First-tier Tribunal (Tax)

Neutral Citation: [2025] UKFTT 501 (TC)

Case Number: TC09510

FIRST-TIER TRIBUNAL

TAX CHAMBER

Location: Decided on the papers

 

Appeal reference: TC/2023/16870

 

Costs application - unreasonable conduct - bringing or defending proceedings - held that in the period of time when the Tribunal had jurisdiction the conduct was not unreasonable

 

 

Judgment date: 1 May 2025

 

 

Decided by:

 

TRIBUNAL JUDGE ALLATT

 

 

Between

 

MINICLOUD LTD

Appellant

and

 

THE COMMISSIONERS FOR HIS MAJESTY'S REVENUE AND CUSTOMS

Respondents

 

 

 

The Tribunal determined the appeal on the papers.  The Tribunal read the skeleton arguments provided by both parties, the document bundle provided by the Appellant on 11 December 2024, and the additional documents and authorities provided by the Respondent on 12 December 2024.

DECISION

Introduction

1.             This is an application by the Appellant for costs in relation to making an appeal to the Tribunal. The timeline of events is as follows:

2.             On 6 and 7 June 2023, HMRC issued appealable decisions to deny input tax to the Appellant for various periods between 2019 and 2023.

3.             The Appellant asked for a review on 21 June 2023. The letter asking for a review was extremely detailed, pointing out among other things that the Appellant had had a recent (August 2019) on site visit from HMRC, who had been shown in detail the methods the company used for recording input VAT.  Minor observations were made by the officer who visited the premises but the main matter at issue in the assessments (whether certain invoices were adequate to claim input VAT) was specifically looked at and no issues raised.

4.             HMRC acknowledged the request for a review on 21 June 2023 and enquired whether ADR was being considered.

5.             Later on 21 June the Appellant pointed out to HMRC that ADR was only applicable after an appeal had been made to the Tribunal.

6.             HMRC issued a review letter upholding the decision on 10 November 2023.  This review letter did not address the significant points made in the very detailed letter of 21 June 2023 from the Appellant, nor did it mention at all the visit made by HMRC to the Appellant in 2019 and any matters covered in that visit.

7.             The Appellant complained to HMRC about the handling of the review on 21 November 2023.

8.             The Appellant appealed to the Tribunal on 30 November 2023 and made a hardship application on 1 December 2023.

9.             There was correspondence back and forth about the hardship decision (the Tribunal was provided with the cover emails but not the attachments to the hardship emails which would detail all the evidence provided). Hardship was approved by HMRC on 14 March 2024.

10.         Initial emails around initiating ADR were sent between January and March 2024.

11.         On 17 April 2024 (a Wednesday) the Tribunal wrote to confirm hardship had been approved and therefore HMRC should produce a Statement of Case within 60 days.

12.         On 22 April 2024 (Monday) HMRC wrote to the Tribunal saying it did not intend to defend the appeal.

13.         The Appellant made an application for costs incurred from 17 June 2023 onwards.

the law

14.         The power of the Tribunal to award costs is derived from section 29 of the Tribunals, Courts and Enforcement Act 2007 which provides as follows:

29 Costs or expenses

(1) The costs of and incidental to-

(a) all proceedings in the First-tier Tribunal; and

(b) all proceedings in the Upper Tribunal,

shall be in the discretion of the Tribunal in which the proceedings take place...

15.          The discretion afforded to the Tribunal is subject to Rule 10 of the Tribunal Rules which provides as follows:

10.(1) The Tribunal may only make an order in respect of costs (or, in Scotland, expenses)—

(a) under section 29(4) of the 2007 Act (wasted costs) and costs incurred in applying for such costs;

(b) if the Tribunal considers that a party or their representative has acted

unreasonably in bringing, defending or conducting the proceedings;

16.         The Appellant has applied under Rule 10(1)(b).

17.          In Market & Opinion Research International Limited v HMRC [2015] UKUT 0012 (TCC) ("MORI") at [22] and [23], the Upper Tribunal endorsed the approach set out by the FTT in that case to the question of whether a party had acted unreasonably.

18.         That approach could be summarised as follows, and has been endorsed by the later Upper Tribunal decision in Distinctive Care Ltd v HMRC [2018] UKUT 155 (TCC) at [44] to [45], which in turn was endorsed by the Court of Appeal in Distinctive Care Ltd v HMRC [2019] EWCA Civ 1010:

(1) the threshold implied by the words "acted unreasonably" is lower than the threshold of acting "wholly unreasonably" which had previously applied in relation to proceedings before the Special Commissioners;

(2) it is possible for a single piece of conduct to amount to acting unreasonably;

(3) actions include omissions;

(4) a failure to undertake a rigorous review of the subject matter of the appeal

when proceedings are commenced can amount to unreasonable conduct;

(5) there is no single way of acting reasonably, there may well be a range of

reasonable conduct;

(6) the focus should be on the standard of handling the case (which we

understand to refer to the proceedings before the FTT rather than to the wider

dispute between the parties) rather than the quality of the original decision;

(7) the fact that an argument fails before the FTT does not necessarily mean

that the party running that argument was acting unreasonably in doing so; to

reach that threshold, the party must generally persist in an argument in the face of an unbeatable argument to the contrary; and

(8) the power to award costs under Rule 10 should not become a "backdoor

method of costs shifting".

19.         The legal test to apply when considering whether a party who has withdrawn from the appeal has acted unreasonably can be found in Shahjahan Tarafdar v HMRC [2014] UKUT 362 (TCC) ("Tarafdar") at [34], where three questions are posed:

a) What was the reason for the withdrawal of that party from the appeal?

b) Having regard to that reason, could that party have withdrawn at an earlier stage in the proceedings?

c) Was it unreasonable for that party not to have withdrawn at an earlier stage?

20.         Here, it is also very material to the application to consider the meaning of 'bringing, defending or conducting the proceedings'.

21.         HMRC submit that the relevant conduct is limited to the conduct after the Appellant submitted the appeal to the Tribunal. They say that this starts from when the hardship appeal was approved. The Appellant submits that because Officer King 'advised' the Appellant to apply for an ADR, which cannot be applied for until after an appeal has been lodged, the conduct of HMRC should be considered from this point.

22.         The Upper Tribunal in Distinctive Care said:

Over what period is conduct to be assessed?

36. The FTT's jurisdiction to award costs against HMRC only arises if "the Tribunal considers that [HMRC] or their representative has acted unreasonably in bringing, defending or conducting the proceedings". The FTT's view on this point was that even if the original issue of the information notice had amounted to "acting unreasonably", HMRC had still not acted unreasonably "in bringing, defending or conducting the proceedings" - as referred to at [18] above. But Judge Mosedale went on to say that in any event she did not consider HMRC to have acted unreasonably - see [61] and [67] of the FTT's decision.

37. Logically, before assessing whether a party has acted unreasonably, it is necessary to define the time span over which that party's actions are to be assessed and tested for reasonableness. To put it another way, the focus of the FTT's enquiry must be on the reasonableness of the relevant actions. Rule 10(1)(b) states that the enquiry must consider whether the relevant party "acted unreasonably in bringing, defending or conducting the proceedings".

38. As was said by the Upper Tribunal in Catanã at [14] in relation to the meaning of the phrase "bringing, defending or conducting the proceedings" in Rule 10(1)(b):

"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 the proceedings, for example by persistently failing to comply with the rules or directions to the prejudice of the other side."

39. In agreeing with this formulation, we consider that in a costs application made against an appellant, the actions of that appellant (and its representative) in bringing the proceedings are to be considered; for an application made against a respondent, the actions of that respondent (and its representative) in defending the proceedings are to be considered; and in both cases their respective actions (and those of their representatives) in conducting the proceedings are to be considered. These are the relevant actions to be considered for the purposes of Rule 10. It may be that some earlier actions of one party or the other might inform the FTT's assessment (for example by demonstrating bad faith), but the focus of the assessment remains on these relevant actions, not on any earlier actions.

40. In Marshall & Co v HMRC [2016] UKUT 116 (TCC) (a case to which neither party directed us in the course of the hearing), the Upper Tribunal said the following about the period over which a party's conduct is to be assessed:

"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. In Catanã this Tribunal approved (at [9]) the following statements from Bulkliner Intermodal Limited v HMRC [2010] UK FTT 395 (TC):

"..... It is not possible under the 2009 Rules ... for a party to rely upon 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. In these respects the principles in Gamble v Rowe ... remain good law. ... That is not to say that behaviour of a party prior to the commencement of proceedings can be entirely disregarded. Such behaviour, or actions, might well inform actions taken during proceedings, as it did in Scott and anor (trading as Farthings Steak House) v McDonald (Inspector of Taxes) [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."

41. Contrary to the submissions of Mr Firth, there is, in our view, no warrant in Rule 10(1)(b) for extending its clear wording to include an assessment of a respondent's conduct prior to commencement of proceedings before the FTT - even if that conduct effectively forces an appellant to commence proceedings which should not reasonably have been necessary. In our view to hold otherwise would, as well as doing clear violence to the actual wording of Rule 10(1)(b), involve the FTT in a potentially wide- ranging assessment of the reasonableness of the entirety of HMRC's conduct leading up to the proceedings, as well as flying in the face of authority. We do not consider that it could have been the intention of the draftsman of the FTT Rules to require such an assessment which would, in many cases, necessitate a detailed enquiry into the factual history (quite possibly both complex and hotly disputed) of matters predating the FTT's involvement.

 

23.         In relation to VAT appeals, an appeal may not be brought unless either the VAT in dispute has been paid, or either HMRC or the Tribunal has determined that payment of this would cause hardship to the Appellant.  This is set out in VATA 1994, s84:

84Further provisions relating to appeals.

(1)References in this section to an appeal are references to an appeal under section 83.

...

(3)Subject to subsections (3B) and (3C), where the appeal is against a decision with respect to any of the matters mentioned in section 83(1)(b), (n), (p), (q), (ra)  (rb) or (zb), it shall not be entertained unless the amount which HMRC have determined to be payable as VAT has been paid or deposited with them.

 (3A)Subject to subsections (3B) and (3C), where the appeal is against an assessment which is a recovery assessment for the purposes of this subsection, or against the amount of such an assessment, it shall not be entertained unless the amount notified by the assessment has been paid or deposited with HMRC.

 (3B)In a case where the amount determined to be payable as VAT or the amount notified by the recovery assessment has not been paid or deposited an appeal shall be entertained if—

(a)HMRC are satisfied (on the application of the appellant), or

(b)the tribunal decides (HMRC not being so satisfied and on the application of the appellant),

that the requirement to pay or deposit the amount determined would cause the appellant to suffer hardship.

(3C)Notwithstanding the provisions of sections 11 and 13 of the Tribunals, Courts and Enforcement Act 2007, the decision of the tribunal as to the issue of hardship is final.

 

discussion

24.         The first question for this Tribunal, before considering the Tarafdar questions, is what is the relevant period of time (and therefore the relevant actions) to consider when applying the Tarafdar questions.

25.         The Appellant contends that the conduct that should be judges to be unreasonable starts when Officer King raised the question of whether the Appellant should apply for ADR, as this 'influenced or caused the actions of the appellant to pursue the appeal proceedings via review and then the appeal process'.

26.         I find quite plainly, given the extremely clear decision on this matter in Distinctive Care in the Upper Tribunal, that the relevant time period starts at the earliest from the time that the Appellant made the appeal to the Tribunal.  The Upper Tribunal stated [41] (see above) 'there is, in our view, no warrant in Rule 10(1)(b) for extending its clear wording to include an assessment of a respondent's conduct prior to commencement of proceedings before the FTT - even if that conduct effectively forces an appellant to commence proceedings which should not reasonably have been necessary'.

27.         The next matter to decide is when the relevant date is that the appeal came within the jurisdiction of the Tribunal - was it on 30 November 2023 when appeal was lodged, or some later date up to the latest date of 17 April 2024 when the Tribunal confirmed it had received the hardship approval from HMRC.

28.         It is clear that the Tribunal does not have jurisdiction to consider an appeal until the payment has been made or hardship confirmed.  This is made clear in the legislation 'it shall not be entertained unless...'

29.         The Upper Tribunal in Distinctive Care quoted with approval from Marshall & Co v HMRC [2016] UKUT 116 (TCC) (which in turn quotes from Bulkliner Intermodal Limited v HMRC [2010] UK FTT 395 (TC)) saying:

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. In Catanã this Tribunal approved (at [9]) the following statements from Bulkliner Intermodal Limited v HMRC [2010] UK FTT 395 (TC):

"..... It is not possible under the 2009 Rules ... for a party to rely upon 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.

30.         I therefore consider that the period for which I need to consider the behaviour of the Respondent is the period after which the Tribunal had jurisdiction to hear the appeal.  This period of time started on 14 March 2024, which is when HMRC confirmed they had accepted the hardship appeal.

31.         Accordingly, I am considering the period between 14 March 2024 and the withdrawal by HMRC on 22 April 2024.

32.         I then go on to consider the questions posed in Tarafdar:

a) What was the reason for the withdrawal of that party from the appeal?

b) Having regard to that reason, could that party have withdrawn at an earlier stage in the proceedings?

c) Was it unreasonable for that party not to have withdrawn at an earlier stage?

33.         The reason given by the Respondent is 'The Respondents undertook a rigorous review of the decisions under appeal and concluded that it should not be defended. Following this review the Respondents exercised their right to withdraw from proceedings. The Respondents notified the parties of their intention to withdraw from proceedings in good time, 5 days later on 22 April 2024 prior to the filing of any defence.'

34.         Whilst this sets out what happened, I do not consider it provides a complete answer as to why to Respondent withdrew.  A complete answer would have explained exactly what it was that the 'rigorous review' found, that made the Respondent withdraw.

35.         However, given questions b and c, I do not believe that this incomplete answer from the Respondents makes any difference to the outcome of the decision in this matter.

36.         'Could the party have withdrawn at an earlier stage in the proceedings?'

37.         HMRC emailed the Tribunal, copying in the HMRC litigator of the appeal, on 14 March 2024.  They wrote to the Appellant on the same date and this letter was received by post on 20 March 2024.

38.         Given that the skeleton argument for the Respondents mentions the 'rigorous review' happening after the confirmation by the Tribunal to both parties on 17 April that as hardship had been approved the appeal could now proceed, it would appear that HMRC did not do anything in this matter between 14 March and 17 April.

39.         It was of course possible for HMRC to have withdrawn from the appeal at any point after 14 March 2024.  The answer to this question is therefore yes, HMRC could have withdrawn (slightly) earlier than they did.

40.          'Was it unreasonable for that party not to have withdrawn at an earlier stage?'

41.         Omission to do something, as well as an actual action, can of course amount to unreasonable conduct.

42.         In this case it appears that HMRC omitted to carry out a review for around 1 month, and then when the Tribunal confirmed that HMRC had 60 days to produce a statement of case, HMRC did review the case and withdrew within 4 working days.

43.         I do not consider that the omission/delay of around 1 month in reviewing the case amounts to unreasonable conduct.  It is reasonable for HMRC to wait for a short period of time for confirmation from the Tribunal of expected timelines before commencing such a review. 

44.         I note that HMRC were at the same time corresponding with the appellant about setting up ADR.  That conduct appears to be entirely reasonable; there is nothing in the correspondence other than routine updates about where matters were regarding setting up the file.

Decision

45.         Because case law makes it plain that the relevant conduct is only that which happens after an appeal falls fully within the jurisdiction of the Tribunal, I consider that HMRC in the relevant time period have not acted unreasonably in 'bringing, defending or conducting the proceedings'.

46.         Accordingly I refuse the application for costs.

Right to apply for permission to appeal

47.         This document contains full findings of fact and reasons for the decision.  Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.  The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to "Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)" which accompanies and forms part of this decision notice.

 

 

Release date: 01^st MAY 2025