First Choice – HMRC ordered to pay taxpayer's costs as a result of its unreasonable behaviour

13 November 2019

In First Choice Recruitment Ltd v HMRC [2019] UKFTT 412 (TC), the First-tier Tribunal (FTT) has held that the taxpayer was entitled to its costs because HMRC had acted unreasonably.


HMRC refused to direct that First Choice Recruitment Ltd (First Choice) was not liable to pay deductions under the Construction Industry Scheme. First Choice appealed to the FTT.

The issues to be determined on appeal were whether:

(1) First Choice had taken reasonable care to verify the "gross payment status" of a subcontractor; and 

(2)  First Choice's incorrect view that the subcontractor in question had "gross payment status", had been reached in good faith.

HMRC's statement of case included allegations of fraud, made on the basis of emails passing between the directors of First Choice. These emails were not produced in evidence by HMRC. In fact, the only emails that were included in its evidence demonstrated that First Choice was not aware that the relevant subcontractor did not have gross payment status.

First Choice argued in its skeleton argument that:

(1) the allegations of fraud had shifted the burden of proof onto HMRC; 

(2)  HMRC's pleadings and particulars were inadequate in relation to the allegations of fraud; and 

(3)  HMRC's evidence was insufficient to discharge the burden of proof.

The appeal hearing had been listed to be heard on 20 August 2018. On 16 August 2018, HMRC wrote to the FTT withdrawing from the appeal.

First Choice made an application to the FTT for its costs under Rule 10(1)(b) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (the Tribunal Rules) on the grounds that HMRC had acted unreasonably in defending and conducting the proceedings.

FTT decision

The application was granted.

The FTT found that HMRC had acted unreasonably in defending and conducting the appeal and ordered HMRC to pay First Choice's costs relating to both the appeal and the costs application.

In the FTT's view, HMRC's allegations of fraud, and the lack of particularisation of those allegations by referring to emails which were not produced in evidence, were "egregious". The FTT also considered that it was unacceptable for a public authority to make allegations of fraud where there was no credible evidence to support such allegations.

HMRC had admitted that an "appropriately qualified and experienced" caseworker would not have made the allegations of fraud. In the view of the FTT, this admission was not an acceptable excuse, and commented that HMRC should have a system of supervision and training in place to ensure that litigators deal with matters appropriately and to the requisite standard. The FTT also considered that if HMRC's Solicitor's Office had handled the case in the same way, that would potentially have amounted to serious professional misconduct.

The FTT found it "particularly worrying" that HMRC had submitted that its conduct in the case was reasonable, as this suggested that HMRC may continue to make similar unsupported allegations of fraud in the future.


As taxpayers are only too well aware, the FTT has in the past been   reluctant to award costs against HMRC. HMRC's unreasonable behaviour in this case was so gross that the FTT had little choice other than to order HMRC to pay the taxpayer's costs. If taxpayers consider that HMRC has acted unreasonably in "bringing, defending or conducting the proceedings", they should consider making an application to the FTT, under rule 10(1)(b) of the Tribunal Rules, for an order that HMRC pay their costs. 

This case also highlights a worrying lack of supervision within HMRC. An allegation of fraud is a serious matter and should not be made lightly. It would appear that in this case an inappropriately qualified caseworker was allowed to make serious allegations of fraud against a taxpayer who was forced to take its appeal to the FTT only for HMRC to withdraw from the appeal four days before the appeal was due to be heard. Such conduct was rightly censured by the FTT, but such a situation should not have been allowed to arise in the first place. HMRC must train its officers to an appropriate standard and there must be proper supervision by line managers, particularly when their actions can have such a detrimental impact on a taxpayer's business and/or life.   

The decision can be viewed here.

Stay connected and subscribe to our latest insights and views 

Subscribe Here