HMRC ordered to pay taxpayer's costs due to unreasonable behaviour

15 February 2023. Published by Liam McKay, Senior Associate

In Eclipse Consultancy Ltd v HMRC (TC/2018/08155), the First-tier Tribunal (FTT) granted the taxpayer's application for its costs to be paid by HMRC due to HMRC's unreasonable behaviour in not withdrawing from the proceedings at an earlier stage.


In Doran Bros (London) Ltd v HMRC [2017] UKFTT 829 (TC), the FTT decided that input tax on professional fees for advice on providing tax efficient incentives to a director was recoverable when the advice was given for the purpose of the business. HMRC did not seek to appeal the decision. 

In November 2018, Eclipse Consultancy Ltd (ECL) was issued with a VAT assessment for £2,120 (the assessment). The assessment followed HMRC’s decision to disallow input tax incurred on professional fees incurred in providing advice regarding a tax planning arrangement known as 'Alchemy', because HMRC considered such advice was not for the purpose of ECL's business. ECL appealed the assessment, relying in part on the Doran Bros decision. 

In May 2019, HMRC sought a stay of the appeal behind Root 2 Tax Ltd v HMRC (TC/2016/06377), the lead case on the Alchemy arrangement. ECL opposed the stay, contending that the Root 2 appeal was irrelevant to its own appeal because it only concerned the effectiveness of the Alchemy arrangement and did not concern the VAT treatment of professional fees incurred in obtaining advice in relation to the Alchemy arrangement.

In October 2019, HMRC sought a stay behind both Root 2 and Praesto Consulting UK Ltd v HMRC [2019] EWCA Civ 353, which concerned a company’s entitlement to claim VAT incurred on legal fees for defending proceedings against its director. ECL again objected to a stay.

In November 2019, the FTT issued its decision in Taylor Pearson Construction Ltd v HMRC [2019] UKFTT 691 (TC), confirming that professional advice on how to reduce the company's tax and NICs liabilities when rewarding its directors was a service supplied for the purposes of its business. The FTT noted the similarities with Doran Bros, and commented adversely upon HMRC’s re-running of the same arguments.

In December 2019, the FTT issued its decision in the Root 2 appeal, confirming that the Alchemy arrangements were not effective.

In March 2020, HMRC applied for a stay in ECL's appeal, in order to consider its position in light of the FTT's decision in Taylor Pearson and in June 2020, HMRC notified ECL that it was withdrawing its non-business argument but would continue with its argument that the VAT incurred was exempt. However, as a result of a de minimis rule, exempt input tax under £7,500 could be recovered as if it was taxable input tax. HMRC therefore agreed that ECL could recover the disputed VAT in full, and conceded the appeal. 

HMRC did not advise the FTT of its withdrawal from the appeal until August 2020. In September 2020, the FTT allowed the appeal.

In December 2020, ECL applied for its costs under Rule 10(1)(b) of the Tribunal Rules, on the basis that HMRC had acted unreasonably in not withdrawing from the appeal earlier. 

HMRC argued that it could not have withdrawn until the decision in Taylor Pearson became final, 56 days after its release, and any delay on its part was not unreasonable given the range of issues it needed to consider following the FTT's decision in Taylor Pearson, and the business disruption caused by the Covid-19 pandemic. 

FTT decision

The application was granted. 

Applying the test in Tarafdar v HMRC [2014] UKUT 362 (TCC), the FTT concluded that it was unreasonable for HMRC not to have withdrawn from the proceedings at an earlier stage. The FTT held that, once notified of the appeal, Doran Bros would have come to HMRC's attention and it should have appreciated that it was directly relevant and considered whether its non-business purpose argument could reasonably be made. Further, if HMRC had good reason for thinking the arguments it intended to rely on in Taylor Pearson would result in a different outcome from that arrived at in Doran Bros, it could have applied for a stay behind Taylor Pearson, but it did not do so. Accordingly, in the view of the FTT, it was difficult to escape the conclusion that HMRC did not properly consider whether it was reasonable to defend the appeal.

In addition, while the FTT accepted that it was reasonable for HMRC to take some time to consider the decision in Taylor Pearson, it found that, even taking into account the difficulties caused by the Covid-19 pandemic, HMRC took an unreasonably long time to notify ECL of its withdrawal and then a further unnecessarily long time to notify the FTT, and ECL was obliged to incur further costs during that period.   

Having regard to HMRC’s conduct of the appeal as a whole, the FTT concluded that an award of costs was appropriate and granted ECL's application. 


As the FTT is not a tribunal of record, HMRC (and indeed taxpayers) has the right to pursue arguments before the FTT that have previously been rejected by the FTT, but the FTT has made clear in this decision that HMRC must turn its mind to the reasonableness of defending an appeal on such a basis at the earliest opportunity. In particular, in the absence of any other grounds, where HMRC does not advance any case as to why previously unsuccessful arguments should lead to a different outcome in a separate appeal, it is unlikely that HMRC would be considered to be acting reasonably in defending such an appeal, exposing them to the risk of an adverse costs award.    

The decision can be viewed here.

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