercise the tribunal’s power to award costs. I decline, therefore, to do so.” (Lyle and Scott Ltd v. HMRC [2017] UKFTT 137 (TC), §52, Judge Citron)

 

Ability to pay irrelevant unless otherwise indicated

 

“If a restriction referable to conduct is the only restriction on the power to award costs in cases before employment tribunals which Parliament can be said to have intended (as I think it is), then I can see no reason why an employment tribunal should think it appropriate to superimpose a further restriction based on the ability to pay, for which there is no basis in the legislation or in the regulations, and no parallel in ordinary litigation. It must be kept in mind that, where Parliament has intended that the amount of the costs ordered against an individual in ordinary litigation (as distinct from the amount of the costs that can be enforced against him from time to time) should be limited to the amount which it is reasonable for him to pay, it has done so in express terms…” (Kovacs v. Queen Mary & Westfield College [2002] EWCA Civ 352, §31).

 

For individuals, see r.10(5).
 

Status as successful party not relevant where unreasonably late in raising trump argument

"[43] In my view neither of these decisions advance HMRC’s case that their status as the successful party is significant to this tribunal’s cost order discretion under Rule 10(1)(b)...Taking account of that threshold, the focus of which as pointed out in Distinctive Care is the handling of the dispute, and also that, as explained there, Rule 10 reflects the intention that the FTT is designed in general to be a “no costs shifting” jurisdiction, it does not appear that the normal rule that costs should follow the event should play any significant part in the exercise of the tribunal’s discretion."(HMRC v. Cheshire Centre for Independent Living [2020] UKUT 275 (TCC), Judge Raghavan)

Existence of other potentially winning arguments may be relevant

"[44] ... While I agree it is relevant in principle to consider whether the new ground would have needed to have been addressed (if it was not then that would suggest the unreasonable delay in raising Ground 2 might not have caused all the costs sought to have been incurred) I disagree the point has any force in this case. As Ms Brown submitted for CCIL, the issue raised by Ground 2 is logically prior to Ground 1; it would have been dealt with first. Given the clear outcome in HMRC’s favour on Ground 2, once that ground was raised CCIL would have been in difficulty in pursuing its appeal." (HMRC v. Cheshire Centre for Independent Living [2020] UKUT 275 (TCC), Judge Raghavan)

Consider receiving party's behaviour

"[45] The reasoning in MG Rover for why the appellant there did not get their costs does however highlight the potential relevance of the other point, which HMRC argued was relevant to this tribunal’s exercise of discretion namely the appellant’s responsibility to appraise their own case. Despite accepting that it is was unsatisfactory HMRC had failed to give a proper explanation for their decision refusing the appellant’s claim, the tribunal in MG Rover considered the appellant’s advisers, who were of equal experience and expertise, should have noticed the weakness in the appellant’s case, (a regulation which disposed of the appellant’s claim) much earlier (at [29]).

[46] In my view it is a valid consideration, in the exercise of discretion once the threshold condition unreasonable conduct is met, to consider any such shortfalls in the receiving party’s handling of the matter. To the extent the costs sought are attributable to the receiving party rather than the paying party it would not appear to me fair and just in those circumstances to award the receiving party all of the costs it seeks.

...

[47] Bearing that in mind and the ongoing obligation on parties to assess the weaknesses in their case, I consider it is relevant, to any award of costs, to factor in that some responsibility lay on CCIL’s advisers to establish the position in relation to the principal supply with greater clarity rather than letting it rest in the ambiguous state that it did." (HMRC v. Cheshire Centre for Independent Living [2020] UKUT 275 (TCC), Judge Raghavan)

30% reduction where receiving party should have realised case was hopeless

"The resulting amount should be discounted to reflect that CCIL bore some responsibility for not evaluating the strength of its case when viewed in the round and for not taking steps to resolve the ambiguity around whether and if so what concession had been made in relation to a fundamental part of its case that the payroll services was exempt. In my judgment a discount of 30% should be applied." (HMRC v. Cheshire Centre for Independent Living [2020] UKUT 275 (TCC), Judge Raghavan)

Tribunal discretion even if unreasonable behaviour found 

Examples of unreasonable behaviour
 

Examples of unreasonable behaviour

- ​Pursuing a case/argument that was false or you ought to have known had no reasonable prospect of success
 

“HMRC would be acting unreasonably in defending an appeal if they ought to have known that their view of the case had no reasonable prospect of success but not otherwise; it cannot be that any wrong assertion by a party to an appeal is automatically unreasonable…” (HMRC v. Jackson Grundy Limited [2017] UKUT 180 (TCC), §47(4) Judges Bishopp and Herrington).

 

“Although it is generally the case that the mere rejection of an argument by a tribunal does not of itself mean that the party putting forward that argument has acted unreasonably, there are occasions when the maintenance of a particular case may be unreasonable. Although every case must be considered in its own context, I accept that one of those possible instances is where a party persists with a case in the face of an unbeatable argument that he is wrong. That was the view expressed by the Firsttier Tribunal in Leslie Wallis v Revenue and Customs Commissioners and another [2013] UKFTT 081 (TC), at [27]; the tribunal there gave an example of persistence with a legal argument the same as one rejected by the Supreme Court, when that rejection has been brought to the party’s attention. That was relied upon by the First-tier Tribunal in Roden v Revenue and Customs Commissioners [2013] UKFTT 523 (TCC) where the tribunal said, at [14], that a party would not be acting unreasonably when pursuing a case without merit unless he ought to have known that his case was without merit.” (Hills v. HMRC [2016] UKUT 266 (TCC), §67, Judge Berner).

 

“It is unreasonable behaviour where a person files an appeal without reasonably held belief that the appeal has a real prospect of success. I accept that an appellant does not need to have obtained all the evidence before it lodges an appeal: this would be impossible when appeals must be lodged within short time constraints. I think an appellant is behaving reasonably when it files an appeal where it has objectively at least reasonable grounds for believing it will be able to gather sufficient evidence to make out the necessary factual case with a reasonable prospect of success.” (Barrell Booze Ltd v. HMRC [2015] UKFTT 0347 (TC), §28 – on the facts, the taxpayer never gave any reason or supplied any evidence supporting his appeal that he did not know and had no means of knowing that excise duty had not been paid on goods purchased).

 

“It seems to us that it cannot be that any wrong assertion by a party to an appeal is automatically unreasonable... Before making a wrong assertion constitutes unreasonable conduct in an appeal that party must generally persist in it in the face of an unbeatable argument that he is wrong...” (Wallis v. HMRC [2013] UKFTT 81 (TC), §27).

 

Consider what HMRC as a whole ought to have known, not just the decision-making officer:

 

“The Tribunal should not be too quick to characterise pursuing what is found to be an unsuccessful case is unreasonable behaviour: the Tribunal rules provide for a no-costs regime in virtually all tax cases (and the exception for complex cases does not apply in this case). So if in this case HMRC’s view had no reasonable prospect of success, HMRC would have been acting unreasonably if they ought to have known this but not otherwise. In considering whether HMRC ought to have known whether the case had a reasonable prospects of success, I consider that I should consider HMRC as a whole and not just the individual officer presenting the case.” (Roden v. HMRC [2013] UKFTT 523 (TC), Judge Mosedale, agreed with in Merlin Scientific LLP v. HMRC [2016] UKFTT 81 (TC), §24)

 

Determining what a party’s argument/position was:

 

“There is no hint in the statement of case that HMRC were inviting the FTT to determine the correct penalty, whether in response to a clear invitation to that effect, as an alternative to upholding the original penalty, or even as a fall-back position should the FTT decide to discharge that penalty. Similarly, Mr Mantle’s skeleton argument before the FTT sought to uphold the original penalty in full. It was not until the hearing before the FTT was in progress that the possibility that the FTT might itself determine the correct penalty was actively canvassed. We proceed, therefore, on the footing that HMRC’s stance at least until the beginning of the hearing was that the penalty should be upheld in its entirety.” (HMRC v. Jackson Grundy Limited [2017] UKUT 180 (TCC), §70 Judges Bishopp and Herrington).
 

Claiming input tax on supplies you knew did not take place 

“The ground on which the FTT made an order for costs in favour of HMRC was that [the taxpayer] acted unreasonably in bringing the appeal in circumstances where it knew that the supplies in issue had not in fact taken place. This appears to us to be a compelling ground on which to exercise the discretion to order costs.” (Reddrock Ltd v. HMRC [2014] UKUT 0061 (TCC), §29, David Richards J – NB the logic appears to indicate that costs should be presumed in such cases).

Failing to accept that an invoice was not genuine in light of HMRC's evidence

 

[17] I considered whether the reasonable person who had been provided with the information in the pre-assessment letter would have accepted that the Disputed Invoice was not genuine or whether that person would only have come to that conclusion when he read Officer Idziak’s witness statement.  However, in my judgment, the information in the pre-assessment letter was such that the reasonable person in the position of HWL would have realised the Disputed Invoice was not genuine, and would therefore not have appealed the Assessment.  

[18] There was thus overwhelming and unchallenged evidence that the Disputed Invoice was not genuine. To apply the wording used by Judge Hellier in Wallis, this constituted an “unbeatable” reason why HWL’s case on the Assessment could not succeed, yet it nevertheless persisted.  This was unreasonable." (Hare Wines Limited v. HMRC [2023] UKFTT 536 (TC), Judge Redston)

Coming to the Tribunal with evidence you know to be false 

 

“The appellant was therefore putting forward misleading evidence (I am not in any way suggesting that this was known to his advisers). On that basis it is more a question that the appellant was withdrawing because he realised that the respondents are likely to prove that his evidence did not stand up. Accordingly, even though the standard of acting wholly unreasonably is an exacting one, I am of the opinion that the appellant has acted wholly unreasonably in connection with the hearing.” (Businessman v. HMRC [2008] STC (SCD) 1151, §7).

- ​Pursuing a case/argument that was false or you ought to have known had no reasonable prospect of success

- Making an application you ought to have known would fail

 

“Using only the criterion of whether or not the Appellant has acted unreasonably in making the application for reinstatement, I believe that the Appellant (through its representatives) has acted unreasonably.  This is because the extent of the defaults made by the Appellant in the 15 months preceding the striking out of its appeal and the absence of compelling reasons for those defaults means that the Appellant’s application for reinstatement was bound to fail.” (Infocom IT(UK) Ltd v. HMRC [2016] UKFTT 319 (TC), §27)

"[57] Despite this partial success, I still consider the appellant’s overall behaviour unreasonable. So far as this partial success was concerned, it would have been reasonable to agree to HMRC’s compromise suggested in August 2013 (and which could have covered Mr Stone’s statement too) in the circumstances that the appellant itself did not seek to identify any particular offending statements of opinion; it was unreasonable to persist in seeking a direction from a Tribunal of non-specific exclusion when the appellant was not prepared to identify the offending parts of the statements.

[58] For these reasons I considered that the application amounted to unreasonable conduct by the appellant.  The appellant did not need and was not really seeking further and better particulars; the purpose behind much of the application was difficult to ascertain.  Why seek schedules it already had and why seek to anticipate HMRC raising questions in cross examination there was no reason to suppose would ever be asked (as not part of its pleaded case)?  Its application for the ‘bona fide’ direction presumably had the purpose of getting the Tribunal to rule by default on the bona fides of third parties, but was quite obviously a hopeless application.  If the appellant wished to put the bona fides of its suppliers and customers in issue then it should have  raised such a case and filed the evidence.  The application for a direction by default was without merit.

[59] I also consider that the appellant pursued its application unreasonably in substituting 30 new questions four days before the hearing." (Trimax Trading International Limited v. HMRC [2014] UKFTT 733 (TC), Judge Mosedale)

- Making an application you ought to have known would fail

Failure to act promptly on the consequences of a new authority that the party should have been aware of

“If the Company or Mr Corbould had behaved reasonably, they would have withdrawn, at the latest, two months or so after the Tribunal sent its direction of 8 January 2015 (as it would not have taken more than two months to consider the implications of the decision in Hanbidge). HMRC did not start incurring material costs in connection with the hearing until 10 April 2015. Therefore, if the Company had withdrawn its appeal at this point, the costs of the 10 April hearing would have been saved.” (Tor View Self Storage Ltd v. HMRC [2015] UKFTT 564 (TC), §34)

- Failure to act promptly on the consequences of a new authority that the party should have been aware of

Party upon whom burden of proof rests adducing no evidence

 

"[58] This case has been presented throughout by Mr Goulding a litigator of HMRC.  The Tribunal understands that litigators are not legally qualified but are entrusted by HMRC with the conduct of a significant volume of litigation matters.  Indeed, HMRC appear to choose between the appointment of counsel and litigators.  The Tribunal, on balance, does not consider that Mr Goulding failed to act with the competence of an unqualified representative.  However, and on balance, the Tribunal considers that HMRC, as the party to the litigation, has acted unreasonably.  It prosecuted a matter in respect of which it bore the burden of proof in circumstances in which, without evidence meeting that burden, there could never have been any reasonable prospect of success for the appeal. 

[59] By reference to the acid test as to whether the conduct permits of reasonable explanation the answer is no.  The Appellant had not understood negligence to be in issue until the statement of case.  The Tribunal found that no evidence had been led, the explanation is arrogance on the part of HMRC that the Tribunal would offer latitude on the basis that the tax insufficiency arose as a consequence of engagement in an accepted and unsuccessful attempt to avoid SDLT.  That is not a reasonable explanation." (GC Field & Son Ltd v. HMRC [2022] UKFTT 314 (TC), Judge Brown QC)

“In my view it was unreasonable conduct on the part of the respondents to defend the appeal without intending to adduce any evidence to establish a prima facie case of negligence. That failure was compounded by a lack of action on the part of the respondents following the correspondence in March 2014 which highlighted the arguments the appellants intended to make. I consider that it was unfair to expect the appellants to answer in the Tribunal a case of negligence which had not been fully particularised and where the respondents had not adduced evidence to make out a prima facie case of negligence.” (Gardiner v. HMRC [2015] UKFTT 115 (TC), §§14 - 15)

- Party upon whom burden of proof rests adducing no evidence

- Making a serious allegation without providing any supporting evidence

 

"[29] I find that HMRC have been unreasonable in defending and conducting this appeal.

[30] HMRC do not challenge the submissions made on behalf of First Choice that the allegations of fraud made in the statement of case were unsupported by evidence.  HMRC admit that an appropriately qualified and experienced caseworker would never have made the allegations included in their statement of case. 

[31] I find that HMRC’s conduct in alleging fraud in their Statement of Case, and particularising that fraud by reference to emails which are not produced in evidence, to be egregious.  It is unacceptable for a public authority to make allegations of fraud where they have no credible evidence upon which to make even a prime facie case.

[32] It is no excuse that the team dealing with the appeal had no experience of dealing with fraud.  HMRC should have an appropriate system of supervision and training in place to ensure that their litigators deal with matters in an appropriate manner and in accordance with the law (including the laws of procedure and evidence).

[33] If this matter was being managed by HMRC’s solicitor’s department, HMRC's actions might well amount to serious professional misconduct." (First Choice Recruitment Limited v. HMRC [2019] UKFTT 412 (TC), Judge Aleksander)

- Making a serious allegation without providing any supporting evidence

- Relying on false evidence

Coming to the Tribunal with evidence you know to be false 

 

“The appellant was therefore putting forward misleading evidence (I am not in any way suggesting that this was known to his advisers). On that basis it is more a question that the appellant was withdrawing because he realised that the respondents are likely to prove that his evidence did not stand up. Accordingly, even though the standard of acting wholly unreasonably is an exacting one, I am of the opinion that the appellant has acted wholly unreasonably in connection with the hearing.” (Businessman v. HMRC [2008] STC (SCD) 1151, §7).

Application made on the basis of false evidence

"[17]...Having thus opened the door, Mr Ahmed was asked - fairly - questions about Mr Keenan, and gave evidence that Mr Ahmed 5 had decided, even before the first Tribunal hearing in 2015, that UM was not going to call Mr Keenan as a witness. That is obviously inconsistent with Mr Donaldson's March 2018 witness statement."

...

[21] It is important that evidence is truthful and accurate. This applies with particular force where an application is being decided on the basis of written evidence, without any cross-examination. The giving of untrue, or misleading, evidence has the potential to seriously compromise the Tribunal's ability to deal with cases fairly and justly. It had such potential here, because, had the Tribunal taken a different view of UM's application, HMRC would have been debarred from participation in the substantive appeal, and the misleading nature of the evidence given in March 2018 would not have come to light. This is conduct of a kind which readily attracts a costs sanction." (Ulster Metal Refiners Ltd v. HMRC [2022] UKFTT 125 (TC), Judge McNall)

- Relying on false evidence

- Late change of fundamental basis of arguments

 

“ The more difficult question is whether HMRC acted unreasonably in “conducting… the proceedings”.  I have concluded that in certain respects they did…That argument was effectively abandoned by HMRC at the hearing, and replaced by the argument that apportionment by a formula could never be permissible for duty purposes.  It became apparent during the course of Officer Pell’s evidence that, regardless of HMRC’s case on the legal positions, their previous arguments would be unlikely to be established as a question of fact…It was an inevitable consequence of this last-minute change by HMRC that much of the work and experience undertaken by Rokit was wasted.  Much of the preparation undertaken by the Tribunal for the hearing was similarly wasted.” (Rokit Ltd v. HMRC [2017] UKFTT 618 (TC), §§33…35…36, Judge Thomas Scott).

 

Raising new trump argument for the first time on appeal to the Upper Tribunal

"[33] As to the third question of whether Ground 2 should have been addressed earlier, I consider this question must be answered in the affirmative too. In short, that was because the law, the key facts relevant to the law, and the centrality of the point raised by Ground 2 to the dispute sought to be litigated before the FTT, were all in plain sight." (HMRC v. Cheshire Centre for Independent Living [2020] UKUT 275 (TCC), Judge Raghavan)

- Late change of fundamental basis of arguments

- Requesting an adjournment to address argument party was already aware of

"[151] As for Butlers’ application for expenses, we agree that all the main points raised by Mr Ghosh in his closing submissions could have been anticipated.  He addressed the Tribunal in detail on the question of proportionality and force majeure.  HMRC had already responded to these lines of argument in their Statement of Case and in their Outline Submissions.  Seeking an adjournment was not justified and constitutes unreasonable conduct of the proceedings within the meaning of Tribunal Rule 10(1)(b) rather than wasted expense as was also tentatively suggested.  We therefore find HMRC liable to Butlers in the costs incurred by Butlers as a result of the adjournment of the proceedings on 28 February 2012, less any savings in expenses as a result of the Tribunal not sitting on 29 February 2012." (Butlers Ship Stores Ltd v. HMRC [2012] UKFTT 371 (TC), Judge Reid)

- Requesting an adjournment to address argument party was already aware of

- Withholding information that undermines the other party’s case until the last minute

 

“If it could be shown that an appellant was in possession of information or evidence that would have persuaded HMRC to withdraw its defence of an appeal, but for whatever reason that appellant withheld that information or evidence and as a result put HMRC to the unnecessary effort and expense of continuing with the appeal until a much later date, HMRC may well have a claim for their own costs in respect of the appellant’s unreasonable conduct in doing so, even though the appeal itself is successful as a result of their withdrawal upon the eventual production of that information or evidence.  In such circumstances, a wasted costs order might also be made against an adviser personally under section 29(4) of the Tribunals, Courts and Enforcement Act 2007, if the Tribunal found that adviser guilty of an improper, unreasonable or negligent act or omission.” (Lam v. HMRC [2014] UKFTT 79 (TC), §21, Judge Poole).

- Withholding information that undermines the other party’s case until the last minute

Failure of party to properly explain its case

“On the contrary, a party’s case must properly be put “cards face up on the table”, and it is generally unreasonable for it not to do so. To the extent that such a failure can be shown to have resulted in unnecessary expense being incurred by the other party, for example in applying to the tribunal for a direction for further particulars, that may properly be the subject of an order for costs under Rule 10(1)(b) of the FTT Rules. But in this case the argument was that the case could have been resolved without a hearing, an argument that I do not accept.” (Hills v. HMRC [2016] UKUT 266 (TCC), §73, Judge Berner)

- Failure of party to properly explain its case

- Not properly considering the issues

Failing to consider proportionality of penalty

 

“Such discussion as there is on the question of proportionality is focused on the seriousness of the breaches concerned and the risk of the business being used for money laundering or terrorist financing; nothing at all is said about the impact of the penalty on JGL…It is well-established that while a penalty must be proportionate to the offence, it must also be proportionate to the offender…£169,652 is manifestly excessive, and we are wholly persuaded that the failings of approach we have identified should have made it clear to HMRC, by the time they came to prepare the statement of case, that the decision was unreasonable and could not be defended.” (HMRC v. Jackson Grundy Limited [2017] UKUT 180 (TCC), §§82…83…84 Judges Bishopp and Herrington).

HMRC having dismissive attitude to new information pre-hearing is a relevant factor

 

“As the FTT observed, at [39], this was the OFT’s only visit to JGL’s premises, lasting about 90 minutes, and it is apparent from other observations made by the FTT that thereafter the OFT made little effort to enquire more deeply into JGL’s practices and procedures. JGL could, of course, have volunteered the information which emerged from Mr Jackson’s evidence, but we can well understand why it did not, until the hearing, because of the largely dismissive attitude of the OFT and, later, HMRC to the information JGL did provide.” (HMRC v. Jackson Grundy Limited [2017] UKUT 180 (TCC), §74 Judges Bishopp and Herrington).

- Not properly considering the issues

Non-compliance with directions

Failing to comply with direction requiring case to be set out

 

“The Tribunal asked the appellant twice in writing (once by means of a formal direction) to articulate its position on Hanbidge. That was an issue central to this appeal. At no point did the Company set out its position in any detail and Mr Corbould’s email set out at [8] was an inadequate response.  The failure to articulate any position on Hanbidge was an unreasonable manner of conducting proceedings. It does not matter whether it was the Company or Mr Corbould who behaved unreasonably since the unreasonable behaviour of either can justify a costs award against the Company.” (Tor View Self Storage Ltd v. HMRC [2015] UKFTT 564 (TC), §28).

 

Failing to comply with directions for no apparent reason

 

“Clearly it was not unreasonable for Mr Ahmad to have brought his appeal. However, the failure to comply with directions thereafter, for no apparent reason, is in our judgment unreasonable conduct by a party or his representative in conducting the proceedings…In the circumstances, and having considered the details of Mr Ahmad’s financial means, also provided in accordance with the directions, we consider it appropriate to award HMRC their costs of and incidental to the appeal.” (Ahmad v. HMRC [2016] UKFTT 722 (TC), §§37…38, Judge John Brooks).

- Non-compliance with directions

- Failure to act promptly (re application or withdrawal etc.)

 

Unreasonably slow method of communicating withdrawal when hearing imminent

 

“I consider that T P Lewis & Partners adopted an unreasonably slow method of communicating withdrawal of the appeal for the following reasons:
(1) On 1 April 2015, the hearing was just 9 days away. Moreover, 3 April and 6 April were bank holidays (Good Friday and Easter Monday respectively) so the letter was sent (by post) just 4 working days before the hearing.
(2)  T P Lewis & Partners should have been aware that HMRC would be incurring costs in preparing for the hearing and that, if they notified HMRC quickly, there was a chance that costs could be saved.
(3) In those circumstances, T P Lewis & Partners showed insufficient urgency in sending a letter to the Tribunal. That course of action meant that HMRC would not find out that the hearing was unnecessary until the Tribunal had received their letter, processed it and notified HMRC of the withdrawal. They should instead have sought to contact HMRC by telephone or email.” (Tor View Self Storage Ltd v. HMRC [2015] UKFTT 564 (TC), §36).

Failure to apply for postponement of hearing promptly

 

“It seems inherently unlikely that he would have arranged to travel from India on 6 April 2016 for a hearing in North Shields on 7 April 2016.  His travel arrangements were presumably cancelled before the afternoon of 6 April 2016.  It would be expected that if he had had to cancel at the last minute because of ill-health, then he would have needed a medical certificate for insurance purposes.  None has been provided…I find that the notification of the requirement to postpone the hearing could and should have been made significantly earlier than the afternoon of 6 April 2016.  Had that been done HMRC's representative would not have incurred the cost of travel to Newcastle nor the cost of accommodation and subsistence.  In those circumstances I find that the appellant has acted wholly unreasonably and I therefore make an Order in terms of Rule 10 of the Rules and that in the sum sought by HMRC.” (Bahanda v. HMRC [2016] UKFTT 761 (TC), §§24…26, Judge Anne Scott).

Waiting too long to withdraw after new information provided

 

"It would have taken some time to consider the new information and reach a decision to withdraw in the light of it.  Given that HMRC actually gave notice of withdrawal on 15 February 2013, it took them approximately two months from receiving the new information before they communicated their intention to withdraw.  It could be said that a quicker decision could have been made, but given the time of year and the stage which the appeal had reached by that time, I would not consider the delay to have become unreasonable before 1 February 2013.” (Lam v. HMRC [2014] UKFTT 79 (TC), §16, Judge Poole – costs of the period 1 February to 15 February summarily assessed at £150).

- Failure to apply/notify promptly

- Careless statement that there was no relevant material

 

“HMRC incorrectly stated to the Tribunal that there was no relevant Hansard extract. We readily accept that this was an entirely innocent mistake. It was, however, careless and, therefore, in our view amounted to unreasonable conduct. If the Tribunal had not previously carried out its own research in relation to Hansard, a serious injustice may have resulted. The withdrawal of registration for gross payment under section 66 (1) would have had very serious consequences for the Appellant, as we heard in the evidence presented at the January 2011 hearing. The Tribunal and taxpayers are entitled to expect HMRC to know its business and not to make careless errors in making statements before the Tribunal. In the event, however, we are satisfied that the Appellant was not prejudiced and no material additional costs were incurred.” (Scofield v. HMRC [2012] UKFTT 673 (TC), §29)

- Careless statement that there was no relevant material

Disproportionate strike out application and failure to refer FTT to relevant authorities

 

“In the circumstances I have decided to make an order in respect of costs under Rule 10(1)(b).  I find that it was unreasonable for HMRC to have made an application to strike out Mr Adewade’s appeal.  The facts in this case are almost on all fours with the facts in Jacobson (the principal difference is that Mr Adewade was stopped in the blue channel, whereas in Jacobson  the appellant was stopped in the green channel).  Jacobson is being appealed to the Upper Tribunal, and the eventual decision in that case must be relevant to Mr Adewade’s appeal.  In the light of Jacobson, the application was bound to fail…Further, and no less important, the authorities cited to me in HMRC’s skeleton argument and included in their bundle were only those that were favourable to HMRC’s case.  They did not include a number of cases that were antithical to their case.  Even though many of those cases would be of persuasive authority only, it is unacceptable for these to be omitted from the bundle.  It is doubly so where the appellant is unrepresented.” (Adewale v. HMRC [2017] UKFTT 103 (TC), §§89…90. Similar reasoning in Hill v. HMRC [2017] UKFTT 18 (TC), §137)).
 

- Disproportionate strike out application and failure to refer FTT to relevant authorities

Failure to correct erroneous inclusion of without prejudice material and to obtain prompt legal advice

 

“Looking first at the issues relating to the statement of case, a reasonable person would, at the very least, have indicated to Mr Rodgers before the application was made to the Tribunal on 2 February 2016 when he might expect a response to the point which had been raised.  Faced with an application to the Tribunal, a reasonable person would also have ensured that he received advice from his solicitor promptly in order to decide whether to resist the application. It is clear that, in this case, the advice was that the statement of case should be replaced, as requested by the appellants.  Had Mr Hone taken these actions, both the application and the hearing would very likely have been unnecessary…Similarly, a reasonable person would not have simply ignored the request to defer the determination of the permitted area throughout the whole of January and February 2016 and continue to ignore it, even after the application which was made on 3 March 2016 and which was received with a covering email encouraging HMRC to resolve the matter without the need for a hearing.” (Ritchie v. HMRC [2016] UKFTT 509 (TC), §§144 – 145 – costs awarded against HMRC).

- Failure to correct erroneous inclusion of without prejudice material and to obtain prompt legal advice

- Expert witness behaviour 

 

“the fact that the court was obliged to ask Professor Trimble, in the middle of his evidence, to provide a written statement as to what exactly his evidence was and the basis upon which he was saying that the Claimant’s continuing symptoms were psychogenic did arise from serious shortcomings in the way in which Professor Trimble approached the giving of his evidence…In my judgment, that conduct on the part of Professor Tribunal was so out of the norm that it justifies an order for indemnity costs.” (Siegel v. Pummell [2015] EWHC 195 (QB), §§37…38).

- Expert witness behaviour 

Failing to engage with the other party on procedural matters

 

“As I have already found, the respondents failed to engage with the appellants with a view to agreeing directions for the conduct of the appeals. I am satisfied that in the words of the appellant “HMRC seemed to be content just to sit back and let the appellant and the judge do all the work”. Ironically, if HMRC had engaged, it would likely have had the benefit of an agreed extension to the time for service of its statement of case. The issues would have been narrowed and the tribunal and the parties could possibly have dealt with more contentious matters at the hearing on 15 February 2013, such as categorisation of the appeals as complex…In my judgment the respondents failure to engage amounted to unreasonableness for the purposes of Rule 10(1)(b).” (Elder v. HMRC [2014] UKFTT 728 (TC), §§106…107)

- Failing to engage with the other party on procedural matters

- Unauthorised and incorrect communications
 

“Judging HMRC by the standard of a reasonable person in their position, I find that it was unreasonable conduct for HMRC to have first said, in Mr Skelley’s 11 February letter, that they would be writing to the tribunal to advise that HMRC would no longer be opposing the closure notice applications, and then, in Mr Pooley’s letter five days letter, to ask that this be disregarded. In my view, this “volte face” (as Mr Jones called it) fell below the required standard: a tax administration in HMRC’s circumstances should have been able to avoid unauthorised communications of this kind being made.” (Lyle and Scott Ltd v. HMRC [2017] UKFTT 137 (TC), §52, Judge Citron, nevertheless, discretion to award costs not exercised)
 

- Unauthorised and incorrect communications

Reneging on representation that party applying for complex re-categorisation would not opt out of costs regime

 

“HMRC argued, as an alternative to its abuse of process case with respect to the request for an opt-out, that Mr and Mrs Hills’ conduct in applying at the stage they did for re-categorisation of the case to Complex, stating their intention not to opt-out and then making a request to opt-out on the last available date was unreasonable…I would have found that combination of conduct unreasonable…” (Hills v. HMRC [2016] UKUT 266 (TCC), §§56…57, Judge Berner)

- Reneging on representation that party applying for complex re-categorisation would not opt out of costs regime

Failing to accept a reasonable offer on costs in a complex case

 

“In my view no reasonable adviser, having been offered approximately 90% of the amount claimed against a background of real doubt as to whether a large proportion of the claim was recoverable in any event would have advised against acceptance of such an offer. As I have found, this offer remained open, even after the hearing on 16 April and the decision in Cantana when HMRC might have been encouraged to believe that ultimately it would be successful in its contentions that costs incurred before the proceedings were commenced were not recoverable. It was still open at the time of the hearing on 30 August 2013, when I joined the chorus of those (Master Haworth and Judge Nowlan) who urged the parties to settle, a chorus which as far as Mr Rice and Stomgrove concerned fell on deaf ears. This leads me to the straightforward conclusion that its rejection of HMRC’s wholly reasonable offer of £4,500 amounted to unreasonable conduct on Stomgrove’s part and caused HMRC, at public expense, to incur further substantial costs.” (Stomgrove Ltd v. HMRC [2014] UKFTT 169 (TC), §48, Judge Herrington)

- Failing to accept a reasonable offer on costs in a complex case

Disproportionate correspondence

 

“Mr Horne’s sent an unreasonably large amount of correspondence in connection with the appeal and made unreasonable interlocutory applications that served to delay matters and increased HMRC’s costs.” (The Moreton Bell Ltd v. HMRC [2018] UKFTT 29 (TC), §45, Judge Jonathan Richards – costs relating to the additional unreasonable behaviour awarded)

- Disproportionate correspondence

- HMRC issuing a letter that was ambiguous as to whether it was an appealable decision

 "[19] However, Foundry’s concern that it needed to protect its position and bring an appeal was perfectly understandable.  HMRC had communicated that they were denying repayment on the return and subsequently confirmed that they had denied input tax.  The letter of 14 September 2022 was not in the same format as other notification of tax loss letters which do not, as I understand and by reference to other notification of tax loss letters in the bundle, state that repayment of any sum will be denied.  Whilst therefore, I consider that the letter does not meet a description of a decision in section 83(1) VATA (and hence strike out the appeal) the letter was ambiguous, the position was compounded and became confusing when HMRC followed up that letter and within the required period in which an appeal must be bought or review requested, with an indicated confirmation that the original 14 September 2022 letter had denied recovery of input tax.  The Appellant was put to the unnecessary expense of brining an appeal or at least request a review so as to protect its position in light of the confusing correspondence from HMRC.

[20] As a consequence and as also communicated in the hearing I consider that HMRC’s conduct in connection with the strike out application itself warranted an order that HMRC pay Foundry’s costs associated with brining the appeal in respect of the 14 September 2022 letter.  The Tribunal has power to make such an order pursuant to rule 10(2)(b) FTT Rules.  During the hearing I indicated that in my view HMRC’s correspondence was confusing and Foundry’s decision to bring the appeal was a reasonable course for it to take.  HMRC’s conduct in respect of the application was also poor.  They first referenced their intention to seek a strike out of the appeal in their statement of case, but they did not, at that time, make the application.  The application was not made until 11 May 2023 at which time HMRC admitted that they had made a mistake in the letter of 3 October 2022 but still did not make the application on the basis of a lack of jurisdiction."(Foundry Supplies UK Limited v. HMRC [2023] UKFTT 656 (TC), Judge Brown KC)

- HMRC issuing a letter that was ambiguous as to whether it was an appealable decision

Examples of behaviour that is not unreasonable
 

Examples of behaviour that is not unreasonable

Allegation of fraud that was originally reasonable but became weak in light of oral evidence

 

“I appreciate that the appellant will doubtless consider that he made it clear during the enquiry that he had relied fully on his accountant and Montpelier and on that basis believed the tax return to be correct. However, in my view HMRC were not unreasonable in seeking to test that in the Tribunal given the lack of documentary evidence of any such advice, the concerns about the Montpelier document that purported to cover the tax position, and given the particular issues relating to the loan, including the apparent difficulty with the dates. It was also not unreasonable to think that, as a successful property investor, the appellant would have paid some attention to the loan and, for example, whether there was a risk that he could have to repay it before the 80 year maturity date, if he had had a real belief in the transaction having been implemented.” (Bayliss v. HMRC [2016] UKFTT 608 (TC), §24)

- Allegation of fraud that was originally reasonable but became weak in light of oral evidence

Waiting to see written evidence before deciding whether to defend appeal

 

“In my view it was not unreasonable for HMRC to wait and review Sir Christopher’s written evidence before deciding whether to defend the appeal, also taking into account the arguments made in the notice of appeal.” (Merlin Scientific LLP v. HMRC [2016] UKFTT 81 (TC), §27)

- Waiting to see written evidence before deciding whether to defend appeal

- Relying on a new argument at the last minute 

 

“MG Rover's real criticism comes down to this. HMRC allowed them to spend fees in pursuit of a dud claim that they would have dropped earlier had the strength of HMRC's case been revealed at that earlier date. The other side of the coin is that the liquidator chose to pursue the dud claim and to run up the fees because he had failed to spot that the claim was flawed. The skeleton argument from HMRC alerted the liquidator at the last minute to something he should have known all along. But the skeleton did not cause additional costs.” (MG Rover Group Ltd v. CEC VAT Decision 20871, §27)
 

- Relying on a new argument at the last minute 

Inefficiency in relation to issuing closure notice

 

“My view is that while HMRC might not have acted particularly efficiently in issuing the closure notice, there is nothing in HMRC’s actions during this period which is vexatious or for which there is no reasonable explanation. On the facts as I understand them, HMRC reacted relatively quickly to the issue of proceedings on 29 April 2015, effectively indicating that they were withdrawing any opposition to the application in their letter of 18 May.” (Archer v. HMRC [2016] UKFTT 141 (TC), §30)

- Inefficiency in relation to issuing closure notice

- Serving skeleton argument one day late

 

“Even if its minor failures to file documents on time occurred in “conducting” the proceedings (which we do not believe they did) HMRC have not acted unreasonably (which the cases show is a high hurdle in this context).  Having discovered the possibility that they may fail to comply with the direction, they took the necessary steps to bring the failure to the attention of the Tribunal and the appellant, and complied within 24 hours.  That is not unreasonable behaviour.” (Essential Telecom Ltd v. HMRC [2016] UKFTT 475 (TC), §20)
 

- Serving skeleton argument one day late

HMRC’s ambiguous conduct leading to submission of unnecessary appeals

 

“The Tribunal Rules allow costs to be awarded against a party, which includes the Commissioners, but only where the party or its representative has acted unreasonably in “bringing, defending or conducting the proceedings”.  Clearly the Commissioners did not bring the proceedings.  They did not act unreasonably in defending them because the proceedings were misconceived and they pointed that out as soon as they became aware of them or at least within a reasonable time of doing so.  They have not done anything unreasonable in conducting the proceedings because they were entitled to resist an order for costs and asked the appellants to withdraw the appeal as soon as it became apparent that an appeal had been submitted in error.” (Dehn v. HMRC [2013] UKFTT 633 (TC), §15 – HMRC witness statement in related appeal referred to penalties that had never been imposed, taxpayer mistakenly submitted an appeal)

- HMRC’s ambiguous conduct leading to submission of unnecessary appeals

- Taking time to consider material provided by the taxpayer and seek advice before issuing closure notice

 

“Was it unreasonable of HMRC to take advice from counsel? I find that it was not: the applicants in the relevant accounting periods had taken part in a notified tax avoidance scheme and I infer from the documentary evidence that the legal issues to which this scheme gave rise were far from “run of the mill”… Nor do I find it unreasonable that, due to the sophistication of the issues and the need for all the members of the team to consider the issues, it took two weeks longer than it might otherwise had done, to organise the conference with counsel.” (Lyle and Scott Ltd v. HMRC [2017] UKFTT 137 (TC), §49, Judge Citron)
 

- Taking time to consider material provided by the taxpayer and seek advice before issuing closure notice

Not seeking a stay of proceedings whilst pursuing a policy review

 

“I do not consider it was unreasonable for the Respondents to press on with the appeal without applying for a stay when they were meeting the Appellant’s argument that there was a single exempt supply and no alternative argument had been put forward…In the circumstances I am not satisfied that the Respondents should have applied for a stay of these appeals pending the outcome of their policy review, nor that it was unreasonable not to notify the Appellant that it was conducting a policy review.” (Football Mundial Ltd v. HMRC [2016] UKFTT 736 (TC), §§70…74, Judge Cannan)

- Not seeking a stay of proceedings whilst pursuing a policy review

Witness giving in under cross-examination

 

“What was the reason for the withdrawal?  We agree with HMRC that the reason for the withdrawal was the admissions made by Ms Dunsmore.  We should say that we reject any insinuation that the cross-examination by [the taxpayer] was in any way oppressive.  It was simply extremely effective.  But we do not think we could say that every officer of HMRC faced with this line of questioning would do as Ms Dunsmore did.  We do not think it could be said that the withdrawal would inevitably have happened as a result of a lack of analysis of the type [the taxpayer] suggests was the proximate cause.” (Elliott Knight Ltd v. HMRC [2018] UKFTT 73 (TC), §72, Judge Richard Thomas)

- Witness giving in under cross-examination

- Testing the accuracy of a witness’s recollection

 

“It would be reasonable in my view, taking Mr Kellett's recollection as truthful, to anticipate that, after the evidence had been heard (and tested or expanded in questioning by the advocates and the tribunal), a tribunal's conclusions could reasonably lie in a range which started at one end with a conclusion that Mr Kellett was somewhat forgetful and disorganised so that little weight should be attached to his recollection, to, at the other end, a conclusion that he was of a meticulous nature and had a good memory which was supported by other circumstances and recollections to which substantial weight should be attached.” (Kellett v. HMRC [2018] UKFTT 130 (TC), §46, Judge Hellier).

- Testing the accuracy of a witness’s recollection

- Resisting penalty based on knowledge of fraud where Tribunal finds actual knowledge

 

"[20] Although the reasonable person would not have believed the Disputed Invoice to be genuine, it does not follow that it was unreasonable of HWL to contest the Penalty on the basis  4  of Mr Hare’s belief.  That is because the burden of proving what Mr Hare believed rested on HMRC, and it was a matter for the Tribunal in the light of all the evidence to decide whether to accept or reject what Mr Hare said.  

[21] The position is the same in MTIC cases where the appellant denies knowledge of the fraud, but the Tribunal finds actual knowledge.  It does not automatically follow from that Tribunal finding, that the appellant had acted unreasonably by challenging HMRC’s MTIC decision.  Instead, costs are only awarded if a party acted unreasonably for some other reason, or the case was complex and the appellant did not opt out." (Hare Wines Limited v. HMRC [2023] UKFTT 536 (TC), Judge Redston)

- Resisting penalty based on knowledge of fraud where Tribunal finds actual knowledge

- HMRC not expected to know every case to which it is a party

 

"[28] I find as follows:

(1) It is true that the time limit argument had been raised by the Appellants and included in their skeleton, but there is a big difference between an argument which relies on a FTT decision, and one which relies on a binding Court of Appeal judgment.

(2) HMRC were unaware of Mrs Archer before the hearing because it was not been cited in the context of this ground of appeal, and it was not included in the authorities bundle.

(3) It is not unreasonable for HMRC not to know every case to which it is a party; instead they are required to consider the authorities cited by an appellant in the context of the submissions being made.

(4) The principles established by Mrs Archer and summarised at §19 above do not appear in clear terms in either Beadle or Walapu.

(5) It is true that the course of the appeals would have been different if HMRC had considered Mrs Archer before the hearing. But their failure to do so was not unreasonable, given that the Appellants did not cite the case in their skeleton, or include it in the authorities bundle. 29. I therefore find that HMRC did not act unreasonably." (Fox v. HMRC [2022] UKFTT 138 (TC), Judge Redston)

- HMRC not expected to know every case to which it is a party
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