Gekko – HMRC's unreasonable conduct leads to costs award against it

19 September 2017

In Gekko & Company Ltd v HMRC [2017] UKFTT 586 (TC), the First-tier Tribunal (FTT), in allowing an appeal against assessments to VAT and penalties, awarded the taxpayer its costs as HMRC's conduct had been unreasonable.


In February 2015, Miss Pearce, an HMRC Officer, carried out a compliance check of the taxpayer's VAT returns for the preceding four years. Following this review, Miss Pearce wrote to the taxpayer setting out her conclusions. In her letter, she identified three issues. The first related to a declaration of output tax on a sale of land at Ferry Lane, in June 2011. The sale was not included in the VAT return for 06/11 and not corrected until 06/14. The second concerned an input tax claim for motoring expenses. The last issue concerned an input tax claim on purchases in relation to a property at Fellands Gate.  

Miss Pearce proposed to issue assessments and penalties for the three inaccuracies she had identified. There was further correspondence between the parties and the taxpayer  provided additional information. 

On 13 November 2015, Miss Pearce wrote to the taxpayer summarising details of her VAT review. She concluded that she had supporting evidence to verify a number of purchases of fuel, but not all, allowing her to reduce the amount of the proposed input tax assessment. She proposed to issue an input tax assessment in relation to Fellands Gate. With regard to Ferry Lane, she maintained that the taxpayer's behaviour for late disclosure was 'deliberate' because the error was identified in 2012 but not corrected until 2014. 

On 11 December 2015, a Notice of Penalty Assessment was issued. The Notice referred to tax for the period for which penalties were assessed. It did not break down the penalties into three separate amounts and did not refer to the tax period in respect of which each penalty had been issued. 

The taxpayer requested a review which was carried out by Mr Matthews. The outcome of Mr Matthews' review was that the fuel costs assessment was upheld. With regard to the penalties, he acknowledged that the taxpayer should have been notified of three separate penalties each with its own tax period, but had not been. This was incorrect and the Notice of Penalty would be cancelled and reissued accordingly.  Mr Matthews added that Miss Pearce would be asked to reconsider the characterisation of the taxpayer's behaviour in relation to the sale of land at Ferry Lane and whether any conditions could be identified that would enable the penalty to be suspended.

Following the review, Miss Pearce provided a revised penalty calculation summary for each of the three penalties. She had considered the reviewing officer's remarks about the behaviour relating to the Ferry Lane omission and had regraded it to be 'careless' and 'prompted' disclosure. The taxpayer requested clarification for the change to 'prompted', as no explanation had been given. Miss Pearce subsequently advised that the taxpayer's accountant had explained the circumstances regarding Ferry Lane at the start of a meeting she had attended in February 2015. The decision to change the penalty to 'prompted' was based on Public Notice 700/45. In particular, paragraph 4.3, which states that correcting the error on a subsequent return is not a disclosure for the "new" [sic] penalty rules. Because separate notification was not received by HMRC, the disclosure in this case was viewed as prompted. 

The taxpayer appealed the penalties. 

FTT decision

The FTT allowed the taxpayer's appeal and awarded costs to the taxpayer.

The FTT's primary finding was that no valid penalty assessment had been issued. HMRC accepted that the Notice of Penalty Assessment should be withdrawn (as it did not specify the relevant periods, it was invalid). However, no replacement Notice of Penalty Assessment was issued. Accordingly, no penalties had been validly imposed and HMRC was now out of time to issue a new assessment. 

Alternatively, the FTT concluded that there was no inaccuracy for the period under dispute in relation to two of the issues (the fuel penalty and the Fellands Gate penalty). However, the FTT was most concerned with the third alleged inaccuracy concerning the sale of land at Ferry Lane. HMRC originally considered this to be a deliberate and unprompted disclosure. However, when subsequently accepting that it was careless, HMRC changed its view and claimed the disclosure had been prompted. The FTT did not consider there was any valid reason for this change of view by HMRC and the penalty should have been reduced to nil.

At the end of the hearing, the FTT advised it was minded to make an order for costs against HMRC. As the appeal had been classified as Standard, the FTT could only make an order for costs if it considered HMRC had 'acted unreasonably in bringing, defending or conducting the proceedings' (Rule 10(1)(b) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009). 

The FTT commented that it was particularly disturbed by HMRC's change of position in relation to the error relating to Ferry Lane. The subsequent re-characterisation of the inaccuracy to 'careless' and 'prompted' was not explained to the taxpayer. Of even greater concern, however, was HMRC's response when the taxpayer raised this change of position with HMRC. The explanation given by HMRC involved a flagrant misreading of a passage from a VAT Notice and ignored the admission made by the officer of the disclosure given by the accountant in 2015. 


It is rare in Standard category cases for the FTT to make an order for costs, but given HMRC's unreasonable behaviour in this case, the FTT appears to have had little doubt that such an order against HMRC was appropriate.  At [175], the FTT commented: 

" … when the appellant spotted the change they were given an explanation which simply beggars belief as an appropriate response (see §109). It involves a flagrant misreading of a passage from a VAT Notice and a complete ignoring of an admission Miss Pearce had made in the previous line. As Miss Pearce seems to have distanced herself from this explanation, we can only assume that it was dictated to her by her superiors."

The FTT went on to say at [177]:

"We consider, having thought about this long and hard, that there are two possible explanations for this volte face. One is that there was incompetence on a grand scale. The other is that there was a deliberate decision to keep the dispute alive, when on the basis of the reviewing officer’s remarks it would have been discontinued, by seeking to revisit the “prompted” issue. The facts that have caused us not to dismiss this possibility include the minimal information about the change with no explanation and the hopelessly muddled response with its spurious justification that Miss Pearce sent when the appellant spotted the change."

It is to be hoped that senior management within HMRC will heed these comments and ensure that similar behaviour is not repeated in the future. 

A copy of the FTT's decision is available to view here.

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