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Cheshire Centre – HMRC ordered to pay taxpayer's costs due to its unreasonable behaviour

18 November 2020.

In HMRC v Cheshire Centre for Independent Living [2020] UKUT 275 (TCC), the Upper Tribunal (UT) ordered HMRC to pay the taxpayer's costs even though HMRC had been successful, as it had acted unreasonably in introducing a new ground of appeal.


The Cheshire Centre for Independent Living (CCIL) was a charity which promoted the independent living of disabled persons. A VAT dispute arose with HMRC and CCIL appealed to the First-tier Tribunal (FTT). CCIL argued that the provision of payroll services was a VAT-exempt supply on the basis that the payroll services assisted disabled persons in employing carers using funding supplied by CCIL. The FTT allowed CCIL's appeal, finding that the supply of payroll services was ancillary to care provided by the carers, which itself was an exempt supply as it is a "supply of services closely linked to welfare work" under Article 132(1)(g) of the Principal VAT Directive (the VAT Directive).

HMRC appealed to the UT, relying on a new ground of appeal. It argued that the carer was an employee of the disabled person and therefore they were not a taxable person capable of making a VAT supply to their employer (because they were an employee) (Ground 2). The employee was not a body governed by public law, nor another body recognised by the UK as being devoted to social welfare. CCIL conceded the point but applied to the UT for a costs order against HMRC on the basis that HMRC had acted unreasonably in failing to run what turned out to be a winning argument sooner which resulted in CCIL incurring avoidable  costs.

CCIL argued that if HMRC had made it aware of Ground 2 when the case was before the FTT, it would have withdrawn its appeal. But as HMRC had not raised Ground 2 until the UT proceedings, CCIL had believed that HMRC had conceded that the care supply was exempt from VAT. HMRC argued that it only raised the point in response to CCIL's oral submissions before the FTT and that the proceedings so far had focussed on whether the payroll services came within the scope of general welfare services, rather than the status of the person making the supply. 

UT decision 

The application for a costs order against HMRC was granted.

The UT was of the view that HMRC could, and should, have raised Ground 2 earlier and included it in its Statement of Case. It had been unreasonable in not doing so as the relevant facts and legal foundations were known about from the outset of the proceedings.

Rule 10 of the Upper Tribunal Rules, gives the UT discretion to make a costs order if a party has conducted proceedings unreasonably. The UT concluded that this threshold had been met. Although HMRC may have only raised Ground 2 following CCIL's submissions in the FTT, it could have been raised in HMRC's Statement of Case, as the question of whether payroll services were "closely related" to the welfare supply was always relevant to the dispute and apparent to both parties from the outset. The status of the carer as an employee was inherent to the nature of the supply and therefore Ground 2  should have been raised by HMRC much earlier.

HMRC argued that the fact that it had been successful overall should mitigate its costs liability. In the view of the UT, although HMRC had acted unreasonably, CCIL should have considered the position of the principal supply and the surrounding factors (such as the status of the supplier) with "greater clarity", as this would have affected its view on the strength of its case. Accordingly, the UT awarded CCIL 70% of its costs on the standard basis, the amount to be summarily assessed if not agreed. 


This decision confirms that an unsuccessful appellant may obtain a costs order from the tax tribunals against a successful party if that party (or its representative) has acted unreasonably in "bringing, defending or conducting the proceedings". The decision suggests that the UT will look closely at the conduct of both parties when determining whether the conduct of one party is sufficiently unreasonable to warrant a costs order being made against that party and, if it is appropriate to do so, will reflect the conduct of the other party by discounting the costs awarded.  

The decision can be viewed here.